NY Court Strikes Down Regulation 187

The Appellate Division of the New York State Supreme Court, Third Department, has struck down the New York Department of Financial Services’ Regulation 187, based on the finding that the rule is “unconstitutionally vague.”

The amended rule took effect Aug. 1, 2019, for annuity sales, and began applying to life insurance sales on Feb. 1, 2020. The amendment required recommendations to be in the best interest of the consumer. Specifically, the amendment required “insurers, including fraternal benefit societies, to implement standards and procedures to address, and producers to consider, the best interest of the consumer when making recommendations involving life insurance and annuity products to ensure that the insurance needs and financial objectives of the consumer are addressed at the time of the transaction.

In a variety of ways, the transaction suitability rule is stricter than the national standards recently endorsed by the National Association of Insurance Commissioners (NAIC), which themselves closely align with the Regulation Best Interest (Reg BI) package by the Securities and Exchange Commission (SEC), which took effect last year. In fact, the Insured Retirement Institute continues to advocate for uniform adoption of the National Association of Insurance Commissioners’ best interest model regulation by all states to avoid a patchwork of conflicting standard-of-conduct regulations for annuity sales.

The ruling states that “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.”

Further, the ruling went on to say, “although the amendment provides certain examples of what a recommendation does not include (i.e., ‘general factual information to consumers, such as advertisements, marketing materials, general education information’ and ‘use of … interactive tool[s]’… 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.”

This decision could be appealed to the New York Court of Appeals, which is the state’s highest court. Additionally, the state may request a stay on the Appellate Division’s decision pending an appeal to the state Appeals Court.