In recent months, eight states — Arkansas, Delaware, Kentucky, Maine, Michigan, Nebraska, North Dakota, and Ohio — have proposed or finalized rules setting forth a best interest standard for annuity producers in recommending annuities to their customers. Each state has designed its rule to follow the NAIC’s model regulation concerning suitability in annuity transactions, which requires producers to act in the consumer’s best interest without placing the producer’s financial interest ahead of the consumer’s. The rule also requires producers, prior to recommending an annuity, to disclose the scope and terms of their relationship to the consumer, how the producer is being compensated, and any material conflicts of interest. Notably, the rule does not create a fiduciary obligation or relationship with the consumer, and producers are not subject to civil liability for breaching any fiduciary standard of conduct.

The NAIC adopted its model suitability rule in early 2020, and since that time at least ten states have set forth rules modeled after the NAIC rule (and in many cases have adopted the rule wholesale). The NAIC and other trade associations reportedly continue to lobby states to adopt the model rule, so interested parties should continue to monitor state regulatory activity in this area.

Separately, it has become apparent that under the Massachusetts fiduciary rule for broker-dealers, the use of sales contests to reward brokers creates a presumption of a violation of the duty of loyalty. This isn’t a per se violation, but rebutting the presumption may be difficult.