To tell the truth: when it comes to disclosure, insurance is the last sector to feel Spitzer's influence.

Key Points

* Real estate brokers may work for both a buyer and a seller at the same time, on the same piece of property, if they get the written consent of both parties and provide each client with a written notice explaining the relationship.

* In 2002, Spitzer forced Merrill Lynch to sever the ties between compensation for analysts and investment banking.

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When New York state Attorney General Eliot Spitzer Made his investigation into the insurance industry public via a lawsuit in October 2004, it set off alarms across every line. How would Spitzer's actions affect the way insurance is sold? After all, his earlier probes into the financial-services sector forced the disclosure of how stock analysts are compensated and disclosure of how mutual funds arc sold and priced. If recent history is any guide, scrutiny by Spitzer's office means that radical changes are coming to the way an industry discloses its selling practices.

So how do commissioned producers in insurance stack up against their counterparts in other high-dollar industries such as securities and real estate? Thanks to earlier scandals and state and federal-level reforms, insurers are among the last in the financial-services sector to have such changes thrust upon them.

In the real estate, securities and mutual fund industries, commissioned producers already have been operating under disclosure requirements of the sort that state and federal regulators now are weighing for the insurance industry.

Real Estate Disclosures

In the real estate industry, a broker may, and sometimes does, work for both a buyer and a seller at the same time, on the same piece of property, which happens when one buyer lists a property and another agent working for the same broker sells the property to a separate client. Such an arrangement is permissible when the broker gets the written consent of both parties and provides each client with a written notice explaining the relationship. In such a "disclosed dual agent" arrangement, the broker must deal with the buyer and seller fairly, but the broker does not strictly represent either party exclusively, explained National Association of Realtors spokesman Walt Molony.

"In that case, the broker is more of a facilitator," Molony said. Undisclosed dual agency is illegal, he said, and the NAR has an ethical code addressing the matter "that goes above and beyond most state laws."

In most states, real estate salespeople must disclose any such conflicts upon the first substantive contact with a customer.

Salespeople might be thought to dislike disclosure requirements, as they bring tip unpleasant associations tit a time when they are trying to establish a rapport with a customer and close a sale--whether it's an insurance contract, a stock sale or a piece of real property. Rather than be told about the product, the customer is instead being told about possible conflicts of interest and being asked to acknowledge and sign off on them.

But real estate agents have long learned to deal with such matters, Molony said.

"I don't think they're viewed as a hindrance to making a sale, but rather they're seen as a help. Real estate agents don't like to be the subjects of litigation, so anything that eliminates potential conflicts or misunderstanding is seen as good, and that's what disclosures do," he said.

Equity Disclosures

Unlike insurance and real estate sales, stocks and mutual fired transactions are governed chiefly by a federal entity: The U.S. Securities and Exchange Commission.

In 2002, Spitzer forced Merrill Lynch, the country's largest securities firm, to sever the tics between compensation for analysts and investment banking. Merrill Lynch agreed to put a firewall between its investment banking business and the part of the firm that determined how its equity analysts were evaluated and paid. Merrill Lynch also agreed to disclose in its research reports whether it had received or was scheduled to receive any compensation from any companies it covers.

Similarly, Spitzer's 2003 probe of the mutual fund industry sparked four congressional hearings, while the SEC has either passed or proposed new rules covering mutual fund governance and pricing, as well as disclosure. In that investigation, Spitzer alleged that four large mutual fund companies hid deals that let a hedge fund profit from short-term trading at the expense of regular investors.

Essentially, any event, adverse or otherwise, that affects a public company's bottom line, has to be disclosed, said SEC spokesman John Nestor. "That includes almost anything that tin investor would need to know to make an informed decision." he said. Officers and directors of a securities or mutual fund firm, as well as the top five enumerated positions listed in the company's SEC filings, are required to disclose all stock transactions involving their own companies, both contemporaneously and in the company's regular quarterly filings.

Brokers are required to disclose possible conflicts to investors tip front, Nestor said. While there is no bright-line test. a broker is expected to disclose material facts that would influence an investor's decision during a sale, he said. Failure to do so can bring a host of penalties, including loss of a brokerage license, a requirement to pay back any funds obtained through the illegal transactions, large fines, and penalties, which act akin to punitive damages.

"The whole range of civil penalties arc possible," Nestor said.

What's Likely for Insurers

The industry itself is split on the issue of changing disclosure requirements. During a November U.S. Senate hearing on the Spitzer investigations, the country's largest life insurance agents' lobby, the National Association of Insurance and Financial Advisors, said that agents should not have to disclose to consumers the commissions they are paid when selling a life product, a reiteration of their past policy. But the American Council of Life Insurers said at the time it was studying the issue on its own and had not yet decided whether reforms were needed or what path they should take.

The National Association of Insurance Commissioners has formed the 12-member Task Force on Broker Activities to develop a draft model law to deal with the issue of broker conflicts and other issues raised by the Spitzer investigation. The regulators' panel has said it will conduct fact-finding activities, coordinate state activities and address allegations of misconduct or violations of state laws.

During the last week of December, the NAIC voted 31-15 in favor of new compensation disclosure requirements, which mandate that "neither (a) producer nor (an) affiliate shall accept or receive any compensation from an insurer or other third party for that placement of insurance" unless the customers are told about that payment, as well as how large it is. The disclosure requirement does not, however, apply to participants in employee benefit plans or group policies; "intermediaries" such as managing general agents, sales managers and wholesale brokers; or to reinsurers. The NAIC has given itself 90 days to finalize the draft requirements.

The NAIC draft model requirement is the most immediate reform likely to happen, but that isn't yet a finished product, said lion Evans of the Independent Insurance Agents & Brokers of America. Still, it seems to be the document from which producers ought to be taking their cues about how the landscape will look.

"They do need to be aware of what's going on out there," Evans said. From his recent talks, both formally and informally, with about a dozen of the trade group's member companies, Evans said he has found that responses to possible changes to disclosure requirements have been mixed.

"We're hearing from some people that they're very comfortable with their practices, 'steady as she goes,' but we're also hearing that some are taking a hard look at their sales compensation practices," he said. Most independent producers don't deal with placement service agreements or PSAs--one focus of Spitzer's probe--while those with contingent compensation agreements "are very much in the minority," Evans said.

The NAIC draft "may not be the final word, but it's a proposal, and producers should be paying attention to it and looking back to the carriers for guidance," Evans said. "It's a work in progress."