Ethics.docx

Definition According to the Merriam-Webster.com Dictionary* ethic could be defined as: a set of moral principles: a theory or system of moral values the principles of conduct governing an individual or a group a consciousness of moral importance  a guiding philosophy a set of moral issues or aspects...

Definition According to the Merriam-Webster.com Dictionary* ethic could be defined as: a set of moral principles: a theory or system of moral values the principles of conduct governing an individual or a group a consciousness of moral importance  a guiding philosophy a set of moral issues or aspects (such as rightness) the discipline dealing with what is good and bad and with moral duty and obligation. a set of moral principles, especially ones relating to or affirming a specified group, field, or form of conduct. Ethics play a crucial role in shaping the way people interact with each other and the world around them. Ethics are the moral principles that guide people's behavior, decisions, and actions. These principles are based on the concepts of right and wrong, good, and bad, and fairness and justice. Every person has their own set of ethical values. The origins of ethics When did ethics begin and how did it originate? If one has in mind ethics proper—i.e., the systematic study of what is morally right and wrong—it is clear that ethics could have come into existence only when human beings started to reflect on the best way to live. This reflective stage emerged long after human societies had developed some kind of morality, usually in the form of customary standards of right and wrong conduct. The process of reflection tended to arise from such customs, even if in the end it may have found them wanting. Accordingly, ethics began with the introduction of the first moral code. Virtually every human society has some form of myth to explain the origin of morality. In the Louvre in Paris there is a black Babylonian column with a relief showing the sun god Shamash presenting the code of laws to Hammurabi (died c. 1750 BCE), known as the Code of Hammurabi. The Hebrew Bible (Old Testament)) account of God’s giving the Ten Commandments to Moses (flourished 14th–13th century BCE) on Mount Sinai might be considered another example. In the dialogue Protagoras by Plato (428/427–348/347 BCE), there is an avowedly mythical account of how Zeus took pity on the helpless humans, who were physically no match for the other beasts. To make up for these deficiencies, Zeus gave humans a moral sense and the capacity for law and justice, so that they could live in larger communities and cooperate with one another. Ethics vs Morals: Is there a difference? Ethics and morals are both used in the plural and are often regarded as synonyms, but there is some distinction in how they are used. Morals often describes one's particular values concerning what is right and what is wrong: “It would go against my morals to help you cheat on the test” Jonathan Goldsbie, Now Toronto, 16 Oct. 2014 While ethics can refer broadly to moral principles, one often sees it applied to questions of correct behavior within a relatively narrow area of activity: “Our class had a debate over the ethics of genetic testing”. Jennifer Foote, Newsweek, 23 July 1990 In addition, morals usually connote an element of subjective preference, while ethics tends to suggest aspects of universal fairness and the question of whether an action is responsible. Etymology Middle English ethik, from Middle French ethique, from Latin ethice, from Greek ēthikē, from ēthikos First Known Use 14th century, in the meaning defined at sense 3 Time Traveler The first known use of ethic was in the 14th century “Ethic.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/ethic. Accessed 1 Apr. 2024. Singer, Peter. "ethics". Encyclopedia Britannica, 14 Feb. 2024, https://www.britannica.com/topic/ethics-philosophy. Accessed 1 April 2024. What Is the National Association of Insurance Commissioners (NAIC)? The National Association of Insurance Commissioners (NAIC) is a nonprofit, nonpartisan organization governed by the chief insurance regulators of the 50 states, the District of Columbia, and the five U.S. territories: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands. The NAIC sets standards and establishes best practices for the U.S. insurance industry and provides support to insurance regulators. It also provides information and resources to consumers. Insurance products sold in the U.S. are largely regulated by the states, rather than the federal government. History of the National Association of Insurance Commissioners The NAIC was founded in 1871 by state insurance regulators to address the need to "coordinate regulation of multistate insurers. The first major step in that process was the development of uniform financial reporting by insurance companies." Because insurers often do business in multiple states, the question of whether they should be regulated on a state or federal level has long been a matter of debate in the U.S. The 1944 Supreme Court case United States v. The South-Eastern Underwriters Association determined that the insurance industry should be subject to regulation by Congress under the Commerce Clause of the Constitution, which gives lawmakers regulatory authority over interstate and international commerce. However, Congress effectively overrode that ruling the following year with the passage of the McCarran-Ferguson Act, which exempted the insurance industry from most federal regulation, including antitrust laws. Today, with few exceptions, that regulatory authority still resides with the states and their elected or appointed insurance commissioners. How the National Association of Insurance Commissioners Works The NAIC is headquartered in Kansas City, Mo., with executive offices in Washington, D.C. The group says its regulatory goals are to: Protect the public interest Promote competitive markets Facilitate the fair and equitable treatment of insurance consumers Promote the reliability, solvency, and financial solidity of insurance institutions Support and improve state regulation of insurance1 Through committees, task forces, and working groups, the NAIC develops model laws and regulations to help standardize insurance across the states. Its standing committees include life insurance and annuities, health insurance and managed care, property and casualty insurance, market regulation and consumer affairs, the financial condition of insurers, financial regulation standards and accreditation, and international insurance relations.4 The NAIC website has a variety of resources consumers can use to learn about insurance products and check out complaint data on specific companies. The NAIC and Consumer Complaints In addition to its work in support of state insurance regulators, the NAIC offers a number of tools for consumers. Its Consumer Insurance Search tool helps consumers research specific insurance companies, including any complaint data the NAIC has collected. Companies are scored on a national complaint index, which shows whether they've received more or fewer complaints than other insurers, after adjusting for market share. According to the NAIC's most recent aggregated data from state insurance departments, the majority of complaints in 2021 involved how an insurer handled policyholders' claims, with unsatisfactory settlements or offers, delayed claims, and denied claims collectively accounting for just over 50% of all complaints. Other types of complaints, though much lower on the list in terms of percentages, included high-pressure sales tactics, misleading advertising, and discrimination.7 For consumers who would like to register a complaint of their own, the NAIC website also has a File a Complaint tool, with links to state insurance departments for further information on the process. Along with those consumer resources, the NAIC website offers basic information on life, health, homeowners, automobile, and several other types of insurance. It also has a Life Insurance Policy Locator tool, which consumers can use to request information on whether a deceased relative left behind an unclaimed policy. ANNUITY SUITABILITY & BEST INTEREST STANDARD Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. The Suitability in Annuity Transactions Model Regulation (#275) serves as a basis for this regulatory framework. Model #275 sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. Since the model's original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA). Most states have enacted the updated version of Model #275. The NAIC membership approved revisions to Model #275 in February of 2020 clarifying that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumers’ interest in making a recommendation. The model now requires agents and carriers to act with “reasonable diligence, care and skill” in making recommendations. The revisions also include enhancements to the current model’s supervision system to assist in compliance. The Working Group also drafted a Frequently Asked Questions document to provide guidance as states adopt the revisions to the model. To date, 40 states have adopted the model revisions. The NAIC believes a high degree of harmonization across regulatory platforms would be beneficial to consumers and the industry. The NAIC hopes to continue a productive dialogue with the SEC, the DOL and other financial regulators as updates to the respective standards of conduct governing the sale of annuity products are considered. What is the best interest standard of conduct and how would a producer or insurer satisfy it? To satisfy the best interest obligation, a producer or an insurer must satisfy four obligations: 1) care. 2) disclosure. 3) conflict of interest; and 4) documentation. To satisfy the four obligations, when making a recommendation, producers must: Know the consumer’s financial situation, insurance needs and financial objectives. Understand the available recommendation options. Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives. Communicate the basis of the recommendation to the consumer. Disclose their role in the transaction, their compensation, and any material conflicts of interest; and Document, in writing, any recommendation and the justification for such recommendation. What types of recommendations fall under the best interest standard of conduct? All recommendations made by a producer or insurer to purchase, exchange, or replace an annuity product must comply with the best interest standard of conduct. Specifically, as defined in Section 5M, a “recommendation” is advice provided by a producer to an individual consumer that was intended to result or does result in a purchase, an exchange or a replacement of an annuity in accordance with that advice. A recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material. Does the best interest standard of conduct apply to a producer who never meets the client, but assists a producer in making a recommendation to the client? Yes, the standard can apply, if under Section 6A(5), a producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence. CARE OBLIGATION What is the intent of language in Section 6A(1)(c), which states “Producers shall be held to standards applicable to producers with similar authority and licensure?” The intent of this language is to help to ensure that in any compliance or enforcement action, a producer’s recommendation is compared only to other producers as opposed to being compared to investment advisers or possibly higher-level fiduciaries, such as trust officers or plan sponsors under the federal Employee Retirement Income Security Act of 1974 (ERISA) for compliance and enforcement purposes. DISCLOSURE OBLIGATION To satisfy the disclosure obligation, Section 6A(2)(a) requires a producer to provide the completed “Insurance Agent (Producer) Disclosure for Annuities” form in Appendix A prior to a recommendation or sale of an annuity. Can a producer provide the form at the initial client meeting? Yes, a producer can satisfy the disclosure obligation by providing a completed form during the initial client meeting. Is the producer required to update the “Insurance Agent (Producer) Disclosure for Annuities” form in Appendix A and provide it again or can the producer provide it once and satisfy this obligation? Yes, if, after the completed form is provided to the client, the information on the completed form becomes out-of-date prior to a recommendation or sale, the producer is expected to provide the consumer with an updated form. CONFLICT OF INTEREST OBLIGATION Why did the NAIC determine that "cash and non-cash compensation" is not a material conflict of interest (as defined in Section 5I(2))? Under the revised model, a producer is required to act in the best interest of the consumer without placing their or the insurer’s financial interest ahead of the consumer’s interest. The revised model contains a disclosure requirement in which producers must prominently disclose to a consumer, using a disclosure form (similar to Appendix A), their relationship with the consumer, the role they will play in the transaction and a description of the cash and non-cash compensation they will receive. In light of these robust disclosures, and the fact most consumers recognize producers will be compensated for their work, the NAIC determined that compensation is not a material conflict of interest. The NAIC also determined that general incentives regarding production levels with no emphasis on any particular product do not create an unanticipated conflict of interest. However, the NAIC did conclude that sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific annuities within a limited time frame should be avoided. Accordingly, the revised model requires insurers to identify and eliminate these arrangements. 3 © 2021 National Association of Insurance Commissioners As defined in Section 5I(2), a material conflict of interest does not include cash compensation or non cash compensation. What other type of financial interest would be considered a material conflict of interest? Is it only an ownership interest as referenced in Section 6A(3)? The revised model defines material conflict of interest as “a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.” Cash and non cash compensation are not considered to be material conflicts of interest, though the revised model does require disclosure about producer compensation and impose restrictions on certain types of non-cash compensation, as described in Q14/A14 below. An ownership interest (such as where a producer has a material ownership interest in an insurance company whose products the producer is authorized to recommend) is one example of a material conflict of interest that would be subject to the revised model’s conflict of interest obligation. Depending on the particular facts and circumstances, a producer could also be deemed to have a material conflict of interest if, for example, he or she borrowed funds directly from a certain insurer (except for loans taken by a producer under his or her own personal insurance policy or contract) or has a spouse, partner or a close relative who works as a senior executive for a particular insurer. Under Section 6A(3), to satisfy the conflict of interest obligation, what must a producer do to identify and avoid or reasonably manage and disclose a material conflict of interest? Examples?. The appropriate steps to satisfy the obligation to identify and avoid or reasonably manage and disclose material conflicts of interest will depend on the specific facts and circumstances. In some cases, material conflicts of interest can be effectively managed by a producer by informing his or her client of the conflict and answering any questions the client may have regarding the conflict and confirming that the client is willing to continue working with the producer. In other instances, informed disclosure alone may be insufficient and is not in the client’s best interest or that puts the producer’s own financial interests ahead of the client’s interest. In such instances, a producer could, for example, consult with his or her manager, supervisor or agency principal to assess whether a conflict is inappropriately influencing the impartiality of the producer’s recommendations. Finally, there may be material conflicts of interest that cannot be effectively mitigated through informed disclosure and additional measures. In those situations, the producer would have to avoid engaging in the activity or relationship that would give rise to the conflict, or, alternatively, abstain from making the recommendation. In all cases, the producer must ultimately and before making a recommendation have a reasonable basis to believe the producer's professional relationship or capacity along with any related annuity recommendation effectively addresses the consumer's financial situation, insurance needs and financial objectives. PRODUCER TRAINING Q15. Are there new producer training obligations under the revised model? A15. Yes, all producers must complete a one-time training course that covers general annuity principles – including the types and uses of annuities, how annuity contract features affect consumers, and tax implications – as well as information about the new standard of conduct and the other requirements of the revised model. The specific training required depends on what prior training the producer has completed. Q16. How can a producer satisfy the training requirements in the revised model? A16. A producer who has completed the annuity training requirements under the prior version of the model must complete either a new four-credit training course that meets the requirements of the revised model or the one-credit training course that focuses on the new sales practices, replacement and disclosure requirements established by the revised model. Courses must be approved by the insurance department. A producer who has NOT completed the annuity training requirements under the prior version of the model must complete the four-credit training course that meets the requirements of the revised model. Producers who have not completed the annuity training requirements under the prior version of the model may not satisfy the training requirement by taking only the one-credit training course. Q17. Does the training requirement apply to producers who are registered with FINRA? A17. Yes, all producers who engage in the sale of annuities, including those registered with FINRA, must complete the training required by the revised model. Q18. When must producers complete the training requirements in the revised model? A18. A producer who has completed the annuity training requirements under the prior version of the model has six months to take the required training. Such producers may continue to recommend and sell annuities during the six-month grace period. A producer who has NOT completed the annuity training requirements under the prior version of the model must complete the required training before engaging in the sale of annuities. Q19. What are the consequences of failing to satisfy the training requirements of the revised model? A19. A producer who fails to satisfy the training requirements is not permitted to recommend or sell annuities. A producer who recommends or sells annuities without completing the required training may face enforcement action by the insurance department. 5 © 2021 National Association of Insurance Commissioners Q20. Can a producer requalify to recommend and sell annuities after failing to satisfy the training requirements of the revised model within the six-month grace period? A20. Yes, a producer who has completed the training required under the prior version of the model can requalify to recommend and sell annuities by completing the new four-credit training course prior to recommending or selling annuities. Q21. If a producer already completed the new training in another state, will they have to retake the training in every state where they may recommend or sell annuities? A21. No, completion of substantially similar training in one state satisfies the training requirement in other states. Producers are not required to take the new training multiple times. Q22. Do producers have to wait for the revised model to take effect in a particular state before taking the new required training? A22. No, a producer can take the training at any time as long as the course they take has been approved by the insurance department in a state where the producer is licensed. Q23. Will a producer get CE credit for taking the new training? A23. A producer who completes the required training will receive CE credit only if the course was approved by their resident state prior to the date the course was taken, and the course provider submits a roster and all applicable fees to the insurance department in the producer’s resident state. Q24. Can a producer satisfy the training requirements by taking a longer course that covers the required training plus additional content? A24. Yes, the revised model states that a producer can also satisfy the training requirement by completing any course that is approved by the insurance department and includes components that are substantially similar to the one-credit or four-credit training course. Q25. Will completion of a course that meets the requirements of the revised model also satisfy the training requirement under the prior version of the model in a state which has not yet adopted the revised model? A25. Yes, completion of the new four-credit training course (but not the one-credit training course) will satisfy the training requirements under the prior version of the model. The new course includes all of the topics that were required to be covered under the prior version of the model (with information on the new requirements established by the revised model). A producer who has completed this course is not required to also complete a course that satisfies the prior version of the model in states that have not yet adopted the revised model. References “Ethic.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/ethic. Accessed 1 Apr. 2024. Singer, Peter. "ethics". Encyclopedia Britannica, 14 Feb. 2024, https://www.britannica.com/topic/ethics-philosophy. Accessed 1 April 2024. NAIC - Supporting Insurance, Regulators, & Public Interest National Association of Insurance Commissioners (NAIC) Defined (investopedia.com) https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard