Empire State Seeks to Extend ‘Best Interest’ Standard

The New York Department of Financial Services recently proposed new regulations that would adopt a “best interest” standard for sellers of life insurance and annuity products – and it could extend to IRAs.

The proposal would amend 11 NYCRR 224 (Insurance Reg. 187) to expand the scope of the existing suitability regulation to include all proposed or in-force life insurance policies. Currently that standard applies only to the purchase or replacement of annuities.

Among other things, the proposal would clarify the duties and obligations of insurers, including fraternal benefit societies, by requiring them to establish standards and procedures for recommendations to consumers with respect to policies delivered or issued in New York such that any transaction with respect to those policies is in the “best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.”

Suitability information would be expanded under the existing regulation to include, among other things, the tolerance of non-guaranteed elements in the policy, including variability in premium, cash value, death benefit or fees. In addition, “suitable” would be defined to include recommendations in furtherance of a consumer’s needs and objectives under the circumstances then prevailing, based upon the suitability information provided by the consumer and all available products, services and transactions.

IRA Impact

The amendment also includes several modifications under the duties of insurers and producers when recommending a transaction to a consumer. Of note is that the amendment seeks to add language similar to the ERISA prudent person rule specifying that the best interest of the consumer is when:

…the producer’s or insurer’s recommendations to the consumer are based on an evaluation of the suitability information of the consumer that reflects the care, skill, prudence, and diligence that a prudent person familiar with such matters would use under the circumstances without regard to the financial or other interests of the producer, insurer, or any other party.

The amendment would continue to exempt policies used to fund qualified retirement plans, ERISA plans and employer-sponsored IRAs; it would not apply to sales of mutual funds or other securities, unless related to an annuity or life insurance product. It would, however, apply to IRAs not associated with a plan sponsor.

The amended regulation would define an insurance producer to mean an insurance agent or insurance broker, and it would define a policy to include a life insurance policy, annuity contract or a certificate issued by a fraternal benefit society or under a group life insurance policy or group annuity contract.

‘Recommendation’ Refined

In addition, a “recommendation” would be defined to include statements or acts by a producer or insurer to a consumer that:

  • reasonably may be interpreted by a consumer to be advice and that result in a consumer entering into or refraining from entering into a transaction in accordance with that advice; or
  • are intended by the producer, or an insurer where no producer is involved, to result in a consumer entering into or refraining from entering into a transaction.

As outlined in a DrinkerBiddle client alert, the proposal raises several issues for insurance producers, life insurers and annuity writers, and, if adopted, would overlap with the DOL’s fiduciary rule and soon-to-be-proposed SEC rule, as well as other state standards, raising potentially conflicting requirements, compliance challenges and enforcement uncertainty.

Comments on the amendment are due by Feb. 28, 2018.

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