A controversial best interest standard for sales of life insurance and annuities in New York may be headed to the state’s highest court now that it has been deemed unconstitutional by an appellate court.
The New York Court of Appeals would be the last stop within the state’s court system should regulators appeal the Supreme Court Appellate Division’s April 29 unanimous decision that the amended New York Regulation 187 is unconstitutional.
“It appears likely that the decision will be appealed to the state’s highest court and, if the appeal is filed, a stay of the appellate court decision will be requested. This would be granted as a routine matter so that Reg 187 would continue to be the law until a final decision,” said Brandi Brown, senior vice president of regulatory affairs for RegEd.
Though the best interest standards established under the amended version of New York’s Reg 187 came into effect for annuity sales on August 1, 2019, and for life insurance sale on February 1, 2020, insurance industry associations, an insurance agency, and a registered representative sought to overturn them by suing the state’s Department of Financial Services (DFS). A state Supreme Court judge ruled in regulators’ favor in August but the Supreme Court Appellate Division’s sided with the remaining plaintiffs, Independent Insurance Agents of New York (Big I NY) an industry trade association, and Testa Brothers, one of its members, in their appeal.
Appellate court rules NY Reg 187 unconstitutional
The appellate court agreed with Big I NY and Testa Brothers and their contentions that the amendment violates their due process rights as it is unconstitutionally vague.
“It provided little if any protection beyond the already robust laws of conduct and accountability for insurance agents, and actually harmed consumers by reducing access to affordable life insurance products and the trusted advice of an agent,” Lisa Lounsbury, CAE, president and CEO of Big I New York said after the ruling, according to an association blog post about winning its lawsuit appeal against NYSDFS.
In siding with the plaintiffs, the appellate court wrote that NY Reg 187 failed to meet either both prong of the two-part test that is used to evaluate “a vagueness challenge.” That is, NY 187 was not sufficiently defined and standards for enforcement were not specific enough.
“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,” justices wrote.
Furthermore, “given the resulting ambiguities in the language employed, coupled with its lack of clear standards for how these provisions will ultimately be enforced, respondents have ‘virtually unfettered discretion’ in determining whether a violation has occurred,” justices continued.
Industry favors NAIC best interest standard
“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,” said Gary Cappon, president of the National Association of Insurance and Financial Advisors New York Chapter (NAIFA-NY), according to an association blog post regarding the appellate courting ruling NY Reg 187 unconstitutional. The NAIFA-NY was among the plaintiffs that initially challenged NY Reg 187 but it was not part of the appeal.
“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 said, referencing the National Association of Insurance Commissioners (NAIC) model regulation on annuity transactions.
The NAIC model regulation requires financial professionals to act in the best interests of consumers during annuity transactions and aligns with the Securities and Exchange Commission’s federal Regulation Best Interest, the NAIFA-NY noted in expressing its support.
The NAIC explains that its annuity suitability and best interest standard requires agents and carriers to act with “reasonable diligence, care, and skill” in making recommendations. Three states have adopted revisions to the model and the NAIC continues to work with regulators nationwide.
Meanwhile, in New York, insurance companies may have to wait to see if DFS will appeal the recent ruling that the best interest standards put forth in NY 187 are unconstitutional.
“Until the appeal of the Supreme Court’s recent decision, some companies may opt to delay training of new agents under Reg 187, but we believe that most insurers will continue to follow Reg 187 until its fate is finally decided,” said Brown, RegEd’s senior vice president of regulatory affairs.
“This means they will continue to need training. And RegEd’s courses will continue to be available for as long as needed.”
RegEd offers three courses that insurers may use for this purpose.
- NY Reg 187: Suitability and Best Interest of Clients in Life Insurance and Annuity Transactions (484_NY)
- Best Interest of Clients in Life Insurance Transactions: NY Reg 187 Course(484_NY_L)
- Best Interest of Clients in Life Insurance or Annuity Transactions: NY Reg 187-1 Hour Course (485_NY)
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