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 regulation’s full title is “Suitability and Best Interests in Life Insurance and Annuity Transactions.” In basic terms, the 2018 regulation established a New York-specific best interest standard for insurance licensee conduct by expanding the scope and requirements of New York’s suitability regulation, which broadly applies to the production of annuity contracts. 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 implemented in recent years by the Securities and Exchange Commission (SEC).
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. The lower court’s ruling in the case, which is actually testing a consolidated lawsuit representing multiple moving parties, sided strongly with the state’s Department of Financial Services (DFS). Among other arguments, challengers to the annuity suitability rule expansion suggest the approach taken by DFS violated the State Administrative Procedure Act (SAPA). On this point, the Supreme Court was skeptical and sided entirely with DFS. Furthermore, turning to the petitioners’ argument that SAPA was violated because DFS did not provide a valid cost analysis, the Supreme Court found that the efforts of DFS in this regard “are amply sufficient.”
The new appellate division ruling sharply reverses course.
“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 appellate division ruling states. “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 tools, 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.”
Additionally, the new ruling states, once a recommendation is deemed to have been made, the guidelines with respect to the suitability information that producers must obtain from the consumer and the suitability considerations that must necessarily be disclosed are “inadequate to the extent that they rely upon subjective terms that lack long-recognized and accepted meanings and provide insufficient guidance with respect to how producers must conduct themselves in order to comply with the amendment.”
“Respondents concede that, in an effort to mitigate the costs of implementation, they intentionally did not mandate a particular format or system nor prescribe specific forms that producers must use to demonstrate compliance with the amendment,” the new ruling states. “However, given the resulting ambiguities in the language employed, coupled with its lack of clear standards for how these provisions will ultimately be enforced, respondents have virtually unfettered discretion in determining whether a violation has occurred. The amendment, therefore, fails both prongs of the test and, accordingly, we find it to be unconstitutionally vague. In light of our holding, petitioners’ remaining contentions have been rendered academic.”
The full appellate division ruling can be viewed here.