Bates Research - 02-28-20

Massachusetts Adopts New Fiduciary Rule; SEC Releases Reg BI FAQs;  NAIC Approves Annuity Regulation

Massachusetts Adopts New Fiduciary Rule; SEC Releases Reg BI FAQs;  NAIC Approves Annuity Regulation
Photo by Ken Lund under CC BY-SA 2.0

As the June 30, 2020, date for compliance with the Regulation Best Interest (“Reg BI”) draws near, federal and state regulators are increasingly vocal in warning market participants about how they should treat client investors. Fortunately, the regulators have provided a constant flow of guidance and resources designed to help firms prepare. Unfortunately, however, a chance still exists that geography will affect compliance. In this article, we look at the latest developments by state regulators to push a more stringent fiduciary standard, new SEC staff considerations on Reg BI questions, and important developments in the National Association of Insurance Commissioners (“NAIC”) model regulation on conflict of interest rules for insurance agents and representatives selling annuity products.

Massachusetts Adopts Fiduciary Rule

On February 21, 2020, the Massachusetts Securities Division (“the Division”) of the Office of the Secretary of the Commonwealth officially adopted its proposed “Amendments to Standard of Conduct Applicable to Broker-Dealers and Agents.” The final regulation, effective March 6, 2020, and enforceable starting September 1, 2020, applies a fiduciary conduct standard to broker-dealers when dealing with customers. (Note: the Division adopted amendments concerning disclosure obligations for investment advisers effective back in June of 2019. Enforceable as of January 1, 2020, the amendments require that investment advisers registered in Massachusetts provide clients and prospective clients with a one-page, stand-alone Table of Fees for Services.)

The final regulations were revised to “make clear that the existing suitability standard still applies to any relationships or transactions expressly excluded from the fiduciary standard.” As a previous Bates post describes, the revised version adds “language expanding a potential breach of fiduciary duties to commodity and insurance products;” establishes a presumption that a fiduciary duty exists simply by the title used by an advisor; and requires that an advisor go beyond disclosure or mitigation of a conflict of interest by requiring efforts to actually avoid such conflicts.

Based on comments received, the standards were adopted despite significant pushback, even from Massachusetts Governor Charles Baker (see here). Broker-dealers and agents registered in Massachusetts that fail to comply with the newly adopted fiduciary standard will be deemed in violation of their obligation of “utmost care and loyalty” and considered to be operating a “dishonest or unethical practice” under Massachusetts law.

SEC Issues New FAQs on Reg BI Compliance

On February 11, 2020, SEC staff modified their Frequently Asked Questions (“FAQs”) documents on Reg BI and CRS Forms. Though staff member answers are not official “rules, regulations or SEC statements” and “have no legal force or effect,” compliance professionals should not ignore them. The documents are available on the SEC website. The Reg BI FAQs cover by category the following: Retail Customer, Recommendation, Disclosure Obligation, Care Obligation, Conflict of Interest Obligation and Compliance Obligation. The CRS FAQs cover Retail Investor, Relationship Summary Format, Delivery Requirements, Amendments to the Relationship Summary, Disciplinary History, and Plain English; and Fair Disclosure.

Among several scenarios, the latest answers clarify (i) the applicability of Reg BI obligations and CRS Form requirements for accredited investors, (ii) whether CRS forms must be sent or resent to customers if the type of account changes, and (iii) issues concerning state and federal registrations.

NAIC Approves Model Regulations

On February 13, 2020, NAIC announced approval of final revisions to the Suitability in Annuity Transactions Model Regulations. Bates has been following the NAIC deliberations to revise standards and procedures for providing recommendations to consumers on transactions involving annuity products. In general, the model regulation requires that an agent demonstrate in writing a recommendation is in the consumer’s best interest and must identify, manage, and disclose material conflicts of interest. In our previous post, we note that NAIC’s Life Insurance and Annuities Committee approved final revisions (i) that spell out that any producer of such products must satisfy obligations of care, disclosure, conflict of interest, and documentation, (ii) that the model regulation does not require a fiduciary relationship between the producer and the customer, and (iii) that the model regulation provides a safe harbor for producers that comply with the Reg BI. For compliance purposes, the revised model also enhances supervision regime. NAIC President Ray Farmer stated that “nearly every state has adopted the model, which has been protecting consumers for 15 years. I encourage my colleagues to work with their state legislatures to pass these updates to provide even stronger protection” for consumers purchasing annuities.

CONCLUSION

There are no surprises among the developments. Processes undertaken by various authorities are leading to different, but anticipated results; some that can coexist (i.e., SEC and NAIC) and some that may ultimately be a bit more challenging for firms (Massachusetts fiduciary duty standards and Reg BI).

Despite the request Kenneth Bentsen Jr., president and chief executive of SIFMA for Massachusetts, issued, to “delay action for at least 18 months and then assess whether any further steps are necessary,” the Division appears to have done the opposite, setting an effective date almost 2 months earlier than the Reg BI compliance date. The stage is set for a possible legal battle about whether state or national standards will prevail.

The NAIC’s Reg BI-friendly model regulation for annuity products appears to accommodate some of the differences between the states and the federal agencies.

Firms have little choice but to prepare for Reg BI and should consider their own business practices in light of the detail offered by the SEC FAQs. For broker-dealers whose customers are in Massachusetts, the March 6th effective date for the regulation is fast approaching. For all, the Reg BI June 30 compliance date is just around the corner.


Bates Group’s Compliance team helps firms through the implementation phase of Reg BI and navigating compliance concerning investor and consumer protection standards. To learn more about Reg BI compliance consulting support for your firm, please visit our Reg BI service page or contact Robert Lavigne, Managing Director, Bates Compliance, at rlavigne@batesgroup.com.

For information about Bates Group’s Insurance and Actuarial practice services, please contact Bates Managing Consultant, Greg Faucher.

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