A New Era in Regulation: Are you ready?
David J. Stertzer, FLMI
As CEO of AALU, and top staff officer for more than 20 years, David has provided continuity, leadership and strategic vision to AALU’s Board of Directors and has worked directly with nearly half of AALU’s 50 Presidents.
The most sweeping re-write of our nation’s ﬁnancial rules and regulations since the 1930s—The Dodd- Frank Wall Street Reform and Consumer Protection Act—is now the law of the land. The legislation aims to address the issue of broker and advisor standard of conduct obligations when providing personalized investment advice to their retail customers about securities, and to resolve the debate over the broad expansion of a ﬁduciary duty to brokers and many life insurance agents. This is an issue that has generated a tremendous amount of interest and advocacy over the past 18 months. AALU, in conjunction with The American College, NAIFA and several other partners from the life insurance industry, has been very active in protecting the interests of the life insurance agent community by working to ensure that any legal or regulatory obligations that arise from this overhaul are fact-based, informed by considerable analysis and targeted to truly protect consumers without damaging the distribution system for important ﬁnancial products and professional ﬁnancial services.
SECTION 913 OF THE DODD-FRANK ACT
The agreement reached by House and Senate negotiators during the two-week ﬁnancial reform conference represents a compromise between two markedly different proposals previously adopted by each chamber. The House moved to immediately direct the Securities and Exchange Commission (SEC) to impose a ﬁduciary duty on all broker-dealers and their registered representatives, including life insurance agents who sell variable insurance products. By contrast, the Senate took a more reasoned and balanced approach to this multifaceted issue. The Senate proposal—under the thoughtful leadership of Senator Tim Johnson (D-SD) and Senator Mike Crapo (R-ID)—called for a one-year SEC study of existing broker and advisor regulations and standards of conduct, to be followed by a rulemaking under the Commission’s existing authority, if the study’s ﬁndings deemed such a rulemaking to be appropriate. Negotiators were able to reconcile these two approaches despite the presence of very different opinions on both sides of the issue, and an agreement was adopted near the conclusion of the conference.
The agreement will require the SEC to conduct a comprehensive six-month study of existing legal and regulatory standards for broker-dealers and investment advisors examining their effectiveness and reporting on any gaps, shortcomings or overlap in regulations. The Commission shall then consider the ﬁndings and conclusions of the study when undertaking a future rulemaking. While the legislation has provided the SEC with the authority to impose a “best interest” standard on brokers and registered representatives, this rulemaking is not mandated. Further, Section 913 stipulates that receipt of commission or sale of a proprietary or limited range of products shall not automatically trigger a violation of the standard, nor will such a standard require a continuing obligation to the customer after investment advice about securities has been provided.
IMPACT FOR THE INDUSTRY AND MARKETPLACE
The agreed upon SEC study is a meaningful victory for brokers and insurance professionals. The Commission will be required to examine the effectiveness and impact of existing standards, comparing and contrasting the current broad, principles-based ﬁduciary duty to which investment advisors are held to the deﬁned, rules-based suitability standards applicable to brokers and agents who are dispensing investment advice or selling securities, including variable life insurance products. As members of The American College are aware, brokers are already subject to a comprehensive set of statutory, SEC and Self-Regulatory Organization (FINRA) requirements; are required to ensure that their recommendations are suitable for the investor’s ﬁnancial situation and needs; are required to engage in fair communication and receive fair compensation; and provide numerous disclosures.
The pending SEC study should reveal these facts and shed light on other critical areas not previously studied, such as instances in which the existing regulations affecting brokers provide greater consumer protection than those affecting advisors. The potential impacts of the expansion of a ﬁduciary duty beyond investment advisors, including ﬂuctuation in costs to consumers and ﬁnancial professionals and the effects on regulators and their enforcement cycles, also should be illuminated.
While the study’s ﬁndings are to be considered by the SEC, their rulemaking, if not properly constructed, still has the potential to be problematic for brokers and agents despite the aforementioned stipulations attached to the rulemaking authority granted to the Commission. The principal concern for life insurance agents selling variable insurance products is that despite layers of robust regulation from federal and state securities regulators and state insurance departments, a poorly crafted best interest standard for these professionals could potentially re-shape the market for variable products and set a precedent for future regulation of other lines of insurance products. More specifically, the cost of variable products could increase as a result of new compliance requirements. The residual impact for retail customers, particularly middle-market consumers who often rely on the ﬂexible investment opportunities provided by variable products, would be diminished product choice. In a marketplace with fewer options, the risk of being underinsured or lacking adequate ﬁnancial protection is certainly greater.
Over the long run, it will be important that the future SEC rulemaking does not place unnecessary or unwarranted compliance burdens on brokers and agents. Doing so could damage the distribution system for the ﬁnancial products relied upon by millions of families and businesses by further complicating the already challenging process of selling life insurance products. Should this be the case, it is quite possible that the demand for professional advice and service would ultimately exceed the supply of professionals equipped to provide it, which could result in marketplace uncertainty and ﬁnancial instability.
AALU, NAIFA and our industry partners, as well as The American College, are committed to working with SEC ofﬁcials to aid in their fact gathering and study of this issue and any future rulemaking as we continue our work in protecting the interests of our members and the consumers they represent.