The National Association of Insurance and Financial Advisors for New York State (NAIFA-NYS) has filed a lawsuit challenging the legality of New York’s “best-interest” regulation.
The lawsuit, filed Friday, alleges that the New York Department of Financial Services (DFS) regulation—which for the first time requires agents and brokers to ensure that any transaction involving insurance or annuities “is in the best interest of the consumer”—directly contradicts existing N.Y. law. NAIFA-NYS’s lawsuit is one of three brought by agents’ groups challenging the standard.
“We’re challenging the New York regulation because it creates a clear legal conflict with New York statute, and that puts agents in an endless position of legal peril,” said attorney Tancred Schiavoni, the attorney at O’Melveny & Myers who represents NAIFA-NYS.
Specifically, NAIFA-NYS’s lawsuit alleges that creating a fiduciary standard that forces “producers” to put consumers’ interests first contradicts New York’s long-standing insurance statutes htat require brokers and agents “to act as an agent of [an] authorized insurer.”
The N.Y. best-interest regulation mandates that “only the interests of the consumer shall be considered in making recommendations” and further orders that agents and brokers may get compensated only if “the amount of the compensation or the receipt of an incentive does not influence the recommendation.”
According to the NAIFA-NY lawsuit, “this can not be squared with an agent’s statutory duty to act as an agent of an authorized insurer under N.Y. insurance law ... which defines an insurance agent as any authorized or acknowledged agent of an insurer. What is more, the legislature has twice taken up and failed to pass broad standards for the life insurance market,” the lawsuit said. “Yet, DFS took it upon itself to promulgate novel and extensive fiduciary duties because ‘other entities’ are too slow to act, drastically impacting the entire industry. This court should invalidate the regulation.”
The regulation was hailed as a clear victory for consumers by both N.Y. Governor Andrew Cuomo and Financial Services Superintendent Maria T. Vullo when it was finalized in July. In addition to requiring agents and brokers to act in consumers’ best interests, it also requires insurers to establish standards and procedures for supervising agent and broker recommendations to consumers.
“As the federal government continues to roll back essential financial services regulations, New York once again is leading the way so that consumers who purchase life insurance and annuity products are assured that their financial services providers are acting in their best interest when providing advice,” Vullo said.
“The regulation will fill in regulatory gaps to protect New York consumers from the elimination of the federal Department of Labor’s Conflict of Interest Rule, which the Trump Administration failed to protect on appeal after a ruling from the U.S. Fifth Circuit Court of Appeals, and also supplements existing consumer protections that already exist in New York, including setting reasonable limits on compensation and compensation transparency for the sale of a life insurance or annuity product,” Vullo said.
Cuomo, who has been mentioned as a challenge President Trump in 2020, has been a vocal proponent of the best-interest regulation.