Originally published by The Investment Lawyer, February 2018
President Donald J. Trump's administration has ordered review and reform of federal agency regulations. In that process, the president has ordered agencies to listen to industry voices, including trade associations.
The chairman of the US Securities and Exchange Commission (SEC) has signed on to a review of its rules, including listening to those affected.
These pronouncements have emboldened the life insurance industry (industry) to think about rule reform that it could take up with the SEC. This article compiles a "Wish List" of matters for possible SEC consideration.
Trump Administration Reform of Agency Regulations
Republican Party Platform
The Republican Party Platform (Platform) describes America as a "Nanny State," where a "vast array of agencies" act as "a super-legislature, disregarding the separation of powers to declare as law what they couldn't push through Congress."1
The Platform says that "regulations are just another tax on consumers."2 The Republicans pledge to "review all current regulations for possible reform or repeal" and remove one existing regulation for every new one enacted.3
President Trump's Executive Orders
President Trump has implemented the Platform by signing three Executive Orders.
The first Order4 instructs agencies, when they propose a new regulation, to identify two existing regulations to repeal. So, President Trump went further than the Platform, which called for only one existing regulation to be repealed.
The second Order lays out the administration's core principles, including "make regulation efficient, effective, and appropriately tailored."5 This order is particularly relevant to the industry, because of its need to have SEC regulations and forms tailored for insurance products and entities.
The third Executive Order6 directs each executive agency to establish a task force to evaluate existing regulations and recommend repeal, replacement, or modification.
President Trump orders each agency to seek input from those affected by federal regulation, including "trade associations."7
SEC Chairman's View
SEC Chairman Jay Clayton, in his first public speech, acknowledged President Trump's Executive Orders and core principles, announced his own principles, and said that his principles "are consistent with, and complimentary to," the president's.8
Chairman Clayton also said that the SEC "should review its rules," to see if they're "functioning as intended" and, in doing this review, "listen to others."9
Reasons for Life Insurance Industry "SEC Wish List"
First, SEC regulation reform could benefit insurance product owners. This would be true, for example, if the SEC authorized a summary prospectus for variable annuity contracts (variable annuities).
Second, SEC regulation reform could reduce time, effort, and resources spent by life insurance companies. This would be true, for example, if the SEC tailored its registration forms to fit non-variable insurance products10 that are required to be registered as securities.
Third, SEC regulation reform could help provide certainty and enhance consistency of SEC regulation. The SEC Staff officials11 heading up regulation of insurance products and entities have tried to provide consistency for many years. However, some things at the SEC are beyond the control of those Staff officials.
Norm Champ, a former director of the SEC's Division of Investment Management (IM Division) has published a book12 about his five-year experience on the Staff . He describes a number of SEC shortcomings that contribute to regulatory uncertainty.
Champ says that the SEC: "lacked formal procedures for anything";13 had "no documented, agreed upon system"14 for how Staff members "would go about their jobs";15 lacked "consistency in policy and procedures";16 and relied "on managers in every office to act as village elders passing down the knowledge to new members of the tribe."17
Champ says that in "conducting exams,"18 "almost no one was doing anything in a consistent or agreed-upon manner,"19 there was no "published guidance on how the SEC went about its investment management exams,"20 and "the SEC didn't have the tech infrastructure to do searches of internal exam reports to glean trends across regions."21 "Examiners," says Champ, "were like air traffic controllers who couldn't track jets outside of local airspace."22
Fourth, SEC regulation reform, by providing more legal certainty, could discourage private litigation.
The plaintiff s' bar, which has brought years of litigation against mutual fund advisers under Section 36(b) of the Investment Company Act of 1940 (1940 Act), may someday turn to life insurance companies, raising novel questions about legal positions that the SEC and its Staff have taken regarding insurance products and entities.
Finally, SEC regulation reform could level the competitive playing field with mutual funds that have been authorized to use a summary prospectus for many years.
So, for the foregoing reasons, this article takes a stab at compiling an "SEC Wish List" for the insurance industry.
Clarify Fundamental Concepts
In 1990, the SEC, under Chairman Richard Breeden, published a release stating that variable insurance products and separate accounts do not "fit comfortably"23 under SEC regulation. The SEC acknowledged that there was no legal certainty as to what is the security, who is the issuer, and when is the sale.24
The SEC surprised the industry by asking whether variable insurance products and separate accounts should continue to be regulated under the federal securities laws25 or whether "a separate statute for variable insurance products would result in a more efficient regulatory framework."26
In an ideal world, it would make sense to address these fundamental concepts and start over with a regulatory clean slate. However, the SEC and Congress do not appear to have the inclination to create a dedicated statute at this time.
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Footnotes
1 Republican Party Platform 2016, Section 5, "Government Reform—Regulation: the Quiet Tyranny," available at https://gop.com/platform.
2 Id.
3 Id.
4 Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, Executive Order No. 13771 (Jan. 30, 2017), [hereinafter President Trump's First Executive Order] available at https:// www.whitehouse.gov/the-press-office/2017/01/30/presidential-executive-order-reducing-regulation-andcontrolling . It is beyond the scope of this article to discuss whether a Presidential Executive Order addresses so-called "independent" agencies like the SEC, as well as "executive" agencies and departments. See infra n.8 and accompanying text.
5 Presidential Executive Order on Core Principles for Regulating the United States Financial System, Executive Order No. 13772 (Feb. 3, 2017) [hereinafter President Trump's Second Executive Order], available at https://www.whitehouse.gov/the-pressoffice/2017/02/03/presidential-executive-order-coreprinciples-regulating-united-states .
6 Presidential Executive Order on Enforcing the Regulatory Reform Agenda, Executive Order No. 13777 (Feb. 24, 2017), available at https:// www.whitehouse.gov/the-press-office/2017/02/24/presidential-executive-order-enforcing-regulatoryreform-agenda .
7 President Trump's First Executive Order, supra n.4. Th e president orders agencies not only to listen to, but to invite, the views of, such industry associations. To the extent that the Presidential Executive Orders address the SEC, this would include such associations as the American Council of Life Insurers, Committee of Annuity Issuers, and Insured Retirement Institute.
8 Jay Clayton, Chairman, SEC, "Remarks at the Economic Club of New York" (July 12, 2017), available at https://www.sec.gov/news/speech/ .
9 Id. at I.F.
10 Such products would include index annuity and life insurance products that fall outside Rule 151 under, and Section 3(a)(8) of, the Securities Act of 1933. The SEC has told a court that Section 3(a)(8) is not available for index products. See infra n.39 and accompanying text.
11 For example, William J. Kotapish, an assistant director who currently heads the SEC's Division of Investment Management's Office of Insured Investments, has been an SEC Staff member who, for approximately 17 years, has strived for consistency of regulation.
12 Norm Champ, "Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis" (2017) [hereinafter Champ Book]. For a review of the book, see Gary O. Cohen, "Going Public by Norm Champ: A Tell-Some Exposé of 'Bureaucratic Warfare,' 'Bizarro Decisions' and 'Political Hit Jobs' by a Former Director of the SEC's Division of Investment Management," Th e Investment Lawyer, Vol. 24, No. 9, Sept. 2017.
13 Id. at 12.
14 Id. at 51.
15 Id.
16 Id.
17 Id.
18 Id. at 56.
19 Id. at 50.
20 Id.
21 Id. at 145.
22 Id.
23 Request for Comments on Reform of the Regulation of Investment Companies, Securities Act Release No. 6868, Securities Exchange Act Release No. 28124, Investment Company Act Release No. 17534, Investment Advisers Act Release No. 1234, and International Series Release No. 128 at 52 (June 15, 1990), available at http://www.gwlr.org/wpcontent/uploads/2012/08/79-5-Healey.pdf .
24 Id. at 53.
25 Id. at 51.
26 Id. at 52.
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