The National Association of Insurance and Financial Advisors for New York State has filed a lawsuit in New York Supreme Court claiming the best interest regulation by the New York Department of Financial Services contradicts New York law and is unconstitutional.
The new best interest standard applies to all investment professionals licensed to sell life insurance and annuity products to state residents. It was specifically adopted by the State Department of Financial Services, which says it has issued the new rules intentionally in the wake of the failure of the Department of Labor’s own attempt to strengthen conflict of interest standards at the federal level.
A statement summarizing the regulation says New York will henceforth require insurers to “establish standards and procedures to supervise recommendations by agents and brokers to consumers with respect to life insurance policies and annuity contracts issued in New York State so 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.”
According to the complaint, New York State’s Constitution vests the power to make policy in the democratically elected Legislature. An administrative agency may promulgate regulations only if the Constitution allows it or the Legislature enacts a statute that does so. The lawsuit alleges that the Department of Financial Services (DFS) exceeded its permissible executive-branch authority by promulgating Regulation 187 without constitutional or statutory authority.
The Association says the court should invalidate Regulation 187 for any one of three reasons:
- DFS did not have constitutional or regulatory authority to promulgate the regulation;
- Even if the court were to interpret the statutes that DFS cites as authorizing Regulation 187, DFS has breached the New York State Constitution because the regulation violates the separation-of-powers doctrine, contains impermissibly vague and confusing terms, and violates due process because the statutes on which DFS relies for Regulation 187 contain no safeguards; and
- Even if Regulation 187 were properly promulgated, the court should strike it as arbitrary and capricious because it will not further its stated purpose of protecting New Yorkers from conflicted advice, but would harm consumers by causing the market for and advice about life insurance policies and annuities to shrink.
The Association says Regulation 187 is arbitrary or capricious because the record does not contain a sufficient—or any—factual predicate for it; there is no rational basis for exempting direct-marketing transactions while imposing a fiduciary standard on all others; and there is no factual basis supporting the decision to conflate agents and brokers into a single group called “producers.”
“Ultimately, consumers will be hardest hit by reduced access and choice, forcing many independent insurance agents to exit the New York market. Consumers may also face higher prices because of reduced supply in the marketplace,” the Association states in its complaint.
The Association also contends the distinction between agents and brokers, “which has been a cornerstone of statutory and regulatory treatment of agents and brokers for decades,” is settled in the case law. Insurance agents act as agent of an insurance carrier and brokers appear as representative of the insured. Yet, the complaint says, Regulation 187 ignores this basic aspect of New York Insurance Law and places obligations on agents that are inconsistent with their statutory—as well as contractual—duties to insurers. “To be clear, if an agent must act solely ‘in the best interest of the consumer,’ then it cannot carry out its statutory duty ‘to act as agent of [an] authorized insurer,’” the complaint states.Other states debating/implementing their own conflict of interest rules are Connecticut, New Jersey and Nevada.