Notwithstanding the decision of the Fifth Circuit Court of Appeals, which vacated the U.S. Department of Labor’s regulations expanding the definition of the term “fiduciary” (Fiduciary Rule), the Annuity Suitability (A) Working Group (ASWG) is proceeding with developing proposed amendments to the NAIC’s Suitability in Annuity Transactions Model Regulation (SAT). Among other things, the proposed amendments to the SAT would require producers (or insurers where no producer is involved) to comply with a “suitability plus” (rather than a “best interest”) standard in connection with annuity transactions with consumers. Although New York has encouraged the ASWG to adopt amendments to the SAT that apply to life insurance as well as annuity transactions, the ASWG has determined that it does not have the authority to do so under its existing charge.

In their current stage of development, the amendments to the SAT would require that a producer (or insurer where no producer is involved), in connection with making a recommendation to a consumer regarding the purchase or exchange of an annuity, have “reasonable grounds for believing that a recommendation is suitable” for the particular consumer. “Reasonable grounds for believing that a recommendation is suitable” would require “fair dealing and reasonable competence, trustworthiness, diligence, care, skill and prudence by the producer [(or insurer)].” As currently proposed, the amendments to the SAT would require a producer (or insurer) to make a recommendation “without placing the financial or other interests of the producer [(or insurer)] ahead of the consumer’s interests as known from the consumer’s suitability information.” The current draft of the amendments to the SAT would also require the producer (or insurer) to make certain disclosures to the consumer, including (a) the cash and non-cash compensation to be received by the producer in connection with the transaction and (b) “[a]ny and all material conflicts of interest.”  During the Summer Meeting, the ASWG discussed comments received on certain defined terms used in the amendments to the SAT, including “cash compensation,” “non-cash compensation” and “intermediary.” The ASWG also began discussing comments to the definition of “material conflict of interest.” Several of the proposed definitions imposed a reasonableness standard to determine what should be disclosed as a “material conflict of interest.” However, the chair of the ASWG indicated that he would prefer to adopt a definition of “material conflict of interest” that includes more objective criteria to identify what constitutes a “material conflict of interest” that is subject to the disclosure requirements. Prior to the NAIC’s Fall 2018 National Meeting, the ASWG hopes to finalize the amendments to the SAT and to present such amendments to the Life Insurance and Annuities (A) Committee ((A) Committee) for consideration at that meeting.  Meanwhile, the New York State Department of Financial Services has finalized amendments to its insurance regulations governing suitability in annuity transactions (New York Insurance Regulation 187), which would, among other things, require insurance producers (or insurers) to comply with a “best interest” standard in connection with both life insurance and annuity transactions with consumers. During the Summer Meeting, in response to a request from New York, the (A) Committee agreed to consider, in connection with its review of the proposed amendments to the SAT, whether the scope of the SAT should be expanded to include both life insurance and annuity transactions.