Maureen James – Co-owner/Principal at Summit Compliance Group, LLC | Compliance, Data Security, Risk Assessment, Regulation, Best Interest Rule
“If you think compliance is expensive – try non-compliance.” – Former US Deputy Attorney General, Paul McNulty
Compliance tends to get a bad rap because it’s often associated with laws, regulations, enforcement actions and their associated penalties. It also takes valuable time, effort, and resources from folks who would much rather be focusing on other areas of their business. However, compliance is not just a necessary evil, it’s good for business. Understanding your unique risks and building systems to mitigate them can pay off handsomely; Ignoring compliance is a gamble you might not be able to afford.
Let’s take a look at 4 critical areas you’ll want to focus on in the coming year to position your business for the long term: Advertising, NAIC “Best Interest” Model Regulation, The DOL’s Investment Advice Rule, and Data Security.
# 1: Regulatory Scrutiny on Advertising Will Continue
Advertising remains one of the easiest ways to put you on the radar of a regulator, and they are unlikely to abandon investigations in 2021 based on advertising violations. Unfortunately, advertising can also serve as the “foot in the door” for a regulator who can then expand their investigation into other parts of your practice.
Unless you’re one of the lucky few who gets 100% of your business via word of mouth or referrals (and wouldn’t that be great!), you likely use at least one or more advertising mediums to engage with consumers in order to solicit business. It might be a seminar, a brochure, a social media blog or post, a software platform, radio show, direct mail, emails, or any other communication.
Guess what? All of that is considered advertising under state and federal regulations and is subject to complex and numerous advertising regulations. And one of the easiest ways for a producer to find himself/herself on the radar of a regulator is through non-compliant advertising. It’s not entirely your fault. Advertising regulations are not intuitive. They are nuanced and often complicated. While you may believe your advertising is fine and you are acting with the best of intentions, unless you are an expert in advertising laws, you are taking a big risk. Your advertising either works for you – by supporting complete, clear and accurate information – or it works against you, essentially creating written documentation that can be used against you during a complaint, litigation or regulatory enforcement action.
Remember…regulators are people, too, and they listen to radio shows, receive seminar invitations, and experience the other types of advertising created by producers. In addition, your competitors are a common source of advertising complaints. Whether or not you believe their complaint (often to a state regulator) has merit, you can still face an ugly, or at best, time-consuming investigation into your advertising – and potentially your entire practice.
Don’t risk what you have worked so hard to build. Have your advertising reviewed by an expert so that you can focus on what you do best, with the assurance that your practice is protected.
# 2: Higher Standard of Care due to the NAIC “Best Interest” Model Regulation
Suitability has been the standard of care in place for many years when it comes to annuity sales. However, we all remember the U.S. Department of Labor’s Fiduciary Rule (“DOL Fiduciary Rule”) from a few years ago that was eventually vacated by the U.S. Court of Appeals for the Fifth Circuit. What the DOL Fiduciary Rule showed us was that many regulators want to move away from the suitability standard of care toward a higher standard of care. We have already seen it happen with the SEC’s Regulation Best Interest and new laws and regulations in several states.
The National Association of Insurance Commissioners (NAIC) has finalized a “best interest” model regulation and, as of the date of this document, two states have adopted it – Iowa and Arizona. At least seven other states are actively considering it, and it is anticipated that several more may do so in 2021.
The NAIC’s best interest standard of care is a significantly higher standard of care than a suitability standard and the requirements are more burdensome. For example, producers will be required to make annuity recommendations that are in the best interest of the consumer and put the interests of the consumer ahead of the interests of the producer and the insurance carrier. In addition, the following four obligations are required to meet the best interest standard: Care, Disclosure, Conflict of Interest, and Documentation.
A best interest standard of care will change the way in which the annuity industry does business and will create additional and substantial risks for producers and marketing organizations. Independent distribution will need to evaluate their sales practices, advertising, documentation, and other processes to identify changes that will be required to comply with these new requirements.
(Stay tuned, we’ll cover the best interest model regulation in more detail in a future DMI Guest blog!)
#3: Changing Regulations Around Advice &The DOL Investment Advice Rule
The U.S. Department of Labor has proposed an “investment advice” rule that would expand who would be considered a fiduciary. Financial professionals, including insurance agents, who provide “advice” regarding retirement plans and IRAs (including rollovers into fixed annuity products) would likely be considered fiduciaries under this proposal. To receive compensation, producers would need to comply with three Impartial Conduct Standards: act in the best interest of the consumer, receive no more than reasonable compensation, and make no misleading statements. There are also additional disclosure requirements under the proposal.
The DOL’s proposal has been sent to the Office of Management and Budget (OMB) and is listed as economically significant. The OMB will need some time to review the proposal, and economically significant proposals typically require 60 days before they become effective. As a result, it is unlikely that the proposed rule will become effective prior to the presidential inauguration day on January 20, 2021. The incoming administration will therefore have an opportunity to delay the proposed rule and make changes to it or rescind it entirely and
come up with its own proposal. Several individuals associated with the incoming administration have publicly stated their desire to impose a fiduciary rule that is more robust than the current proposed rule so it appears likely that the current proposal will not become effective and an even more burdensome proposal will be forthcoming.
#4: Ongoing Cyber Threats and Data Security
The threat of a data breach continues to grow for businesses of all sizes. In fact, Verizon’s 2020 Data Breach Investigations Report1 found that 28% of data breaches involved small businesses. External actors (hackers) accounted for 64% of attacks in the financial and insurance sector and they are financially motivated to get easily monetized data (social security numbers, bank account information, policy information, etc.). Many small businesses that are the victim of a data breach do not survive due to legal costs, reputational damage, and other related factors.
A dozen states have passed data security laws and regulations that are specific to the insurance industry and more states are likely to do the same in 2021 because securing the huge quantity of consumers’ non-public information utilized in our industry is a bi-partisan issue and concern among lawmakers and regulators. Most states (not all) do not have many requirements for producers and smaller marketing organizations. However, insurance carriers are required to assess the data security of third-party vendors which likely includes independent producers and marketing organizations. This assessment by insurance carriers could lead to the need to enhance data security protocols or risk losing insurance carrier appointments.
The Changing Political Landscape and its impact on 2021
With all of the new laws and regulations, there will be ample opportunity for regulators to identify violations and take action. The new Democratic administration may push for more enforcement to protect consumers and this could influence state regulators to “step up” their own enforcement to prevent being viewed as “soft” on enforcement. We’ve seen this happen in the past with the DOL Fiduciary Rule.
Protecting your business in this time of increasing regulation is critically important. Compliance is often easier and less expensive than you may think. Like with so many other things, it pays to not procrastinate when it comes to meeting regulatory requirements.
