What Every IMO/BGA Principal Must Understand About Today's Compliance Requirements
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"Soon, 49 States will have adopted the NAIC Best Interest model regulations. Most producers are failing to comply with its provisions."
Imagine a technology platform that minimizes compliance risk while generating sales growth. That is the uniqueness of Insurance SalesGuard (ISG). ISG helps producers, wholesalers and insurers minimize financial liability and administrative costs while simultaneously expanding insurance sales. Consider where we are now.
The regulatory environment is in flux. The preliminary injunction staying the implementation of the DOL’s Retirement Security Rule has been appealed. DOL may also choose another path i.e., crafting a new Prohibited Transaction Exemption. Or, it may rescind the five-part test,” or produce yet another “version of its fiduciary rule.” The stay in the Joint Trades lawsuit in the Northern District of Texas (which is also a nationwide stay as in the FACC case) applied to both PTE 84-24 and PTE 2020-02. The impact of that is that PTE 2020-02 remains in place as it existed prior to the Rule being stayed.
Soon, 49 States will have adopted the NAIC Best Interest model regulations. Most producers are failing to comply with much of its provisions. Ignorance of the law’s requirements offers no solace when producers become subject to penalties due to their lack of compliance.
"Cresczendo believes that the SEC’s Cutter case may be the first of many high-profile actions taken against IARs who have adopted the dual-hat business model. Like the DOL, the SEC has targeted annuity producers. Advisors who act as fiduciaries are legally required to put their clients’ best interests first. However, when the same advisors sell commission-based products, they have an incentive to recommend products that generate higher commissions, even if these products might not be the best option for the client."
Recent changes in the law have shifted liability away from insurers and onto agents. But not just agents. In practice, liability potential extends to the IMO/BGA, and not just in instances of rescinded cases. The reason is this: In the normal conduct of your business, your employees influence the products your agents recommend. In terms of to whom liability extends, the law also includes this language, "...and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer (IMO/BGA) has had any direct contact with the consumer." No IMO/BGA can prudently ignore this liability risk.
Consider how most of your revenue is generated. Think about the number of producers who generate the lion's share of your firm's income. In contrast to the total number of agents contracted through your agency, your top line derives from a comparatively small group of loyal producers. It is in the best interest of your business that these producers follow practices that ensure compliance with all existing laws and regulations. But here's the truth: It is highly likely that much of your revenue is generated from sales transactions that are not compliant. This reality will inevitably and adversely impact the IMO/BGA.
Best Interest requirements have changed the landscape for selling fixed annuities. For the last 15 years, agents have been required to follow a suitability process for selecting products for their clients. However, until now the carrier was ultimately liable for the suitability of the product issued. NOW, the agent is fully liable for the sale and is legally obligated to adhere to best interest standards and duties of care, documentation, disclosure, and conflicts of interest. Add to that the Department of Labors continued goal of "leveling the playing field" by making everyone a fiduciary not to mention the SEC's expansion of their enforcement of dual-licensed annuity sellers. Many agents are looking at a trifecta of potential liability. With this, along comes the potential exposure of the IMO or BGA who works with that agent.
Cresczendo is aware of multiple current instances of carriers auditing annuity sales. These audits most likely stem from regulator inquiries about transactions that typically involve1035(s) exchanges. The carrier demands that the agent provide all of the documentation that is mandated by NAIC Best Interest regulations. After learning that he or she is subject to this audit, who does the agent call first? Of course, your office. The agent explains that the carrier has threatened to reverse the transaction and reverse the commission. The agent is very angry, cannot understand why this is happening and asks you to, "fix it." But no matter how great your importance and prestige may be to the carrier; this is a problem you cannot fix. Yet, you have a financial exposure that hinges on it being fixed.
Your business' health going forward is well served by making a relatively small investment in insurance SalesGuard in order to provide the compliance support your best agents need. Moreover, it is highly likely that your investment will be returned to you multiple times in terms of increased sales due to the exclusive marketing dimensions of the application. An investment in compliance support is truly an investment in sales growth.