LIFE, ANNUITY, and RETIREMENT SOLUTIONS INDUSTRY Volume IV, December 2019 ®
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LIFE, ANNUITY, AND RETIREMENT SOLUTIONS INDUSTRY Volume IV, December 2019 ® EXPECTLEGAL ISSUES AND DEVELOPMENTS FROM CARLTONFOCUS FIELDS RESETTING THE RULES A FAST START FOR THE NEW DECADE vIV INSIDE 5 Round and Round – Will 2020 Bring the End to Inconsistent Anti-Rebating Prohibitions? 3 Innovation and Technology 11 Life Insurance That 18 Third Circuit Application at the NAIC 2019 Fall Benefits the Living of Certified Questions Meeting Confirms STOLI Policies 12 SEC Pressures Advisers on Void in New Jersey 4 FSOC: “Too Big to Fail” Has Undisclosed Conflicts Failed 19 No Saving Grace for 14 Reg BI Compliance Policyholders 5 Round and Round – Will Countdown: T-Minus Six 2020 Bring the End to Months 20 The Risk and Reward of Inconsistent Anti-Rebating Life Insurance 15 Clarity on Application Prohibitions? of California Usury Law: 21 Not So Fast: Court 6 Insurance Company Insurers Not Subject Upholds Denial of Request High-Yield Real Estate to Compound Interest for Accelerated Life Investments Limitations Insurance Payment 7 OCIE Risk Alert Highlights 16 Second Circuit Opens 22 News & Notes Compliance Program Door to Lawsuits Based on Catch-22 Contract Violating 1940 Act 8 NAIC Life Insurance and Annuities (A) Committee 17 2019 Year-End Class Action Ends 2019 With a Big Bang Roundup ® EXPECTFOCUS LIFE, ANNUITY, AND RETIREMENT SOLUTIONS DECEMBER 2019 Executive Editor Tom Lauerman The content of EXPECTFOCUS® is for informational purposes only and is not legal ® Assistant Editors Stephanie Fichera advice or opinion. EXPECTFOCUS does not create an attorney-client relationship with Carlton Fields or any of its lawyers. Todd Fuller Production Manager Jessica Bennett SUBSCRIPTIONS: Changes in address or requests for subscription information should be submitted to: Emily LaCount, [email protected]. Production Coordinator Emily LaCount Art Director & Designer Frances Liebold Copyright © 2020 Carlton Fields. All rights reserved. No part of this publication may be reproduced by any means, electronic EXPECTFOCUS® is a quarterly review of or mechanical, including photocopying, imaging, facsimile developments in the insurance and financial transmission, recording, or through any information storage and services industry, provided on a complimentary retrieval system, without permission in writing from Carlton Fields. basis to clients and friends of Carlton Fields. EXPECTFOCUS® is a registered trademark of Carlton Fields. 2 Life, Annuity, and Retirement Solutions | Volume IV, December 2019 • EXPECTFOCUS.COM Innovation and Technology at the NAIC 2019 Fall Meeting BY ANN BLACK AND JAMIE BIGAYER Several NAIC groups continued addressing issues related to innovation in the life insurance industry as follows: y PRIVACY PROTECTIONS WORKING GROUP – is determining whether the NAIC Insurance Information and Privacy Protection Model Act (#670) and the Privacy of Consumer Financial and Health Information Regulation (#672) need to be revised, as a result of the increased use of consumer data, to address any gaps in the current regulatory framework. Initially, the group compared the existing NAIC models against the California Consumer Privacy Act as an example. It also discussed insurers’ reliance on third parties and the insurers’ responsibility to ensure that third parties comply with applicable laws and use accurate data in their determinations. y ACCELERATED UNDERWRITING WORKING GROUP – is obtaining information on, and is assessing issues that may arise out of, life insurers’ use of accelerated underwriting. It will evaluate the issues and determine whether it should draft guidance for the states. y ARTIFICIAL INTELLIGENCE WORKING GROUP – is drafting guiding principles for the use of artificial intelligence in insurance for use by the various NAIC groups, state regulators, and the insurance industry. The draft principles, which are based on the OECD Principles on Artificial Intelligence that seek to promote innovation while protecting privacy and transparency and preventing discrimination, are being tailored for the insurance industry. y BIG DATA WORKING GROUP – concluded that regulators have adequate authority under existing insurance laws and regulations to review insurers’ use of data and algorithms, including as provided by third-party vendors. It discussed whether third-party vendors should be subject to regulatory authority through FCRA-like regulation or requiring that third-party vendors be licensed as advisory organizations. Life, Annuity, and Retirement Solutions | Volume IV, December 2019 • EXPECTFOCUS.COM 3 FSOC: “Too Big to Fail” Has Failed Insurance and Investment Firms Breathe Easier BY TOM LAUERMAN On December 4, 2019, the Financial Stability Oversight Council adopted final interpretive guidance on addressing systemic threats to the financial system that prioritizes the identification and regulation of risky “activities” rather than risky companies. Pursuant to the Dodd-Frank Act, the Based on such considerations, the regulators, the SEC, the CFTC, etc. — will FSOC initially adopted standards for FSOC has, for a number of years, been be better able than the Federal Reserve designating systemically important placing more emphasis on (a) identifying Board to tailor appropriate constraints nonbank financial institutions activities that pose significant on that institution’s risky activities. (SIFIs) that relied heavily on the risks to the financial system and (b) size of the institution, among other appropriately addressing such risks For that and other reasons, insurance considerations. SIFIs — often referred across a spectrum of different-sized companies and money managers to as “too big to fail” — are deemed companies engaged in those activities, have generally welcomed the FSOC’s to expose the U.S. financial system rather than seeking to assign the SIFI migration away from “too big to fail” to such significant risks that, under label to individual companies that, by that has now culminated in the final Dodd-Frank, they are subjected to themselves, pose systemic risks. The interpretive guidance; and the FSOC has special prudential regulation by the FSOC’s December 4 final interpretive not recently designated any such firms Federal Reserve Board. guidance is the most recent and as SIFIs. Nevertheless, if the FSOC does definitive articulation of this approach. not believe that measures imposed by Following Dodd-Frank’s enactment, an institution’s primary regulators can very large insurance, mutual fund, and Under the final interpretive guidance, or do adequately address systemic money management firms (among the FSOC will, among other things, give risks presented by that institution, the others) were concerned that they might priority to identifying activities that FSOC and the Federal Reserve Board be designated as SIFIs, and several large present systemic risks and seeking still retain a variety of other remedial insurance companies did in fact receive to adequately control those risks by options, including, in appropriate such designations. The prudential making nonbinding recommendations cases, designating and regulating the regulation to which these insurance to the primary regulators of the institution as a SIFI. companies were subjected proved companies engaged in those activities. burdensome and arguably unnecessary, It is hoped that an institution’s primary given the nature of their activities and regulators — e.g., state insurance the state insurance and other regulation to which they already were subject. 4 Life, Annuity, and Retirement Solutions | Volume IV, December 2019 • EXPECTFOCUS.COM Round and Round – Will 2020 Bring the End to Inconsistent Anti-Rebating Prohibitions? BY ANN BLACK AND JAMIE BIGAYER Since mid-2018, the NAIC’s Innovation and Technology (EX) Task Force (Innovation TF) has been considering how state anti-rebating laws impede insurers and producers’ ability to offer innovative products and services to insureds. Innovation TF members sought to develop guidance or bulletins that would permit insurers and producers to provide “value-added” products and services. During 2019, the Innovation TF worked on language for a template bulletin as a potential alternative to revising the NAIC’s model Unfair Trade Practices Act (Model #880). The Innovation TF initially worked on requirements. For example, Alabama To increase the likelihood of uniformity draft guidance that would allow for also requires that the insurer be able among the states, the drafting value-added products and services to discontinue the service at any time. group would also need to consider to be offered to consumers. However, West Virginia requires the product or the Rebate Reform Model Act as the Innovation TF went round services to be “clearly identified and developed by the Financial Services and round in the drafting process, it included in the policy.” and Multi-Lines Issues Committee discovered that the interpretation of the National Council of Insurance and implementation of Model 880 As a result of the variations, the Legislators. Hopefully, the Innovation was inconsistent among the several Innovation TF agreed at the NAIC’s Fall TF will be able to develop revisions to states. Adding to the complexity, National Meeting to abandon work on Model 880 during 2020 that will be while the Innovation TF worked on a template bulletin. Rather, to obtain quickly adopted by the states to end the draft bulletin, Alabama, Arizona, more consistency across the states, the inconsistent anti-rebating prohibitions. Connecticut, Florida, Massachusetts,