What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?
Among other reforms, Dodd-Frank created the Consumer Financial Protection Bureau (CRPB) and the Federal Insurance Office (FIO). CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....."
In addition to creating the CFPB and the FIO, Dodd-Frank directed the SEC to study the need for a new, uniform, federal fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary. The SEC:
- Released its fiduciary standard study in January 2011.
- Concluded that a uniform standard of care “at least as stringent” as the fiduciary standard currently applied to investment advisors should extend to all brokers, dealers and investment advisors.
- Is expected to release its proposed regulation for a uniform fiduciary standard this year.
Historically, brokers, dealers and insurance producers have been held to a "product suitability" standard which is less stringent than a fiduciary standard. As defined at uslegal.com, "[A] fiduciary duty is an obligation to act in the best interest of another party..... A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client." (emphasis added)
NAIC Annuity Suitability Regulation
For comparison purposes, the NAIC "Suitability in Annuity Transactions Model Regulation" (Suitability Regulation) provides: "In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments or other insurance products and as to his or her financial situation and needs, including the consumer's suitability information ..." (emphasis added)
The NAIC Suitability Regulation defines "suitability information" to include: age; annual income; financial situation and needs, including financial resources used for the funding of the annuity; financial experience; financial objectives; intended use of the annuity; financial time horizon; existing assets, including investment and life insurance holdings; liquidity needs; liquid net worth; risk tolerance; and tax status.
Significantly for structured settlements, however, the NAIC Suitability Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process". By way of explanation, the legislative history of the NAIC Suitability Regulation specifically references "structured settlements" and adds: "[a] regulator pointed out that this type of contract did not generally result from a recommendation by an insurer or producer but agreed that it did not hurt to have the exemption there."
Impact on Insurance Professionals
Although the SEC's anticipated uniform fiduciary standard has received limited publicity within the structured settlement and settlement planning industries, it has generated significant controversy and disagreement among financial planners, broker dealers and life insurance professionals.
A recent article by Brian Anderson titled "Impact of a Universal Fiduciary Standard" looks at the related issues from the perspective of "insurance producers". Part of a series of articles about threats to the independent life insurance distribution channel, Anderson's article includes the following summary of arguments for and against a universal fiduciary standard:
- "Proponents of a universal fiduciary standard — including many financial planner and consumer groups — claim consumers who rely on the financial advice of experts are confused by the different standards of care. These consumers are at an information disadvantage, they say, and vulnerable to exploitation by advisors who are not required to make recommendations in the best interest of the customer."
- "Opponents of a fiduciary standard — including many life insurance industry trade associations — say a universal fiduciary standard is unnecessary because the current suitability standard is effective. Opponents also say the imposition of a universal fiduciary standard would result in higher costs and reduced choices and service for consumers."
Some life insurance representatives have expressed concern, according to Anderson's article, that the anticipated SEC fiduciary standard could potentially ban commission-based compensation for insurance product sales and thereby destroy the traditional life insurance business model.
Others disagree. Anderson quotes Jill Hoffman, NAIFA assistant vice president of federal government relations, as stating: “The language of Dodd-Frank specifically says that a fiduciary standard can be met, and a person can still receive commissions, and a person can still sell proprietary products. In other words, the language says you cannot violate a fiduciary standard just because you sell proprietary products and get paid commission.”
Structured Settlements and Settlement Planning
Will the SEC uniform fiduciary standard impact settlement planners and structured settlement professionals? Here are some reasons why leading settlement planners and structured settlement professionals should study, and anticipate the need to adopt, whatever uniform fiduciary standard the SEC ultimately adopts:
- Blended products - Structured settlement annuities increasingly are paid into trusts that also include financial products.
- Multiple licenses - In addition to structured settlement annuities, settlement planners increasingly sell securities as well as multiple life insurance and annuity products.
- Competition - To successfully compete in today's economic and legal environment, structured settlement sales persons must adjust upward to match the higher product suitability standards and best business practices of their competitors including settlement planners, financial planners and trustees.
- Clients and Stakeholders - As a matter of self-protection as well as consumer protection, many structured settlement clients (defendants; plaintiff attorneys) and stakeholders ( judges; mediators) will increasingly demand higher product and sales standards for injury victims.
- Lawsuits - In this era of accountability and compliance, all structured settlement participants are likely to be held to higher legal standards.
What issues might a uniform fiduciary standard create for structured settlement and settlement planning professionals? At their worst, as S2KM has previously observed, certain traditional structured settlement business practices fail to meet any fiduciary standard. For example:
- Misrepresentations or omission of material facts
- Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
- Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
- Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
- Structured settlement myths- historically used to promote sales such as:
- Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
- Structured settlements enable injury victims to live free of reliance on government assistance.
- Conflicts of interest - without written, informed client and/or customer consent
- Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
- Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
- Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
- Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.
For additional S2KM reporting about structured settlement business standards and practices, see the structured settlement wiki.