New York court shoots down state's annuity best-interest rule

A New York Court Thursday shot down the state’s relatively new “best interest” regulation for annuity and life insurance sales, ruling that it was too vague and gave the state too much latitude in finding violations.

In 2018, the state’s department of financial services issued Insurance Regulation 187 to the dismay of insurance companies and industry groups, which saw the potential for the rule to disrupt business substantially.

The regulation’s language was similar to that used in the now-defunct Obama-era fiduciary rule from the Department of Labor, establishing a uniform standard of care that required agents and brokers to act in the best interest of customers when recommending products. The annuity requirement took effect in 2019, while the life insurance component became effective last year.

Two different groups of plaintiffs, including the National Association of Insurance and Financial Advisers, sued the state agency in 2018 seeking to overturn the regulation, and the cases were consolidated. In 2019, the New York State Supreme Court upheld the best-interest regulation, finding that the department did not exceed its powers in establishing the rule and that it was neither arbitrary nor capricious.

But Thursday, in a big win for the insurance industry, that judgment was reversed by the New York Supreme Court Appellate Division. The standards in the state regulation are unconstitutionally vague, the court found.

The state has the option of appealing the decision to a higher court.

“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 opinion read. “Although the amendment provides certain examples of what a recommendation does not include … the remaining definitional language is so broad that it is difficult to discern what statements producers could potentially make that would not be reasonably interpreted by the consumer to constitute advice regarding a potential sales transaction and therefore fall within the purview of the amendment.”

Further, the law’s ambiguous language and lack of clear standards gave the state “virtually unfettered discretion” to determine whether a broker or agent broke the law, the order stated.