SB 263, California's annuity sales standards update bill, sailed through the state Senate in May, with no opposing votes at the committee level or on the state Senate floor.
But the ultimate fate of the bill is still uncertain because of ongoing strong opposition from California consumer groups.
One open question is whether a California move to use its own annuity sales standards after 2025 could give the Securities and Exchange Commission a chance to regulate fixed annuity sales in all states.
What It Means
How U.S. individual fixed annuity sales rules will work after 2025 is still unclear.
The Annuity Sales Rule Fight
Life insurers that offer annuities can promise customers to provide a guaranteed stream of benefits payments for a specified period of time, or the lifetime of an annuity holder.
Regulators, consumer groups and financial organizations that offer investment products without guarantees have often objected to the efforts insurers and their agents use to sell annuities.
The SEC already shares regulation of variable annuities with state insurance regulators.
Under former President Barack Obama, federal regulators tried to require sellers of all types of annuities, including fixed annuities, to meet a fiduciary standard, or a requirement to put the consumer's interest first. Many sales standards specialists contend the use of a fiduciary standard would prohibit the use of annuity sales commissions.
Today, in spite of the rise of annuity products and annuity distribution programs aimed at the fee-based annuity market, about 98% of U.S. individual annuity sales involve commission-based compensation arrangements, according to Sheryl J. Moore, the CEO of Wink. a life and annuity tracking firm.
While Donald Trump was president, federal regulators ended the effort to impose a fiduciary standard, and the SEC adopt Regulation Best Interest, or Reg BI, which requires annuity sellers to act in the best interest of a consumer considering annuities and to show that they have considered a wide range of options for a retirement saver and why they have recommended the options they have.
Now, under President Joe Biden, the U.S. Department of Labor appears to be inclined to renew the fight for a fiduciary standard.
The NAIC Model Update
The National Association of Insurance Commissioners, a Kansas City, Missouri-based group for insurance regulators, developed an annuity sales rules model based on a "suitability" strategy, or effort to ensure that the annuities offered to a consumer suit the consumer's needs, in 2003.
The NAIC then adopted a suitability update in 2012.
States can choose whether to implement NAIC models. Many have based their annuity sales rule laws and regulations on the NAIC model update.
In 2020, the NAIC approved a new suitability model update designed to complement the SEC's Reg BI approach. It requires annuity sellers to act in the best interest of the consumer, to consider a wide range of annuity options, and to document the thinking behind product recommendations, but it appears to allow continued use of sales commissions.
Since the NAIC approved the suitability update, at least 38 states, including Florida, Pennsylvania and Texas, have implemented it, according to the American Council of Life Insurers.
