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State Advocacy Priorities: A Look at the Year Ahead

By NAFA General Legal Counsel Pamela Heinrich, Esq.

2014 is shaping up to be a very interesting year politically, and it should also prove to be an interesting – and hopefully prosperous – year for the insurance industry and for the fixed annuity community in particular. The NAFA Board of Directors has approved the 2014 NAFA advocacy priorities, which were developed by NAFA’s Government Relations Committee (GRC). Some of NAFA’s interests in 2014 concern activities at the federal level, but several of the advocacy and educational goals are directed at state activities, either through the state legislative process or the regulatory process, via state departments or divisions of insurance.

Quoting the NAFA Government Relation Committee’s charge:

NAFA’s primary mission is to promote the awareness and understanding of fixed annuities. A core value proposition for NAFA members is advocacy on issues affecting the fixed annuity industry. Through active engagement in the legal, legislative, and regulatory processes, NAFA will continue to advocate for a healthier environment for the industry in its delivery of quality products to clients so that clients have more freedom of access and choice in their purchase of guaranteed retirement income and savings security.

So as we ring in the New Year, let’s take a look at some of these state advocacy priorities and, to the extent possible, project the activity we might expect to see in the months ahead.

  • Promote efforts by the NAIC and States to adopt a bulletin clarifying permissible and prohibited activities of annuity salespersons similar to Iowa Insurance Bulletin 11-4.

Sometimes referred to as the “source of funds” issue, this goal tackles the challenge that insurance-only licensed producers face when a client or prospective client desires to purchase an annuity with funds derived from the sale or liquidation of a security product. Because insurance-only licensed individuals are prohibited from giving “investment advice,” it can be problematic to analyze a client’s financial affairs and to discuss broader financial trends without, perhaps, crossing the line. Alleged violations can trigger administrative actions, fines, loss of license and appointments, and even civil or criminal liability.

In June 2011, the Iowa Insurance Division (IID) issued Bulletin 11-4, Licensing and Permitted Activities, to provide guidance to insurance producers about the permitted and prohibited activities with respect to a recommendation to purchase an annuity contract or life insurance policy made to a consumer who may choose to liquidate a security in connection with such purchase. Since Iowa’s adoption of the Bulletin, only Tennessee has followed that lead, adopting an identical bulletin on May 22, 2013. NAFA members worked for over 18 months to develop the language utilized by  Iowa and Tennessee. NAFA believes that the Bulletin, while not a complete prophylactic, provides important guardrails to prevent producers from crossing the line into giving investment advice. NAFA’s GRC will work with the NAIC and with regulators at various state departments of insurance to foster widespread adoption of the Bulletin.

  • Support State adoption of the NAIC Annuity Disclosure Rule and the 2013 updated Deferred Annuity Buyer’s Guide Model.

The NAIC amended its Annuity Disclosure Model Regulation (#245) in October 2011, amending the standards concerning the form and content of annuity illustrations. Subsequently, the NAIC Disclosure Model Working Group spent months revising the Annuity Buyer’s Guide, which under the Disclosure Rule is required to be presented to a purchaser of an annuity “at or before” the time he or she completes the contract application. NAFA worked closely with the NAIC Disclosure Model Working Group in addressing its charge to create consumer-friendly, easy-to-read guides so that prospective buyers might better understand the functions and features of the two types of deferred annuities – fixed and variable. Eventually three guides were created: one for deferred annuities (reflecting both variable and fixed annuities, the “combination” guide), one for fixed deferred annuities and one for variable deferred annuities. The NAIC adopted these guides in August 2013.

The IID was the first state insurance division to formally adopt the updated guide, announcing the adoption of the three new versions of the deferred annuity buyer’s guide in a bulletin issued on October 21, 2013. The IID will allow companies and producers selling fixed annuities to use either an appropriate version of the new NAIC deferred annuity buyer’s guide or the older version of the guide through March 31, 2014, after which time they must use only an appropriate version of the new guide. Other states currently considering adopting the updated guide are Oklahoma, Georgia, Rhode Island, Maine and Idaho. Some of these states allow carriers to use either the new guide(s) or the old guide until such time as the updated guide is formally adopted.

NAFA promotes the adoption of the updated buyer’s guide, and, in particular, is working to make sure that states adopt all three of the guides – especially the Buyer’s Guide for Fixed Deferred Annuities – so that a consumer who chooses to purchase a fixed annuity receives the appropriate fixed guide and is not limited to receiving the combination guide. This is because the combination guide includes details that are unique to variable annuities (such as risk-based investing, for example) and are not germane to the fixed annuity purchaser, this irrelevant variable annuity information brings confusion and unnecessary complexities to the fixed annuity transaction and puts the insurance-only licensed producer in the potentially liable position of explaining a product they do not sell and are not licensed to sell.

  • Support State adoption of the 2010 NAIC Suitability in Annuity Transactions Model Regulation.

To date, 32 states plus the District of Columbia have adopted the 2010 version of the NAIC Suitability in Annuity Transactions Model Regulation. Currently, several other states, including Wyoming, Maine, Georgia, and Tennessee, have either proposed new rules to reflect the updated Model Regulation or will be proposing a new rule in the near future. This leaves 14 states that have not yet adopted or proposed the new suitability standards.

The Dodd-Frank Harkin Amendment “deadline” of June 16, 2013, has long since passed, and certainly that statutory date played a significant role in the adoption of the 2010 Model Regulation by two-thirds of the individual states as well as the majority of national carriers; nevertheless, we can expect to see more states adopt the updated suitability standards in the coming year. NAFA works closely with legislators and regulators at the state level to urge the adoption of state suitability rules that do not deviate substantively from the Model Regulation, promoting consistency and predictability in the annuity marketplace.

  • Oppose State and Federal regulatory efforts to treat any type of fixed annuity as subject to securities regulation.

This objective is a general NAFA call to arms Although there is no specific threat or opportunity at the state level at this time imminent, NAFA will monitor legislative and regulatory activity that may or does affect the fixed annuity industry and continue to engage to correct harmful and precedent setting litigation.

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