COMPLIANCE & ETHICS FORUM FOR LIFE INSURERS

C. J. Rathbun, CCEP, FLMI, HIA, AIRC, ACS Senior Consultant First Consulting & Administration, Inc.

Federal Regulation of the Life Insurance Industry

Alphabet Soup of Federal Regulations

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How many federal agencies, laws and regulations that have dominion over the life insurance industry can you name in 2 minutes? Each table should write down the acronyms.

Overview

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Alphabet Soup of Federal Regulators and Laws

Dual Regulation of Variable Insurance Products – FINRA & SEC

Financial Services Modernization Act (GLB) Privacy Regulations – and FCRA

USA Patriot Act – Anti-Money Laundering Regulation

Corporate Compliance – FSGO

IRS and Taxation of Life Insurance & Annuities

Copyright & Trademark Laws – Advertising Compliance

SOX & Dodd Frank - FIO

Retirement Products and Employee Benefit Plans - ERISA

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Federal Alphabet Soup FINRA (Financial Industry Regulatory Authority) SEC (U.S. Securities and Exchange Commission) GLB (Gramm-Leach-Bliley Act ) AML (USA Patriot Act Anti-Money Laundering Rule) FINCEN (Financial Crimes Enforcement Network OFAC (Office of Foreign Assets Control) FCRA (Fair Credit Reporting Act) FSGO (Federal Sentencing Guidelines for Organizations) IRS (Internal Revenue Service) USPTO (U.S. Patent and Trademark Office) SOX (Sarbanes-Oxley Act) FIO (Federal Insurance Office) DOL (Dept. of Labor) & ERISA (Employee Retirement Income Security Act)

Dual Regulation of Variable Insurance Products – FINRA & SEC

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Variable Life Insurance and Annuities are considered both insurance products and securities. FINRA requires registration of representatives selling the products. FINRA supervises the broker dealers distributing the products as wholesalers and/or retailers.

SEC Rule 38a-1 - Comprehensive Compliance Programs for Investment Advisors

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This rule requires written Compliance Procedures designed to prevent violations of securities laws from occurring, to detect violations that have occurred, and to correct promptly any violations that have occurred.

Graham Leach Bliley (GLB) – Financial

Privacy Rule

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The Financial Privacy Rule under GLB requires financial institutions to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice explained information collected about the consumer, where it’s shared, how it’s used, and how it’s protected. The notice gives the consumer the right to opt out of the information being shared with unaffiliated parties.

FCRA – The Fair Credit Reporting Act

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The Fair Credit Reporting Act (FCRA) regulates the collection, dissemination, and use of consumer information, including consumer credit information. Insurance companies using credit reports for agent background and/or customer credit checks are required to get a signed FCRA authorization. The consumer must be notified when an adverse action is taken on the basis of these reports, so that the accuracy and completeness of the report may be verified or contested by the consumer.

USA Patriot Act – Anti-Money Laundering

Regulation

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Insurance companies must develop and implement a written AML program reasonably designed to prevent the companies from being used to facilitate money laundering or financing terrorist activities. Insurers must screen all new customers, existing customers, annuitants and beneficiaries against the OFAC list to prevent doing business with anyone who is a SDN (Specially Designated National). US businesses are prohibited from doing business with a SDN.

Filing Suspicious Activity Reports (SAR)

with FINCEN

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Insurance companies covered by the AML Program Rule are also subject to SAR filing requirements with FINCEN. Insurers are required to report transactions involving $5,000 or more if the firm “knows, suspects or has reason to suspect” that a transaction: 1. involves funds derived from illegal activities or is intended to hide funds derived from illegal activities; 2. is designed to evade other reporting requirements (such as those that apply to large cash transactions under the Bank Secrecy Act); 3. has no business or lawful purpose; or 4. involves the use of the insurance company to facilitate criminal activity.

Corporate Compliance – Federal Sentencing Guidelines for Organizations (FSGO)

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FSGO established basic criteria for an effective compliance program: • Exercise Due Diligence and Promote an Ethical Culture. • Implement Standards and Procedures to detect and prevent

criminal conduct. • Knowledgeable Governing Oversight of the effectiveness of

compliance and ethics program.. • High-level personnel of the organization assigned overall

responsibility for the compliance and ethics program. • Day-to-Day Responsibility delegated for the compliance and

ethics program.

IRS - Taxation of Life Insurance & Annuities

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Life insurance products have special tax treatment under the IRS rules and the industry is very protective of this status.

Tax deferred growth of cash surrender values while a policy is in force, FIFO withdrawal status on premiums paid into the contract , income tax free policy loans from policies that are not Modified Endowment Contracts (MEC), and income tax free death benefits are all very important elements to the tax status of life insurance products.

Changes to the tax law in 1988 resulted in certain insurance policies that were funded too rapidly (generally in one large payment) being classified as MECs, and eliminated the use of such policies as short-term savings vehicles by imposing stiff penalties.

The tax treatment of annuity products varies by the type of annuity (deferred or immediate) but these products still offer tax benefits to customers.

US Patent and Trademark Office (USPTO) – Advertising Compliance

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Federal copyright and trademark laws apply to insurance companies and the advertising compliance departments pay close attention to these rules. A trademark is a word, phrase, symbol, and/or design that

identifies and distinguishes the source of the goods of one party from those of others.

A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods. The term “trademark” is often used to refer to both trademarks and service marks.

A copyright protects works of authorship, such as writings, music, and works of art that have been tangibly expressed.

Sarbanes Oxley Act (SOX)

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Under SOX, the CEO and CFO of a public company must personally sign a certification that the financial statements and other information included in the periodic report fairly present in all material respects the financial condition, results of operations and cash flows of the company. SOX Section 404: The SEC adopted rules requiring an internal control report in each annual report. The NAIC adopted various aspects of the SOX rules for all insurance companies and SOX definitely raised the bar for safeguards in financial reporting and practices in the insurance industry.

Federal Insurance Office (FIO)

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act ”) established Federal Insurance Office (FIO) within the U.S. Department of Treasury, which is authorized to collect data on the insurance industry. The FIO can recommend changes to the state system of insurance regulation and preempt certain state insurance laws. The FIO director submitted a report to Congress and recommended certain improvements to the regulation of insurance.

Retirement Products and Employee Benefit Plans – ERISA

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The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. COBRA and HIPAA are amendments to ERISA.

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Other Federal Laws or regulators that might

apply to your companies: FCPA,

OCC, BSA,

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Questions???

© CEFLI 2012. All Rights Reserved. June 12, 2014 • 19

Compliance & Ethics Forum for Life Insurers P.O. Box 30940 Bethesda, MD 20824 www.cefli.org