Independent insurance agents won their battle to overturn New York’s best-interest rule governing sales of annuities and life insurance yesterday, but that doesn’t mean the war is over.

“My concern now is how strictly the department will redefine the regulation going forward and what the additional cost will be on the consumer,” Gary Slavin, a registered rep with Mass Mutual and a plaintiff in the case, told Financial Advisor magazine.

Slavin, along with the Independent Insurance Agents and Brokers of New York and the National Association of Insurance and Financial Advisors—New York sued the New York Department of Financial Services to overturn the state’s best-interest rule, arguing it is “unreasonable, arbitrary and capricious, lacks a rational basis” and is constitutionally vague.

The New York Supreme Court Appellate Division agreed, reversing a 2019 ruling affirming that the department was within its authority when it issued Regulation 187, which permits agents or brokers to make a recommendation only if they believe the sale is in the consumer’s best interest.

According to the court decision, "While the consumer protection goals underlying promulgation of the amendment are laudable, as written, the amendment fails to provide sufficient concrete, practical guidance for producers to know whether their conduct, on a day-to-day basis, comports with the amendment's corresponding requirements for making recommendations and compiling and evaluating the relevant suitability information of the consumer.”

The court also agreed that agents and advisors have experienced unreasonable difficulty attempting to comply with regulation requirements that are often "subjective," the court ruled, echoing the arguments of the lead plaintiffs in the case.

Slavin said New York regulators failed to listen to insurance companies or agents or to do a cost-benefit analysis of it’s now-defunct sales rule.

“I was not surprised that the court found the regulation unconstitutional because the regulation was too vague; because it is,” Slavin said.

“A major insurance carrier stopped writing new policies in the state of New York and the cost of life insurance policies in the state have gone up to comply with the regulation,” Slavin said. “The regulation has also sent a chill through the term insurance market because of the amount of information the client has to divulge to their agent to buy a term policy. Please keep in mind that if the policy is sold direct by an insurance company, this regulation doesn’t apply. Term insurance should be exempt from this rule,” Slavin said.

“Our members have tried mightily to comply with the regulation, but, as the court found, it has been extremely difficult to meet the vague and subjective standards of the rule,” Marc Cadin, the CEO of Finseca, an advocacy group for securities professionals, said in a statement. “We look forward to continuing to serve the insurance-buying public with the best service to meet their financial needs, and we will continue to work with the Department of Financial Services to ensure we are best protecting New York consumers.”

Industry lobbyists don’t believe that N.Y. regulators will just accept the defeat laying down, given that N.Y. has some of the most stringent insurance regulations in the country. “Today’s New York appellate court decision is important, but it may not be the final step in the legal process, as the decision may be appealed to the New York Court of Appeals," said Jason Berkowitz, chief legal and regulatory affairs officer with the Insured Retirement Institute (IRI). "[IRI] continues to advocate for uniform adoption of the National Association of Insurance Commissioners’ best interest model regulation by all states to avoid a patchwork of conflicting standard-of-conduct regulations for annuity sales.”

The state’s Department of Financial Services said it is reviewing the decision. The department “continues to believe in the consumer protective notion that insurance agents and brokers must not put their own profits above the needs of the consumers who turn to them for advice,” said a spokeswoman for the department in a statement. “This is the heart of the regulation. We are reviewing the decision and will consider our appellate rights.”

The New York rule imposed a number of requirements on agents and insurance and annuity companies:
• It required a recommendation to be in the best interest of a consumer by furthering the consumer’s needs and objectives and that it be made “without regard to the financial or other interests of the producer, insurer or any other party.”
• It required the disclosure of all suitability considerations and product information that formed the basis of any recommendation.
• It permitted agents or advisors to make a recommendation only if they had a "reasonable basis to believe that the consumer can meet the financial obligations under the policy."
• It prohibited an agent or broker from telling a consumer that a recommendation was part of their financial planning, investment advice or related services (unless the agent or broker was a certified professional in that area).
• It required insurers to "establish and maintain procedures to prevent financial exploitation and abuse."

The proposal did not apply to sales of mutual funds or other securities, unless these were related to annuity or life insurance products. Life insurance policies and contracts used to fund qualified retirement plans, ERISA plans and employer-sponsored IRAs were also exempted from the rule.