The environment for high-commission variable annuities sales gets a little less friendly by the day.

Both the Securities and Exchange Commission and the Financial Industry Regulatory Authority are hyper-focusing their advisor examinations on variable annuities. That’s the word from securities attorneys at Eversheds Sutherland, who spoke during a press conference Thursday. The regulators are looking for product sales where pricing and commissions appear excessive and instances where advisors are doing costly swaps of clients’ existing contracts for new VAs that add little or no client benefit but generate new commissions and fees.

The law firm looked at preliminary enforcement statistics for 2018. According to Eversheds Sutherland partner Brian Rubin, the statistics show that Finra was zeroing in on advisors’ unsuitable sales, especially variable annuities, and levied $10 million in fines.

“One big enforcement Finra brought,” Rubin said, “involved a $4 million fine against a firm for suitability violations for variable annuities exchanges. The firm was also required to pay $2 million in customer restitution.

“This gives you an indication that the level of Finra interest and level of fines are high,” he said.

To throw a spotlight on variable annuity fees and commissions and judge whether they’re suitable for customers, the SEC has proposed a sweeping new layered approach to VA customer disclosures and has published a new investor alert on VAs. The alert urges consumers to review the policy prospectuses, ascertain all costs and “be prepared to ask your financial professional questions about whether the policy is right for you.”

In the meantime, the state of Maryland has introduced legislation that would make all brokers and insurance agents fiduciaries—a standard that has traditionally prevented commission sales of any kind. If the state’s legislature is successful, brokers and agents operating in the state might only be able to offer clients no-load variable annuities.

Can the salad days of the 4%-9% variable annuity commission and additional 4%-9% “early withdrawal penalties” survive this assault?

Don’t expect the powerful securities or insurance industries who defeated the Department of Labor fiduciary rule in court to mount anything less than the most aggressive of campaigns to derail the bills or any push to constrain VA sales.

Big Money And The Demise Of The DOL Rule

There is much at stake. Total annuity sales hit $59.5 billion for the second quarter of 2018, after the DOL rule was killed, according to the Limra Secure Retirement Institute. Sales had not been as high since early 2015, just before the DOL rule was being put in place.

The National Association of Insurance Commissioners has created its own model regulation for variable annuities. It’s been years in the proposal stage as the insurance and brokerage industry have commented on it. But as time goes on, that proposal is being eclipsed by tougher federal and state initiatives—ones that may very well force VA issuers and brokers to eliminate conflict of interests and put clients’ best interests first using VAs with either lower commissions or no load at all.

The latest draft of the NAIC’s model (“Suitability in Annuity Transactions Model Regulation”) would require an agent to act with reasonable diligence, care, skill and prudence on behalf of clients and disclose to them conflicts of interest as well as cash and non-cash compensation. There is no requirement in the proposal that would mandate that agents act in clients’ best interests.

According to Mike Lacek, a retirement, insurance and annuity consultant with Bates Group, “The NAIC deliberations reflect a real tension underlying efforts to produce a simple rule that can do it all. Until such time as these issues are resolved in a comprehensive and coherent way, companies will have to continue to address the ongoing compliance challenges they present.”

The American Council of Life Insurers is opposing tougher best-interest and fiduciary standards, as it did when successfully suing the DOL, on the grounds that such a rule will force brokers to eschew all commissions and commission-based products to work only with clients who have accumulated assets upon which they can levy an asset-based fee.

In a self-published op-ed on Medium.com, ACLI President and CEO Susan K. Neely came out swinging against the Maryland fiduciary standard for brokers and agents, saying the bills “would hurt middle-income Marylanders trying to protect themselves and their families with better financial security.” The op-ed is available here.

“The problem comes with the fact that the bill in Maryland would make every financial professional who sells an annuity a ‘fiduciary’ of the customer,” Neely said. “This would end commission-based sales because fiduciaries are generally not allowed to represent both the buyer and seller in the same transaction.”

She added, “If financial firms are forced to move to a model where the only way a consumer can get financial advice is if that consumer pays a fee to a financial professional year after year out of their own pocket, then lower- and middle-income consumers — everyday Americans — are far less likely to be able to consider all their options for their own retirement needs.

“It’s also unfair to consumers who don’t want a fee-based arrangement where the annual charges can become costly over time,” she said.

The latest data shows the average annuity owner has a household income of $64,000, while more than a third have household incomes less than $50,000, the ACLI reports.