Months before any action is expected on a proposed New York State fiduciary rule for investment professionals, the state has implemented new rules that require broker-dealers selling annuities to operate in the best interest of their clients.
The new rule, known as Amended Regulation 187, requires that broker-dealers licensed to sell insurance products in the Empire State as well as insurance agents and insurance brokers — all known as “producers” in the rule — consider only the interests of a consumer when recommending an annuity and not be influenced by financial compensation or incentives. The rule took effect Aug. 1 for annuity sales, and will apply to life insurance sales on Feb. 1, 2020.
It requires that the producers base their recommendations for the purchase of an annuity “on an evaluation of the relevant suitability information of the consumer,” and that the consumer be informed of how the producer is compensated for the sale and servicing of the policy as well as “various features of the policy” and the potential consequences of the sales transaction, both favorable and unfavorable. Difference in features among fee-based and commission-based versions of the policy must also be disclosed.
Moreover, the broker-dealer or insurance agent selling the annuity cannot use the title or designation of financial planner, financial advisor or a similar title unless he or she is properly licensed or certified to use that title and does actually provide securities or other non-insurance financial services.
The National Association of Insurance and Financial Advisers, Independent Insurance Agents and Brokers of New York and several other insurance agent groups sued the New York State Department of Financial Services and its superintendent, Maria Vullo, to have the regulation overturned, but the New York State Supreme Court dismissed their petition on July 31.
Vullo applauded the court decision noting that the new rule “is a common sense regulation” and “a step in the right direction to protect consumers by ensuring that only consumers’ needs and financial objectives are considered in any transaction.”
When she first issued the regulation earlier in July Vullo cited the need for providers to “adhere to a high standard of care and only recommend insurance and annuity products that are in the consumer’s best interests and not be influenced by a producer’s financial incentives” given “the key role insurance products play in providing financial security to middle-class New Yorkers” and the federal government’s rollback of the Labor Department’s fiduciary rule. last year.
Following the demise of the Labor fiduciary rule, vacated by a federal appeals court ruling in 2018, the SEC took up the mantle and last month approved Regulation Best Interest, which is expected to be tougher than the suitability rule that has governed broker-dealer securities sales to retail investors for years but less restrictive than a fiduciary rule.
New York State Assemblyman Jeffrey Dinowitz, who had previously introduced a state fiduciary rule, New York City Comptroller Scott Stringer and State Sen. Brad Hoylman called Reg BI “backwards regulation” that will serve “the best interest of only bankers and brokers who will use these regulations to profit at the expense of their clients.”
In a joint letter, they said Reg BI “allows brokers to ‘explain away’ any conflicts of interest and squeeze their clients for fees … [which] will only serve to mislead investors, potentially weaken existing protections, and allow reckless financiers to cash in.“
Dinowitz is expected to reintroduce his legislation in January 2020, several months before Reg BI takes effect on June 30, 2020.
Nevada, New Jersey and Massachusetts have proposed their own state fiduciary regulations for broker-dealers. None have been finalized and the battle lines that are being drawn in the meantime look a lot like the positions taken up for the Labor fiduciary rule: industry groups like the Securities Industry and Financial Markets Association oppose the state proposals. Groups like the Consumer Federation of America support the state proposals.
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