OLDWICK, N.J. — Certain life insurance agents and broker-dealer firms could face increased legal liability depending on how the U.S. Securities & Exchange Commission rules on the fiduciary standard pertaining to the sale of investment products.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, signed into law on July 21, the SEC is directed to study the obligations and legal standards of care of broker-dealers and investment advisers when providing investment advice about securities to individual investors. That report to Congress is due within six months.
Investment advisers are held to a fiduciary standard, meaning they must put the interest of their clients before their own, whereas a broker-dealer must observe standards that include an obligation to make recommendations that are suitable for their clients, said SEC Chairman Mary L. Schapiro in a July 27 speech posted on the SEC website.
A uniform fiduciary standard could possibly destroy the captive agency business, said Steven Schwartz, an equity analyst with Raymond James. "The issue is whether a career agent, if he or she is restricted to selling the products of a single company, can actually be acting in the best interest of the client," he said.
If a captive agent can only sell variable annuities from one company, "the conflicts may be so great that acting in the best interests of a client becomes problematic at best," he said.
Currently, the best-interest standard only applies to investment advisers but will be applied to registered representatives licensed by broker-dealers at some point, Schwartz said.
The current suitability rule simply requires that registered representatives ascertain that the products are suitable for clients, "a much lower standard," he said.
Many insurance agents who sell securities-linked insurance and investment products, such as variable annuities and variable life insurance, along with mutual funds, must be registered with and licensed by a broker-dealer.
There are about 11,500 investment adviser firms and 5,400 broker-dealer firms registered with the SEC. Many life insurers, including MetLife (NYSE: MET), Prudential Financial (NYSE: PRU), New York Life and Northwestern Mutual, also have broker-dealer subsidiaries.
Sales people, sometimes called registered representatives, register primarily with the Financial Industry Regulatory Authority, John Heine, an SEC spokesman, wrote in an e-mail.
The concern among affected parties is the possible increased legal liability or financial penalties from the SEC if they don’t meet the new standard, said Carmen Balber, director of the Washington, D.C. office of Consumer Watchdog.
A certain financial product offered to a client may have commissions that are 10 times higher than a similar one, said Denise Voigt Crawford, president of the North American Securities Administrators Association and the Texas securities commissioner. That product may be suitable, "but it’s certainly not in their best interest" to pay that higher commission.
If someone is anything other than an investment adviser, they’re not required to meet the fiduciary standard, which means "they can put their own interests first," she said. An insurance agent who provides investment advice about variable annuities, for example, isn’t subject to the fiduciary standard, Voigt Crawford said.
When the study is completed, the SEC will be authorized to write rules "that would create a uniform standard of conduct for professionals who provide personalized investment advice to retail customers," Schapiro said.
It’s not known whether the SEC will rule that everyone must be subject to the same standard, Voigt Crawford said.
The National Association of Insurance and Financial Advisors maintains that the law does not define what the rules are for compliance with a legal best-interest standard, thus subjecting registered representatives to the potential of "never ending lawsuits."
For example, "is ‘best’ the cheapest recommended product? The ‘best’ premium relative to the benefit of the product?" the group says.
In an opinion piece, Thomas Currey, president of NAIFA, wrote: "Under the current suitability standard of care, life insurance agents and financial advisers provide high quality service to investors the large investment advisory firms would otherwise often ignore."
Most mutual life insurers have career agents.
"Over the past 30 years, we have experienced a reduction in the number of people dedicated to talking about life insurance," Robert Kerzner, president and chief executive officer of LIMRA, LOMA and LL Global, wrote in an e-mail. The average age of an affiliated agent is 52, he said.
"These regulations could make it more difficult to attract new producers and retain experienced ones," Kerzner said.
Jack Dolan, a spokesman for the American Council of Life Insurers, said his group wants to "make sure existing business models are protected, including proprietary products and channels, although this is addressed in the law."
The comment period is open for 30 days after publication of the comment request in the Federal Register, the SEC said on July 27.
(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])