Breaking: NY Court Overturns Regulation 187

By John Hilton

The New York Supreme Court sided with plaintiffs today in overturning the toughest state annuity sales standard in the nation.

The state Supreme Court Appellate Division reversed a 2019 ruling by Justice Henry Zwack that the New York State Department of Financial Services was within its authority when it issued Regulation 187.

Regulation 187, often described as similar to a fiduciary standard, took effect in 2019 as state officials bypassed a National Association of Insurance Commissioners' effort to create a model standard for annuity sales. The New York regulation applies to life insurance sales as well and sets a high bar for a sale to be in the consumers' "best interest."

Today's court ruling determined that the bar is too high.

"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," the court decision reads.

This decision could be appealed to the New York Court of Appeals, which is the state’s highest court. Additionally, the state may request a stay on the Appellate Division’s decision pending an appeal to the state Appeals Court.

Industry officials were understandably happy with the ruling.

“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 Finseca CEO Marc Cadin. “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.”

Producers would have unreasonable difficulty attempting to comply with regulation requirements that are often "subjective," the court ruled.

"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.

A DFS spokeswoman said the office is reviewing the decision.

“DFS 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; this is the heart of the regulation. We are reviewing the decision and will consider our appellate rights,” she said in a statement.

Lawsuit Details

The Independent Insurance Agents and Brokers of New York and the Professional Insurance Agents of New York State filed suit in 2018 to stop the regulation. The National Association of Insurance and Financial Advisors-NY filed a separate suit that was later joined with the Big I-NY/PIA-NY lawsuit. The appeal was filed by the Big I-NY alone.

The lawsuits made several arguments, including:

That Regulation 187 conflicts with governing statutory scheme and is beyond the respondent’s authority to impose; it is unreasonable, arbitrary and capricious and lacks a rational basis;
and it is unconstitutionally vague.

Zwack disagreed, finding the regulation a proper exercise of the powers granted to the DFS Superintendent, that it is not an attempt by DFS to improperly legislate, and that it is neither arbitrary or capricious.

The New York rules include several requirements, including:

Require disclosure of all suitability considerations and product information that form the basis of any recommendation.
Permit agents or brokers to make a recommendation only if they have a "reasonable basis to believe that the consumer can meet the financial obligations under the policy."
Prohibits an agent or broker from telling a consumer that a recommendation is part of financial planning, investment advice or related services (unless the agent or broker is a certified professional in that area).
Additionally, the regulation requires insurers to "establish and maintain procedures to prevent financial exploitation and abuse," disclose to customers all relevant policy information in order to evaluate a transaction, and provide to producers all relevant policy information in order to evaluate a replacement transaction.

Some Exemptions

The New York standard exempted policies/contracts used to fund qualified retirement plans, ERISA plans and employer-sponsored IRAs. The proposal also would not apply to sales of mutual funds or other securities, unless related to an annuity or life insurance product.

For all other sales, the proposal required licensees to apply a standard very similar to the DOL’s best interest standard, as well as the ERISA prudent person rule.

As such, a recommendation is in the best interest of a consumer if it furthers the consumer’s needs and objectives, and is made “without regard to the financial or other interests of the producer, insurer or any other party.”

Clarification: And earlier version of this story inferred that The Independent Insurance Agents and Brokers of New York and The National Association of Insurance and Financial Advisors filed a lawsuit jointly and omitted the plaintiff role of PIA-NY.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.