Insurance agents and advisors in the state of New York won a monumental lawsuit today to overturn the state’s best interest sales standard governing the sales of annuities and life insurance on the grounds that the standard was unconstitutional.
The New York Supreme Court Appellate Division reversed a 2019 ruling affirming that the New York State Department of Financial Services 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.
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, the Independent Insurance Agents and Brokers of New York and the National Association of Insurance and Financial Advisors—New York, which sued to overturn the regulation.
"Once a recommendation is deemed to have been made, the guidelines with respect to the suitability information that producers must obtain from the consumer and the suitability considerations that must necessarily be disclosed are inadequate to the extent that they rely upon subjective terms that lack long-recognized and accepted meanings and provide insufficient guidance with respect to how producers must conduct themselves in order to comply with the amendment," the ruling said.
Since early in the 20th Century, New York has traditionally imposed some of the nation's most stringest regulations on insurance sales. Many life insurers have created separate policies with more explicit consumer disclosures to do business in the state.
“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,” said Marc Cadin, the CEO of Finseca, an advocacy group for securities professionals, 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.”
Regulation 187, which is similar to the U.S. Department of Labor’s fiduciary standard, took effect in 2019, when state regulators sidestepped the National Association of Insurance Commissioners' efforts to create a model standard for annuity and life insurance sales.
The insurance agent trade groups argued that the rule is “unreasonable, arbitrary and capricious and lacks a rational basis” and it is unconstitutionally vague.
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.”
According to Jason Berkowitz, chief legal and regulatory affairs officer of the Insured Retirement Institute: “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. [The Insured Retirement Institute] 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 currently 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 by New York.