NASAA Proposal of Best Adviser Practices Receives Pushback

Industry advocates in the insurance and securities industries expressed general disapproval of a proposal from the North American Securities Administrators Association which would update its model rule on dishonest or unethical business practices of broker/dealers and agents. The comment period for the proposal closes on Monday.

The proposal aims to implement the Securities and Exchange Commission’s Regulation Best Interest at the state level. For example, it would require advisers and broker/dealers to only make recommendations in their clients’ best interest and not to put the adviser’s interest ahead of the client’s. Certain practices, such as sales contests for specific securities in a set timeframe, would be presumed to be putting the adviser’s interests first.

NASAA wrote in its proposal that the current rule, beyond needing to be updated to SEC standards, “does not fully account for other significant changes that have occurred in the financial services industry in recent years, including the blurring of brokerage and advisory service models and the emergence of fintech and other digital investing platforms.”

Sarah Wood, director of state policy and regulatory affairs at the Insured Retirement Institute, says that NASAA model rule proposals serve as recommendations for states that can advance legal uniformity between them. States are not required to accept model rules.

Industry critics of the rule argue, though, that the NASAA proposal goes further than the SEC’s Reg BI in some important ways. The comment letters from the IRS, the American Securities Association and the Securities Industry and Financial Markets Association all argued that the definition of “recommendation” and framework for conflicts both go beyond Reg BI.

The IRI’s letter explains that the definition of a recommendation would capture marketing and educational materials, which Reg BI excludes. Wood calls this an “extremely broad” definition that could “dramatically alter” the way various securities and annuity products are sold.

The proposal also creates a rebuttal presumption of a conflict if an adviser is compensated beyond transaction-based commissions, Wood explains, and could create issues for compensation models that involve recruiting clients.

According to Wood, some products may be taken off the market if their fee structures do not align with the NASAA proposal, assuming it is adopted. Wood emphasizes that even a few states adopting the proposal in its current form could “upend the industry.”

Wood expresses particular concern for variable annuities. She explains that the changes to rules governing conflicts and recommendations “are all things that could limit offerings that are available such as variable annuities.” Instead, Wood says that the framework created by the National Association of Insurance Commissioners is preferable, since it is a more faithful implementation of Reg BI to the insurance industry.

The IRI letter supports a “pure incorporation” of Reg BI.