New York state has heated up the fight over financial services sales standards by adopting a best interest standard that applies both to annuities and to life insurance.
The final best interest regulation is set to take effect Aug. 1.
If the regulation takes effect on schedule and works as drafters expect it will affect transactions involving a wide range of products, including term life, life policies with small death benefit, group life policies, large policies sold to sophisticated investors through private placements, and group annuities, as well as to products such as individual annuities and individual permanent life insurance policies.
The regulation does include four exemptions. The exemptions are for:
- Pension risk transfer arrangements.
- Corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) arrangements written under New York State Insurance Law Section 3205(d).
- Credit life insurance.
- Life settlement transactions.
The New York Department of Financial Services has drafted the new regulation in the form of an amendment to an existing regulation, Insurance Regulation 187.
The department has posted a packet of materials related to the regulation, including a copy of the text, here.
The department says it already has a fiduciary rule standard for life settlement arrangements.
Department officials say, in an assessment of the 36 sets of public comments the draft form of the regulation received, that they resisted many requests for additional exemptions.
“The department agrees with those commenters that support a consistent standard of care across life insurance and annuity product lines,” the department says in the assessment. “A consistent standard promotes a level playing field among insurers, is more easily understood by consumers and is more auditable for the department. Consistency across life insurance and annuity product lines also promotes cost savings for producers and insurers who would not have to develop multiple compliance systems and multiple supervision systems.”
If the department added more exemptions, that “would result in a patchwork of standards and uncertainty among producers and consumers about the standards of care that producers will provide to consumers in any given transaction,” the department said.
The Employee Retirement Income Security Act of 1974 and related laws and regulations have set standards for sales of investment products to retirement plans.
State insurance regulators have developed a number of sales standards and other market conduct requirements for sellers of annuities. One major standard, the suitability standard, requires sellers and issuers of annuities to verify that the products sold suit the purchasers’ needs.
During the administration of former President Barack Obama, the U.S. Department of Labor responded to complaints about possible gaps in ERISA-based rules by trying to develop the DOL fiduciary rule, and a set of best interest guidelines implementing the fiduciary rule. The fiduciary rule would have required sellers and issuers of retirement-related services and products to act in the best interests of the retirement savers. The best interest standard guideline would have defined the term “best interest.” That guideline and other guidelines would have set the rules product issuers, distributors and sellers would have used to implement the DOL fiduciary rule.
Under President Donald Trump, DOL officials delayed implementation of the rule. In June, a federal appeals court panel blocked the implementation of the rule, declaring it to be arbitrary and capricious.
The U.S. Securities and Exchange Commission is now trying to develop a best interest standard that would apply to both brokers and to financial advisors.