legislation and regulation
Will Disclosure Bring Closure
C
MARK VALENTINI
Mark Valentini, MPP, is
NAILBA’s former Director
of Government Affairs
and currently works as
a lobbyist for a non-
profit organization in
Washington, D.C. Mark has
a Masters in Public Policy
with a Concentration in
Governance Systems and
Policy Management from
George Mason University
and has worked in a variety
of legislative roles during
his career.
30 perspectives WINTER 2019
ompensation has been
at the center of the
argument supporting
more stringent standards
of care when it comes to
selling financial products and
providing recommendations.
Regulators want to ensure
when a customer is provided
with options for a product
like an annuity, the producer
is not going to push a less
suitable product on a customer
simply because it will pay that
producer a higher commission.
New York State pushed for a
commission disclosure rule
back in 2010 on fixed products
that many in the industry
opposed, NAILBA included.
In the end, Regulation 194
was passed, and producers
were required to include a few
extra pages accompanying
product illustrations outlining
the expected compensation
the producer would receive,
the agent’s role in the
sale, the variability of the
compensation, and the
source of compensation. The
disclosure also provides the
option for the customer to
receive further details about
the producer’s compensation,
having the choice of getting
this information either
verbally or in writing.
At the time Regulation
194 was being promulgated
(around 2010), NAILBA’s
opposition to the proposal
was premised on the argument
that disclosing compensation
risks placing undue focus on
how an agent gets paid as
opposed to which product is
more suitable for a customer.
Specifically, NAILBA and
its industry partners were
concerned that compensation
disclosure would incentivize
producers to recommend
lower-commission products,
even if equally suitable or
better suited products paid a
higher commission, in order
to avoid even the appearance
of a conflict of interest. It was
a slippery slope to further
restrictions on commission-
based sales.
The Regulation Best Interest
(RBI) rule currently being
considered by the Securities
and Exchange Commission
(SEC) contemplates a similar
disclosure component for
SEC-regulated products. The
consumer groups that support
more stringent standards of
care believe RBI is watered-
down precisely because
they’re afraid compensation
disclosure requirements
would be as stringent as the
rule gets. If compensation
disclosure puts this issue
to rest once and for all,
that would be a win for the
industry considering there are
elements in this debate that
view the simple act of being
paid commission as a conflict
of interest. However, New
York’s Regulation 187 that
was passed last year imposing
a best interest standard not
only on the sales of annuities
but also life insurance is proof
that compensation disclosure
does not put the standards of
care issue to rest, regardless
of the type of product being
sold. If disclosure would
resolve the debate on what’s
in a customer’s best interest
in New York it would have
ended with Regulation 194,
but it didn’t. A slippery slope
indeed.
In addition to New York,
the “best interest” issue has
become a political football
in large markets such as
California and New Jersey.
Newly-elected California
Governor Gavin Newsom could
tout his state’s attempts
at more stringent sales
standards as evidence of his
tough stance on the financial
services industry as part
of a potential presidential