New York state’s best interest regulation has lasting impact

By now, we can assume most or all insurance and annuity advisors are familiar with the terms “suitability” and “best interest.” If you work with securities, you are also familiar with the Financial Industry Regulatory Authority’s Regulation Best Interest. If you work with employer-sponsored retirement plans (qualified plans), you are familiar with the Department of Labor’s prohibited transaction exemption (PTE 2020-02), otherwise known as the fiduciary rule.

On top of these rules and regulations, you also may be bound by a Code of Standards (Certified Financial Planner Board), a Code of Professional Conduct (American Institute of Certified Public Accountants) or a Code of Professional Responsibility (Society of Financial Service Professionals), to name a few. These codes usually include requirements to act with:

» Fairness (respecting the interests of those you serve).

» Competence (knowledge and skills that start with technical competence and continued learning).

» Integrity (placing the client’s interest above your own).

Revised New York Department of Financial Services Regulation 187 (enacted in 1997) was published in the New York State Register on Aug. 1, 2018, with an effective date of Aug. 1, 2019. On April 29, 2021, the New York Supreme Court, Appellate Division, ruled that state Insurance Regulation 187, “Suitability and Best Interests in Life Insurance and Annuity Transactions,” was unconstitutional. On Oct. 20, 2022, New York’s highest court reinstated the 2018 regulation.

Under Regulation 187, irrespective of how you are compensated — commission or fee or both — recommendations must be made “in the best interest of the consumer and appropriately address the insurance needs and financial objectives of the consumer at the time of the transaction.” [NYS Regulation 187, Section 224.0(b)]

In my experience, since the regulation was published, life insurance and annuity carriers have taken steps to comply. The regulation is clear, outlining the duties and obligations of insurers — including fraternal benefit societies — by requiring them to establish standards and procedures for recommendations to consumers, with respect to policies delivered or issued for delivery in New York state, to make sure transactions are in the consumer’s best interest.

The regulation also further clarifies the duties and obligations of producers when making recommendations to consumers with respect to policies delivered or issued for delivery in New York state. The regulation is designed to help ensure that a transaction is in the consumer’s best interest and appropriately addresses the consumer’s insurance needs and financial objectives at the time of the transaction.

Therefore, the carrier and the advisor are bound by procedures, duties and obligations. There are limited exceptions.

Regulation 187 directly impacts advisors who deliver or issue for delivery life insurance and annuity contracts in New York state. However, the regulation has implications for all advisors in all states.

Acting in the client’s best interest has been a foundation of the industry that is all about providing financial security. Rightfully so, the advisor, as with any other entrepreneur, should be paid for this service. The term “fiduciary” is not mentioned in the New York regulation, but isn’t it a fiduciary duty to serve clients in their best interest? And how can you serve your client if you’re not being reasonably compensated?

The answer: proof — evidence, in writing and other documents, distinguished from oral evidence. In certain instances, there may be recordings and video. This is proof that your meetings met your duty and obligation that your recommendation was based on all the client’s relevant suitability information. Additionally, proof must reflect the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the prevailing circumstances.

How do you prove you are acting in the client’s best interest? That you said so will not be enough. It must be memorialized with written or electronic documentation.

As of the writing of this article, 27 states (New Mexico is the most recent, with adoption on Oct. 1, 2022) have some form of rule, regulation or legislation regarding systems and procedures for advisors to act in a consumer’s best interest regarding annuities and life insurance.

Beyond New York state

As when John Paul Warren coined the phrase “Cream always rises to the top … so do good leaders,” those with competence, skill, a solid work ethic and strong moral character will succeed. Presenting yourself as a professional comes with a duty and obligation. If we consider Regulation 187 a high standard, shouldn’t that standard be applied in all your transactions in all states? Four in 10 producers (41%) say merger and acquisition activity among intermediaries will affect where they choose to place business and will make it more complex.

You will not find the term “fiduciary” in Regulation 187. However, when you consider that the regulation outlines the duties and obligations of carriers and advisors, it mirrors a fiduciary’s duties and obligations.

Ernest J. Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA, national president of the Society of Financial Service Professionals, is the director of qualified plans, business markets for Consolidated Planning. He may be contacted at [email protected].