The New York Supreme Court has upheld the state’s contentious fiduciary rule governing annuities and lift insurance sales practices.
The ruling (https://www.dfs.ny.gov/system/files/documents/2019/08/reg187.pdf) found that the New York State Department of Financial Services was neither "arbitrary" nor "capricious” in “providing guidelines for trustworthy and competent producer practices and preventing self dealing by producers at the consumer’s expense,” Acting Supreme Court Justice Henry F. Zwack wrote in the ruling.
The decision is a blow to the insurance industry and the trade groups who filed complaints asking the court to dismiss the state regulator’s rule.
Trade groups and businesses asking the court to dismiss New York Insurance Regulation 187 are the National Association of Insurance and Financial Advisers – New York State Inc., the Independent Insurance Agents and Brokers of New York Inc., Professional Insurance Agents of New York State Inc., Testa Brothers, an insurance brokerage and Gary Slavin, an insurance broker.
The groups were consolidated into one petition by the court, which soundly rejected the complaint to dismiss the fiduciary standard it is decision on July 30.
“[W]e are clearly disappointed with today’s decision of the Court to dismiss this matter, without any hearing on the important issues we raised. We have always believed that there are serious flaws in how the regulation was promulgated and are concerned that the Court did not appreciate those points of our argument,” Phillip Held, president of NAIFA-NY, told Financial Advisor Magazine in a statement.
“We remain confident that we will continue to constructively engage with the DFS to assure good faith compliance with the regulation that goes into effect today and to address the many other issues of interest to the life agent and financial advisor community and their clients in a collaborative and constructive manner,” Held said.
In the decision, Acting Supreme Court Justice Zwack wrote: “Against a backdrop of legitimate concerns for consumers, the burgeoning market of increasingly complex insurance and annuity products and the rather remarkable lapse rate the market is experiencing, the Amendment…reflects a rational and reasonable movement toward consumer protection.
“Arguing against a standard that requires a review of the suitability of an insurance product for a consumer is simply counterintuitive, where the recommendation need only be made with ‘care, skill, prudence and diligence. The recommendation is not binding and the ultimate choice remains in the hands of the consumer,” Zwick opined.
The decision is an opening salvo in what is likely to be the insurance, annuities and securities industry’s prolonged and bloody legal fight to battle back state fiduciary standards. Similar to New York, tougher standards, albeit ones that apply to all securities and retirement planning advice, are nearing completion in Massachusetts, New Jersey and Nevada.
Attorneys and lobbyists at national trade groups that were plaintiffs in the successful appeal to dismiss the Department of Labor’s fiduciary standard last year are watching state developments closely. The Financial Securities Industry, NAIFA and SIFMA did not immediately respond to a request for comment on the NY decision.
Meanwhile, proponents of tougher fiduciary standards are celebrating the NY Supreme Court decision. Knut Rostad, president of the Institute for the Fiduciary Standard, called the ruling “a decisive consumer victory.