10 States Where Annuity Sales Rules Still Look Different

A team at the National Association of Insurance Commissioners has posted a new map that hints at whether the U.S. Securities and Exchange Commission will get a new chance to regulate fixed annuities in at least some states. Drafters created the map to show which states have adopted the 2020 update to the NAIC's Suitability in Annuity Transactions Model Regulation. Forty states have adopted the annuity sales update. Nine states have not, and one state has adopted a fiduciary rule. For a look at the 10 states that have not adopted the update, see the gallery above.

The Background

The NAIC's 2020 suitability model update is based on the SEC's Regulation Best Interest. The NAIC is a Kansas City, Missouri-based group for state insurance regulators. It does not have the ability to make direct changes to state annuity sales standards. States can decide whether to base their rules on NAIC "models," or sample language, and model updates. The suitability model update would require annuity sellers to act in the best interest of the client, without imposing a fiduciary standard. Many observers predict that the suitability update and Reg BI will let traditional, commission-based annuity sales compensation arrangements stay in place. A fiduciary standard would require annuity sellers to put the client's interests first. Use of a strict fiduciary standard could prohibit or limit use of annuity sales commissions.

The SEC, the States and Annuities

Federal law leaves regulation of the business of the insurance to the states. Variable annuities expose owners to the risk of loss of principal. The SEC has defined the products as securities and shares jurisdiction over the products with state insurance regulators. Congress put a provision in section 989J of the Dodd-Frank Wall Street Reform and Consumer Protection Act that lets states keep oversight over sales of fixed annuities, including non-variable indexed annuities, if they adopt rules that are similar to or stronger than the NAIC's 2010 suitability standards, and if they adopt rules that are similar to or stronger than any new NAIC standards within five years of NAIC adoption of the new standards. The NAIC Life Insurance and Annuities Committee has suggested that, under Dodd-Frank section 989J, states that fail to adopt the 2020 suitability update or stronger sales standards by 2025 may end up having to share jurisdiction over non-variable indexed annuities and other non-variable annuities with the SEC.

Financial Services Group Perspectives

Trade group representatives note that one state has adopted annuity sales standards that are tougher than the NAIC model state and that three states are visibly, actively at work on suitability bills. Whit Cornman, a representative for the American Council of Life Insurers, emphasized most states' speed at updating their rules. "The momentum behind a best interest standard remains strong, and discussions among policymakers are ongoing in states yet to introduce the NAIC model," Cornman said. "We expect more states will soon join the 40." Finseca representatives noted that practical considerations, such as the local rules for replacing existing regulations, have affected the speed of update adoption in some states that are likely to implement the update. Diane Boyle, senior vice president of government relations at the National Association of Insurance and Financial Advisors, agreed that more states will soon adopt the update, and she welcomed states' willingness to stick with the NAIC's language for consumer protections. "It really benefits financial professionals and consumers to know they are dealing with a consistent standard," she said. The Insured Retirement Institute sees update adoption in motion in eight states. "We are encouraged by the progress," said Dan Zielinski, an IRI representative. Credit: rudall30/Shutterstock