The New York Department of Financial Services (“DFS”) proposed amendments to New York’s existing suitability regulation in order to establish a “best interest” standard for the sellers of life insurance and annuity products.
DFS issued the proposal in order to protect New York State consumers from receiving conflicted advice from agents, brokers and/or insurers regarding life insurance and annuity product transactions. The proposal would require an agent or broker (or an insurer, if there is no agent or broker involved) to “act in the best interest of the consumer.” According to the proposal, this means that an agent, broker or insurer should make recommendations “based on an evaluation of the suitability information of the consumer that reflects the care, skill, prudence, and diligence that a person familiar with such matters would use under the circumstances without regard to the financial or other interests” of themselves or other parties.
The amendments would (i) require disclosure of all suitability considerations and product information that form the basis of any recommendation, (ii) permit agents or brokers to make a recommendation only if they have a “reasonable basis to believe that the consumer can meet the financial obligations under the policy,” and (iii) prohibit an agent or broker from telling a consumer that a recommendation is part of financial planning, investment advice or related services (unless the agent or broker is a certified professional in that area).
Additionally, the proposed regulation would require insurers to (i) “establish and maintain procedures to prevent financial exploitation and abuse,” (ii) disclose to customers all relevant policy information in order to evaluate a transaction, and (iii) provide to producers all relevant policy information in order to evaluate a replacement transaction.
The proposed amendments are open to public comment for 30 days after their publication in the New York State Register.
Lofchie Comment: The proposed NYDFS standard that a seller must understand fourteen different characteristics of the insurance buyer, and must take account of “all available, products, services and transactions,” seems to set an unreachable bar. Is NYDFS really requiring that an insurance broker have information as to all available products, including those she does not offer, and then evaluate all of those available products against the customer’s fourteen suitability information characteristics?
Further, a “recommendation” seems to be defined to include any communication with a customer of a non-clerical nature, as it would seem that a broker would expect that a communication with a customer or potential customer would result in either the customer transacting or not transacting (that seems to cover all the bases). Does this mean that a broker responding to any question from a customer is thereby subject to the “best interest standard”? If so, the broker would be wise to let the customer do her own research.
These standards are published immediately after the SEC issued its own Retail Best Interest standard. While those rules seemed as if they would set a difficult standard for firms to meet, and likely would discourage firms from making recommendations, the New York State proposal is harsher by far; can brokers really meet these standards in talking to customers? This is not the first time that the NYDFS has issued a proposal with which compliance appeared impossible on its face (see, e.g., the NYDFS proposed AML Rules).
If these rules go forward as proposed, firms selling annuities in New York may be at high risk.