Regulators near completion of guidance on compliance with annuity rules

More than a year after first circulating a draft guidance on compliance expectations for its best interest standard for annuity sales, regulators are nearing a final version.

The National Association of Insurance Commissioners adopted the Suitability in Annuity Transactions Model Regulation #275 update in 2020 to strengthen state regulation over annuity sales.

The draft guidance provides details for insurers regarding their obligations when they rely on third parties, such as broker-dealers, investment advisers, or ERISA fiduciaries, to comply with the annuity suitability model.

In March 2024, Iowa Insurance Commissioner Doug Ommen first noted that reviews of compliance with #275 turned up “deficiencies” in producer monitoring. Ommen chairs the Annuity Suitability Working Group, which is behind the draft guideline.

Reviews “disclosed several ways in which companies’ safe harbor implementation is failing to rise to the level of monitoring the relevant conduct of the financial professional, including inadequate board onboarding of new broker-dealers to sell for the insurer,” Ommen said then, referring to the issues as “systematic deficiencies.”

The working group met on Tuesday for some final minor wording changes and voted for another 14-day exposure for public comment. “I would like to get this document completed,” Ommen said.

Safe harbor explained

The guidance addresses insurers’ reliance on the safe harbor and on third parties to supervise sales.

A safe harbor is a legal provision to sidestep or eliminate legal or regulatory liability in certain situations, provided that certain conditions are met. The NAIC model includes a “comparable standards safe harbor” that considers a producer in compliance if they satisfy a “comparable standard even if such standard would not otherwise apply to the product or recommendation.”

Examples include a broker-dealer registered under federal or state securities laws or a plan fiduciary under the Employee Retirement Income Security Act of 1974.

The guideline reminds insurers of their responsibilities to:

• Verify that the safe harbor conditions are satisfied.
• Actively monitor the supervising entity.
• Report to the supervising entity the data necessary to maintain an effective oversight system.

“To meet safe harbor requirements, insurers must monitor the insurance producer or their supervising entity,” the guidance reads. “An effective monitoring program involves the insurer taking active steps to assure itself that the supervising entity is complying with its obligations. Simply awaiting complaints or regulatory actions after regulatory exams are passive approaches that are inadequate in and of themselves.”

Fixed annuities could fall within the safe harbor if the supervisory control system implementing the comparable standard, whether it be the SEC or ERISA, contemplates fixed annuities. The draft guidance highlights that insurers “must ensure that policies of the supervising entities also address the unique features of annuity contracts, including their long-term guarantees and surrender charges.”

How to monitor

The guidance recommends three key practices to effectively and “actively” monitor the supervising entity:

The contract. When the supervising entity is handling the compliance obligations for an insurer, “a written contract reduces misunderstanding between the parties as to who is doing the supervising,” the guideline states.

Onboarding. The insurer should perform onboarding due diligence that includes a review of policies and procedures and regulatory actions, the guideline states. The review of policies and procedures should ascertain whether the policies apply to registered and unregistered annuities with appropriate modifications for product differences.

Ongoing monitoring. The guideline defines “ongoing monitoring” as including: due diligence questionnaires; periodic engagement with the supervising entity on compliance; risk analysis of sales activity, including sales to older consumers, free-look cancellations, early surrenders, and replacements; a strong audit program of adequate sample size on a frequent, risk-based basis; and meaningful annual certifications that are “detailed and active.”

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