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Regulation and Compliance > Litigation

New York Best-Interest Rule for Annuity Sales Struck Down

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What You Need to Know

  • The court unanimously concluded that the rule is “unconstitutionally vague.”
  • Judges said the rule uses “subjective terms” and “fails to provide sufficient concrete, practical guidance.”
  • The decision could be appealed.

The New York best-interest standard for annuity sales was struck down Thursday by the Appellate Division of the New York State Supreme Court for being “unconstitutionally vague.”

Formally known as the New York Department of Financial Services’ Amended Regulation 187, Suitability and Best Interests in Life Insurance and Annuity Transactions, the rule is “unconstitutionally vague,” the judges unanimously concluded. They noted that it uses “subjective terms,” “fails to provide sufficient concrete, practical guidance for producers,” and “provide[s] insufficient guidance with respect to how producers must conduct themselves in order to comply.”

The amended rule took effect Aug. 1, 2019, for annuity sales, and began applying to life insurance sales on Feb. 1, 2020. The amendment required recommendations to be in the best interests of the consumer.

Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, told ThinkAdvisor Thursday in an email that “today’s NY 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.”

IRI, Berkowitz said, “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.”

Wesley Bissett, senior counsel for government affairs at the Independent Insurance Agents & Brokers of America, said Thursday in a statement that the decision “could have implications beyond New York in light of state consideration of the NAIC’s Suitability in Annuity Transactions Model Regulation.”

The National Association of Insurance Commissioners’ model “mirrors the New York rule in numerous ways and includes similar ‘best interest’ references, which create the same type of ambiguity and vagueness that is at the heart of today’s decision,” Bissett said.

Insurance agents “desire clear obligations and rules of the road, and no constituency benefits from nebulous and subjective mandates that do not specify what actions or compliance measures are required and what behavior is prohibited,” Bissett said.

The views expressed by the court today, Bissett added, “are why IIABA has urged the NAIC and individual states to remove any ambiguous references to ‘best interest’ and to allow the robust elements of the model to stand on their own.”

The ruling states that “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.”

Further, the ruling states, “although the amendment provides certain examples of what a recommendation does not include (i.e., ‘general factual information to consumers, such as advertisements, marketing materials, general education information’ and ‘use of … interactive tool[s]‘… the remaining definitional language is so broad that it is difficult to discern what statements producers could potentially make that would not be reasonably interpreted by the consumer to constitute advice regarding a potential sales transaction and therefore fall within the purview of the amendment.”

Unintended Consequences

Gary Cappon, president of the National Association of Insurance and Financial Advisors New York chapter, said Thursday in another statement that the amendment to Regulation 187 “created unintended consequences that placed unnecessary barriers between Main Street New Yorkers and the insurance and financial services professionals who serve them.”

The ruling, Cappon continued, “is a very encouraging sign, but NAIFA-NY will work with our industry allies as well as state regulators and legislators to protect New Yorkers’ ability to receive needed financial services and advice. We believe agents and advisors are necessary to help New Yorkers attain financial security and achieve their financial goals.”

The court’s ruling on Regulation 187 “gives New York a fantastic opportunity to make a fresh start and create a regulation to protect consumers based on the NAIC model,” Cappon added.

“NAIFA-NY firmly believes that insurance and financial professionals must act in the best interests of their clients. It’s a requirement every NAIFA member subscribes to when they agree to abide by our association’s Code of Ethics,” Cappon said. “The NAIC model achieves this goal without the unworkable requirements and restrictions of Regulation 187.”

The Petitioners

The original petitioners in the IIABA case were Independent Insurance Agents & Brokers of New York, the Professional Insurance Agents of New York State Inc., Testa Brothers Ltd. and Gary Slavin.

  • The Independent Insurance Agents & Brokers of New York, or Big I New York, is a DeWitt, New York-based group that represents 1,750 agencies and 13,000 agency employees. The parent organization, IIABA, is based in Alexandria, Virginia.
  • The Professional Insurance Agents of New York State Inc., or PIANY, is based in Glenmont, New York, and is an affiliate of the National Association of Professional Insurance Agents, which is based in Alexandria, Virginia.
  • Testa Brothers is a homeowners insurance agency based in Northport, New York.
  • Slavin is a Greenvale, New York-based benefits advisor who has been a member of the PIANY board.

NAIFA-NY also brought a related suit together with Donald Damick, an agent based in Geneva, New York.

— Allison Bell contributed to this report. 


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