WASHINGTON, DC- Obama signs Financial Reform Bill, Regulation of Indexed Annuities to Remain with the States
President Obama signed H.R. 4173, the Dodd-Frank Financial Services Reform Act bill, into law today. Among the myriad of new financial regulations the bill will engender over the coming months and years, one significant regulation will remain unchanged. Fixed Indexed Annuities will retain their classification as insurance products and their regulation will continue under the purview of the state insurance commissioners, effectively strangling SEC proposed rule 151a in its crib. This, combined with the recent ruling by the D.C. Court of Appeals to vacate the rule on procedural grounds, essentially would require the SEC to start from scratch if it wants to take over regulatory territory of FIAs. What does it all mean?
1. Suitability will continue to be a primary concern: As we have seen in recent years, FIA sales will be scrutinized with vigor by both the carriers and state regulatory authorities. The wave of litigation targeting FIA carriers that began in the middle of the decade has continued, and both entities will work hard to avoid allegations of elder abuse. We have seen these efforts result in additional layers of suitability at the carrier level and that trend should continue unabated.
2. Expect the SEC to put down its slingshot, for now: SEC Chairman Mary Schapiro will have her hands full with an array of issues surrounding the implementation of the new bill. As reported in National Underwriter yesterday, Schapiro said that the bill will present an “extremely labor intensive” and “logistically challenging” workload in the coming months, and “The SEC will not be revisiting the (FIA regulation) issue, because the Dodd-Frank bill gives the states purview over the products.” Schapiro still has concerns over the marketing of FIAs, however, and continues to believe in a uniform fiduciary standard for the sales of all financial products. The current suitability standard requires only that the adviser sells the product in the client’s best interest, but does not impose a universal standard. Expect the SEC to revisit the issue on a broader scale in the future as it considers the political and logistical viability of a new, sweeping standard.
3. FIA sales will be classified as an OBA, raising questions about current suitability processes at the B/D level: In anticipation of the Rule, and in the wake of NASD recommendation 05-50 in 2005, B/Ds had stepped up its own supervision of FIA sales for its registered rep force. Those efforts had resulted in added scrutiny and product restrictions at the B/D level. Since the new bill has formally classified FIAs as insurance products, those efforts will be reevaluated as continued scrutiny of OBAs takes place.
4. Expect a new flurry of editorial against the provision: Many still believe that the sales practices of FIAs have been dubious during the product’s considerable growth. Many articles have already appeared, denouncing the Harkin Amendment as dangerous to seniors. Proponents of FIAs must be vigilant in countering the media onslaught.