States Resist Fiduciary Annuity Standard With Best-Interest Laws

California is on track to become the latest US state to adopt a standard for annuity sales that’s weaker than federal fiduciary obligations for 401(k) rollovers.

Together with New York, the bill (SB 263) in California had stood out by insisting on a tougher fiduciary code of conduct for carriers and agents. But the legislation’s authors bowed to industry opposition to the fiduciary standard last month, putting California on track to become the 40th state to instead adopt the National Association of Insurance Commissioners’ best-interest model.

The difference between best-interest and fiduciary investment advice is fundamental to insurers and finance professionals, not least because it can determine whether state or US Labor Department regulators oversee their businesses. For consumers, the different standards of care shape the quality and price of the products they’re offered.

“Having nebulous standards of care sounds great, but the reality is we live in a litigious world, so we need to know what the rules of the road are,” said Wes Bissett, senior counsel for governmental affairs at the Independent Insurance Agents & Brokers of America.

When a financial adviser provides fiduciary advice, their own motivations can’t be weighed, making it nearly impossible for agents to make commission on a sale. The NAIC best-interest standard requires agents and carriers to act with “reasonable diligence, care and skill” to ensure consumers get the best possible product, without putting their own interests ahead of the customer’s.

California’s best-interest bill passed the Senate in May and was reported favorably by the State Assembly insurance committee late last month. Now it heads for an appropriations vote before it can make its way to the assembly floor where it has bipartisan support.

IIABA helped organize an effort to block SB 263 in an earlier fiduciary form, drawing from experience its local California independent insurance affiliate had fighting state regulators over a fiduciary standard for property and liability insurance sales.

“We fought a bloody but ultimately successful battle with the department for a fiduciary standard,” said Stephen Young, the group’s senior vice president and general counsel. “As part of that experience, we’ve been concerned about any precedent that would impose this best-available insurance standard.”

Fiduciary Contempt

Local opposition to state-based fiduciary rules demonstrates the bitter contempt many insurers have for the heightened obligations and the lengths they’ll go to avoid falling under a federal version.

States are rushing to adopt the 2020 NAIC best-interest model partly to keep their annuity sales under local control pursuant to the Dodd-Frank Act (Pub. L. No. 111-203).

But the work of a separate coalition of states enhancing consumer protections from the less rigorous “suitability” standard of care sends a message to the Labor Department that annuity sales are already regulated enough, insurance industry insiders told Bloomberg Law.

“There’s already this newly enhanced regulatory framework,” said Sarah Wood, director of state policy and regulatory affairs at the Insured Retirement Institute.

At the same time, DOL’s Employee Benefits Security Administration is defending its attempt to impose fiduciary standards on individual retirement account and annuity rollovers in a Texas federal court case.

A magistrate judge there already recommended stripping back many of the agency’s controls, but the conservative court could go further, eliminating EBSA’s ability to extend regulatory influence outside workplace retirement accounts into products where retirees put their money later.

Industry groups have been pushing back on another EBSA attempt to alter the definition of a fiduciary under federal benefits law in order for the agency to avoid the same legal scrutiny it’s facing now.

Together with state best-interest models, the US Securities and Exchange Commission also implemented a best-interest standard for consumer investment advice on its own, creating a “regulatory environment that has changed substantially,” according to the IRI.

“Federal and state regulators are actively and aggressively enforcing this newly strengthened regulatory framework of the best interest standard,” the group said in a letter to the White House on Wednesday. “No evidence has been produced to show that problems or deficiencies make the existing regulatory framework ineffective in protecting retirement savers.”

The extension of federal fiduciary obligations to historically state-regulated insurance operations would mean broker-dealers and agents could be sued in federal court for Employee Retirement Income Security Act (Pub. L. No. 93-406) violations. Iowa Insurance Commissioner Doug Ommen, who helped draft the revised NAIC model in 2020, said that was an important detail in their negotiations.

“Fiduciary principles are based on common law provisions and are enforceable through litigation,” Ommen said. “Our responsibility was devising a type of increased consumer protection that included a lot of the concrete, express requirements.”