New York Best Interest Standard Violates Law: NAIFA-NY

A group for New York state life insurance producers says New York state's new "best interest" standard regulation clearly conflicts with the state's statutory definition of the term "insurance agent." The National Association of Insurance and Financial Advisors — New York State Inc. (NAIFA-NY) makes that point in a suit against the New York Department of Financial Services. The new New York state best interest standard, which is set to take effect Aug. 1, 2019, requires an agent to put the needs of an annuity or life insurance customer first. But, under Section 2101(a) of New York Insurance Law, "an insurance agent acts on behalf of an insurer," NAIFA-NY says in a petition filed in a New York state court in New York County, in connection with NAIFA-NY v. New York State Department of Financial Services and Maria T. Vullo (Case Number 2018-160701). "Agents also have contractual duties to insurers on whose behalf they operate." (Related: Waters Vows Crackdown on 'Bad Actors' as Finserv Chair) New York state, state regulators and state courts have distinguished between insurance agents and brokers for decades, NAIFA-NY says. NAIFA-NY also argues that the New York state best interest standard is vague and confusing, and that it is neither reasonable nor rational. NAIFA-NY is asking the court to rule in its favor and to award it cash for attorneys' fees. Vullo, the New York state financial services superintendent, established the best interest standard, for the sale of both annuities and life insurance, by revising Regulation 187, which was the state's annuity suitability regulation. A suitability standard merely requires the seller of a product to verify that the product appears to suit the needs of the purchaser, not to put the purchaser's needs before all other priorities. NAIFA-NY is one of several New York state producer groups suing over the Regulation 187 update.

The Background

State insurance regulators have been drafting, approving and applying annuity suitability rules for years. The U.S. Securities and Exchange Commission already regulates variable annuities. It tried to move in on the indexed annuity market, by classifying all indexed annuities as securities. Congress rebuffed the SEC's move, by creating a mechanism states and insurers can use to have indexed annuities regulated as insurance products. The Employee Benefits Security Administration (EBSA), part of the U.S. Department of Labor, then embarked on an effort to apply a fiduciary standard to sellers of all retirement savings products, whether in the employer plan market or the individual market. The administration of President Donald Trump let the federal courts killed the DOL effort this past summer. Now, the SEC is working on a best interest regulation of its own. EBSA appears to be working on a new version of its fiduciary rule and best interest regulations. New York state, meanwhile, has a Democratic governor, Andrew Cuomo, who is said to be considering a run for president in 2020. California is getting a new, Democratic insurance commissioner, Ricardo Lara, who is so progressive that he co-introduced a single-payer health care bill that could have prohibited the sale of private major medical insurance. The climate could spawn major battles between Trump administration regulators in Washington and "Blue State" regulators in California and New York over a wide range of financial services issues, including financial services product sales standards. — Read New York State Final Best Interest Regs Cover Life As Well As Annuities, on ThinkAdvisor. — Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.