NY Judge Upholds State’s Tough Annuity Sales Regulation

NEW YORK CITY -- A New York judge upheld the toughest annuity sales standard in the nation Thursday, dismissing a lawsuit brought by industry opponents on the same day the rule took effect.

Acting Albany County Supreme Court Justice Henry Zwack ruled that the New York State Department of Financial Services was within its authority when it issued Regulation 187.

Both regulators and industry executives were buzzing about the decision this morning at the National Association of Insurance Commissioners' Summer Meeting in Manhattan. An NAIC working group is working through final drafts of an annuity sales model law and New York officials are lobbying the group to adopt its tough standard.

"I would recommend that everyone here buy your annuities here (in New York) because the producer is required to act in the best interest of the consumer," said James Regalbuto, deputy superintendent for life insurance at the New York, as the packed room let loose some chuckles.

Later, Gary Sanders, vice president of government relations for NAIFA, reminded the assembled group that the trade associations eventually prevailed in court against the Department of Labor fiduciary rule.

"Right now, we're batting .500," he quipped.

While hesitant to speak on the record, attendees on both sides said that Judge Zwack's decision will undoubtedly be appealed.

Linda A. Lacewell, superintendent of the New York Department of Financial Services, sent InsuranceNewsNet the following statement on the court decision:

“I am pleased that New York’s Insurance Regulation 187 was resoundingly upheld by the court,” Lacewell said. “DFS is the first insurance regulator to implement a ‘best interest’ standard that requires sellers of annuities and life insurance to act in the best interest of consumers when providing recommendations.

"This ruling recognizes that DFS acted within its grant of authority when implementing the amendment. This is a common sense regulation and it is a step in the right direction to protect consumers by ensuring that only consumers’ needs and financial objectives are considered in any transaction.”

Lawsuit Details

The Independent Insurance Agents and Brokers of New York and The National Association of Insurance and Financial Advisors -- New York filed suit in 2018 to stop the regulation.

Their petition made several arguments, including:

• It 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.

Regulation 187 is particularly tough because it applies to life insurance sales as well, which takes effect in six months.

The New York rules would:

• 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."
• Prohibit 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 proposed regulation would require 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 would continue to exempt 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 would require 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.”

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.

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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.