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States Plan to Adopt the NAIC Best Interest Rule

By: Randy Kemnitz, Ph.D., CFP®
June 30, 2020
NAIC Best Interest Rule - Caring for Client

Best interest and fiduciary rules have been the focus of several regulatory bodies, especially after the Fifth Circuit Court of Appeals struck down the DOL Fiduciary Rule in 2018. Earlier this year, the National Association of Insurance Commissioners (NAIC) adopted a best interest rule as a revision to Suitability in Annuity Transactions Model Regulation (#275), enabling state regulators and legislatures to take up the rule. This article provides an overview of best interest rules (including the NAIC best interest rule), who is adopting them, and what they mean for insurers.

Overview of Best Interest Rules

Simply put, best interest rules state that all recommendations by agents and insurers must put the interests of their clients ahead of their own. For example, in 2019, an amendment to New York State suitability standards for annuity transactions (Regulation 187) was passed, and New York called it the “Best Interest Rule.” The amendment requires recommendations to be in the best interests of the consumer. It requires insurers to establish new standards and procedures for how agents and brokers make insurance and annuity product recommendations.

In February 2020, NAIC enacted its own best interest standard as a revision to its regulation 275. In a press release, NAIC describes it like this: “All recommendations by agents and insurers must be in the best interest of the consumer and ... agents and carriers may not place their financial interest ahead of the consumer’s interest in making the recommendation.” The rule requires that agents and carriers act with “reasonable diligence, care, and skill” in making recommendations.

Now that NAIC has approved the revision and issued guidelines, the insurance regulators in all 50 states and the U.S. territories can take it up in their respective jurisdictions.

Best Interest Rule vs. Fiduciary Standard: What’s the Difference?

When you look at a best interest rule like New York’s or the NAIC’s and compare it with the fiduciary standard for CFP® professionals, it’s hard to tell the difference. After enacting its Regulation Best Interest (BI), the SEC indicated that it views fiduciary and best interest as the same. Other organizations, most notably CFP Board, maintain that the fiduciary standard is stricter.

A fiduciary standard, says CFP Board, “should put the interests of the client first and should include both a duty of care and a duty of loyalty.” Certain consumer groups and states agree. They don’t feel the “best interest” standard goes far enough.

New York, for example, will not revise Regulation 187 to meet the NAIC best interest rule because New York wants to hold brokers and agents to a higher standard. Some states appear to be taking New York’s view. Massachusetts finalized its own fiduciary standard, although it excluded insurance agents, and New Jersey, Nevada, and Maryland are pursuing similar rules.

Many states prefer the NAIC rule, and it is believed that as many as 12 states will adopt it by the end of this year.

Iowa and Arizona: First Adopters of NAIC Best Interest Rule

Iowa is the first state to put the new NAIC rule in play. The state insurance regulator approved the rule quickly, and the state legislature adopted the new rule in May effective January 1, 2021.

Arizona took the initial draft and created its own version, although it is about 99 percent the same. The differences are subtle and focus on communication and disclosure requirements. Arizona's law is also effective January 1, 2021.

In addition, proposals are pending in Arkansas, Kentucky, Michigan, Nevada, Ohio, and Rhode Island.

Stay Up-to-Date on all the Rules

Over the course of 2020 and beyond, Kaplan will be following the progression of the NAIC Best Interest Rule, along with any other standards individual states adopt. We encourage you to follow along. As they become part of each state’s insurance continuing education, we will also add them to our insurance CE packages.