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Recent State Fiduciary and Best Interest Developments: New Mexico Becomes the 20th State to Adopt an NAIC Best Interest Model

Joining the growing number of states who are implementing the National Association of Insurance Commissioners’ (NAIC) model regulation concerning suitability in annuity transactions, New Mexico has issued its best interest rule to become effective on October 1, 2022. The rule will require insurance producers to act in the best interest of a consumer when making a sale or recommendation of an annuity in New Mexico or to a resident of New Mexico and will obligate the insurer to establish and maintain a system to supervise recommendations to ensure compliance.

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Recent State Fiduciary and Best Interest Developments: Pennsylvania’s New Law; Nevada May be Next

Pennsylvania has adopted legislation implementing the model regulation concerning suitability in annuity transactions adopted by the National Association of Insurance Commissioners (NAIC). This brings to 19 the total number of states adopting the NAIC suitability model. Nevada may be the next state to watch. Nevada’s Securities Administrator has indicated that she is resuming work on the state’s fiduciary rule for investment advisers and broker-dealers and expects to release the rule by November. Stay tuned.

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Brace for Impact: It’s Going to be (Another) Busy Year for FINRA

F. Scott Fitzgerald said “There are only the pursued, the pursuing, the busy, and the tired.” FINRA may be all of these in 2022, as FINRA CEO Robert Cook announced FINRA’s laundry list of priorities during a SIFMA Q&A last week. Below are some of the highlights from his Q&A.

Exam Time: Annual Exam and Risk Monitoring Findings

While Mr. Cook advised the “ink isn’t dry” on the 2022 priorities, he suggested broker-dealers can expect more of the same, with some new additions. New topics for examination will include: trusted contact person, disclosure of order routing, and intra-day trading.

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State Fiduciary and Best Interest Developments: Texas, Virginia and Montana

Texas, Virginia and Montana are the latest states to enact legislation or rules setting forth a best interest standard for annuity producers in recommending annuities to their customers.  Each state has designed its rule to follow the NAIC’s model regulation concerning suitability in annuity transactions, which requires producers to act in the consumer’s best interest without placing the producer’s financial interest ahead of the consumer’s.  Virginia’s new rule took effect May 1, 2021, while Texas’s and Montana’s rules will take effect on September 1 and October 1, 2021, respectively.

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Recent State Fiduciary Duty Developments: Idaho, North Dakota and Ohio

Idaho and North Dakota have adopted wholesale the National Association of Insurance Commissioners’ (NAIC) model suitability standard. Ohio also finalized its proposed rule adopting the NAIC model rule. This brings to six the number of states that have adopted the NAIC model (Arkansas, Delaware, Idaho, Michigan, North Dakota and Ohio), and three others have proposed to do so (Kentucky, Maine, and Nebraska).

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Recent State Fiduciary Duty Developments: Eight States Have Proposed or Finalized Best Interest Standards for Annuity Producers

In recent months, eight states — Arkansas, Delaware, Kentucky, Maine, Michigan, Nebraska, North Dakota, and Ohio — have proposed or finalized rules setting forth a best interest standard for annuity producers in recommending annuities to their customers. Each state has designed its rule to follow the NAIC’s model regulation concerning suitability in annuity transactions, which requires producers to act in the consumer’s best interest without placing the producer’s financial interest ahead of the consumer’s. The rule also requires producers, prior to recommending an annuity, to disclose the scope and terms of their relationship to the consumer, how the producer is being compensated, and any material conflicts of interest. Notably, the rule does not create a fiduciary obligation or relationship with the consumer, and producers are not subject to civil liability for breaching any fiduciary standard of conduct.

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Reg BI Information Overload: The Countdown to June 2020 Continues with Planned Reg BI Stress Tests, Checklists and FAQS Courtesy of FINRA and the SEC

As the countdown to the June 30, 2020, date for compliance with Reg BI inches forward, FINRA and the SEC are providing a potpourri of support and information to help firms ensure compliance.

FINRA EFFORTS: FINRA’s northeast regional director announced in late October that FINRA will perform “preparedness reviews” of broker-dealers to determine firms’ readiness to comply with Reg BI. At its November Senior Investor Conference, FINRA President and CEO Robert Cook confirmed FINRA’s intention to perform these “stress tests.” . FINRA has emphasized that its intent is not to be punitive and fine firms for compliance violations. Rather, FINRA insists its primary goal is to assist firms in successfully implementing the nearly 1,000 pages of Reg BI’s regulations.

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House Looks to Put the Brakes on Reg BI

On the heels of the SEC’s recent approval of the “Reg BI Package,” on June 26, 2019 the U.S. House of Representatives passed a bill that would prevent enforcement of Reg BI.  Specifically, Rep. Maxine Waters included a last minute amendment to an appropriations bill that would prevent any funds from being used to “implement, administer [or] enforce” Reg BI.

While the bill was comfortably passed in the House, its prospects to pass in the Senate seem unlikely.  Senators will have the opportunity to introduce their own version, which will then need to be reconciled with the House’s.  As always, we will continue to closely monitor any developments concerning Reg BI, and will publish any updates.

The Final Reg BI Package: What to Know and What’s Next

To nobody’s great surprise, on June 5, the SEC approved the “Reg BI Package,” which includes a series of new standards governing the fiduciary responsibilities of broker-dealers and investment advisers. The approved items consisted of the Regulation Best Interest – Standard of Conduct for Broker-Dealers; Form CRS Relationship Summary; Standard of Conduct for Investment Advisers; and Interpretation of “Solely Incidental,” all of which seem likely to have considerable impact on the industry going forward.

Drinker Biddle’s Best Interest Compliance Team issued an alert summarizing the June 5th meeting, certain statements made by the commissioners, and examining the potential effects of the new standards.

Read the full client alert.