New York Department of Financial Services Rings in the New Year with New Suitability Requirements for Insurance Companies

by Carlton Fields
Contact

Carlton Fields

New York’s Department of Financial Services decided to bid farewell to 2017 and ring-in the new year by proposing to amend Suitability in Annuity Transactions, 11 NYCR 224 (the Annuity Suitability Rule). On December 27, 2017, the first amendment to the Suitability Rule was published in the New York State Register (the First Amendment). The First Amendment, which would rename the Annuity Suitability Rule to the Suitability in Life Insurance and Annuity Transactions (the Life & Annuity Suitability Rule), offers a parade of new requirements to which insurers and producers would be required to march. In general, the First Amendment revisions:

  • Broaden the scope of the Suitability Rule by applying to life insurance policies as well as in-force policies and by altering the definition of “recommendation” to include communications with the consumer, which “the consumer interprets to be advice” and to include “any act intended to result in a consumer entering into or refraining from entering into a transaction.”
  • Expand suitability analysis to include a consideration of “all available products, services, and transactions” and of additional suitability information, including “the duration of existing liabilities and obligations” as well as “tolerance of non-guaranteed elements in the policy.”
  • Create a best interest standard requiring a prudent person standard of care and suitability of the transaction.
  • Expand the disclosures that are required to be provided to the consumer.
  • Prohibit a producer from stating or implying that a transaction is part of financial or investment management services unless the producer is adequately qualified in those areas.
  • Expand producers subject to the Life & Annuity Suitability Rule’s requirements to all producers involved in the transaction, even those that do not have direct contact with the consumer.
  • Mandate that insurers establish and maintain procedures to prevent financial exploitation and abuse.
  • Allow for any type of, or amount of, compensation permitted under the New York insurance laws.

Set forth below is a brief discussion of the impact of some these revisions.

Broadened Scope

The biggest noisemaker in Life & Annuity Suitability Rule is its broadened scope. The Life & Annuity Suitability Rule applies “to all transactions or recommendations with respect to a proposed or in-force policy.” The Life & Annuity Suitability Rule defines policy to mean:

a life insurance policy, annuity contract, or a certificate issued by a fraternal benefit society under a group life insurance policy or group annuity contract.

Thus, if adopted, the Life & Annuity Suitability Rule would apply to recommendations made to a consumer with respect to the consumer’s initial purchase of life policy or annuity contract as well as recommendations subsequent to the consumer’s initial purchase. For example, the Life & Annuity Suitability Rule would apply to these recommendations post-sale:

  • For a life policy, as to whether to increase the face amount of a life policy, change the death benefit option, or to elect to receive accelerated death benefits. It may also apply to recommendations as to whether to change the premium payments to be made under a universal life policy or to elect to abbreviate premium payments under a whole life policy. 
  • For an annuity contract, as to whether to elect a step-up to a benefit base for an income benefit or enhanced death benefit as well as to elect income benefits. It may also apply to recommendations as to whether to pay additional premiums.

Presumably recommendations with respect to allocations among the different interest crediting options or among different variable investment options would also be subject to the Life & Annuity Suitability Rule.

Further broadening the scope is the revised definition of recommendation and the new definition of transaction. The Life & Annuity Suitability Rule defines recommendation to mean:

one or more statements or acts by a producer, or by an insurer where no producer is involved, to a consumer that:

(1) reasonably may be interpreted by a consumer to be advice and that results in a consumer entering into or refraining from entering into a transaction in accordance with that advice; or

(2) is 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.

It defines transaction to mean:

any purchase, replacement, modification or election of a contractual provision with respect to a proposed or in-force policy.

While the Life & Annuity Suitability Rule’s definition of recommendation includes some of the language used in the Department of Labor’s (DOL's) definition of recommendation within its fiduciary investment advice rule, it does not contain any of the DOL’s exemptions from the definition or recommendation. Moreover, a key to triggering the DOL’s fiduciary investment advice rule, is the receipt of compensation in connection with the advice given. There is no such trigger in the Life & Annuity Suitability Rule.

Under the Life & Annuity Suitability Rule’s definition of recommendation, insurers and producers would need to exercise exceeding care to prevent their communications from unintentionally being interpreted by the consumer as advice. This would include communications that the insurers and producers intended to be merely educational, such as informing the consumer about the benefits and conditions of a life policy or annuity contract. Moreover, if for example, a producer meets annually with a consumer to review the consumer’s life policy(ies), annuity contract(s), or any combination of the foregoing, the various duties of the insurers and the producer contained in Life & Annuity Suitability Rule could be viewed as being triggered. This may be the case even if the consumer decides not to take any action with respect to the insurance products the consumer owns and not to make any of the numerous possible elections, because under a broad reading, the consumer may have interpreted the discussion as providing advice to refraining from replacing the insurance products or making an election of a contractual provision. Thus, based on a broad reading, under the Life & Annuity Suitability Rule, the requirement to obtain the consumer’s suitability information and to supervise the producer’s recommendation would apply to the annual meeting. 

Expanded Suitability Analysis

The First Amendment defines suitable and adds additional information that must be gathered to determine the suitability of a recommendation. In so doing, the First Amendment expands the required suitability analysis. The Life & Annuity Suitability Rule defines suitable to mean:

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.

The First Amendment also adds new items of suitability information that must be obtained, including:

tolerance of non-guaranteed elements in the policy, including variability in premium, cash value, death benefit, or fees.

The Life & Annuity Suitability Rule’s inclusion of “all available products, services, and transactions” is similar to the NAIC’s proposed Suitability and Best Interest Standard of Conduct in Annuity Transactions Model Regulation’s (NAIC’s Suitability and Best Interest Model) requirement imposed on the producer or insurer to evaluate "the types of financial products which correspond to the consumer's disclosed suitability information and address the consumer's financial objectives" and raises some of the same issues. This seems to suggest that before making a recommendation, including a recommendation with respect to in-force policies, the producer or insurer must consider the universe of other products, services, and transactions that are available at the time of recommendation. The Life & Annuity Suitability Rule, however, does not define products or services. To the extent that products would include securities, insurance licensed only producers would not have the requisite registration to consider securities products.

Also like the NAIC’s Suitability and Best Interest Model, the suitability information to be gathered under the Life & Annuity Suitability Rule includes information on non-guaranteed elements. This follows the NY DFS’ promulgation of Rule 210 on non-guaranteed elements. No guidance is given as to what is meant by a consumer’s tolerance of non-guaranteed elements. Moreover, it is unclear what information would reflect a consumer’s tolerance. 

Best Interest of the Consumer

The First Amendment turns a new leaf by imposing a best interest standard by adding the following "prudent person" requirement:

[a person] acts in the best interest of the consumer when . . . [the person'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 Life & Annuity Suitability Rule also includes as part of its best interest standard, a requirement that the transaction is suitable, and the Annuity Suitability Rule's requirement that there be a reasonable basis to believe that (i) the consumer is reasonably informed of key facts, (ii) the consumer would benefit from the features of the life policy or annuity contract, and (iii) if the transaction is a replacement, the replacement is suitable, taking into consideration specified items of analysis. 

The Life & Annuity Suitability Rule's prudent person language follows the best interest language from the DOL's Best Interest Contract Prohibited Exemption language. 

Expanded Disclosure

Although there is already a confetti of disclosure that must be provided to consumers The First Amendment requires even more disclosure. As part of the best interest standard, the First Amendment adds the following to the list of items that the consumer has to be reasonably informed of:

potential consequences of the transaction, whether favorable or unfavorable. 

. . .

potential tax implications of the various transactions that can occur under a life policy or annuity contract.

. . .

the manner in which the producer is compensated for the sale and servicing of the policy.

The First Amendment also adds the following new disclosures:

all relevant suitability considerations and product information, whether favorable or unfavorable, that provide the basis for any recommendations.

. . .

all relevant policy information with respect to evaluating any transaction or proposed transaction, including a comparison, in a form acceptable to the superintendent, of all available policies of the same product type offered by the insurer.

Each of these additional disclosures raise a host of interpretative questions which may give producers and insurers a hangover. For example, would disclosures of potential consequences of a transaction require the use of personalized disclosures because whether or not a transaction or a feature of an insurance policy or annuity contract is favorable or unfavorable, may depend on the individual circumstances of the consumer? The same issue arises with respect to potential tax implications unless it would be sufficient to provide a general description of the tax consequences and then direct the consumer to his or her tax advisor. Also, does the disclosure on "the manner" in which the producer is compensated merely require disclosure that the producer receives an upfront commission based on premiums paid or trail commissions based on the value of the insurance policy or annuity contract? Or, is the amount of commissions also required to be disclosed? Further, what about other amounts received by the producer, such as amounts for advertisement or administrative expenses? Is the disclosure limited to the producer that interacts with the consumer, or does it also include other producers who may receive overrides or other compensation? Finally, what information is required in the comparison of products offered? Does this comparison need to be delivered only for initial sales or also for recommendations with respect to in-force polices?

Prohibiting Statements or Implications of Financial or Investment Services

The First Amendment restricts the fanfare that a producer may use in communicating with consumers. Under the Life & Annuity Suitability Rule, a producer is not permitted to:

state or imply to the consumer that a recommendation to enter into a transaction is part of financial planning, financial advice, investment management, or related services unless the producer has a specific certification or professional designation in that area.

This new limitation may also cause some headaches as producers try to determine what "specific certification or professional designation" would allow them to say they are providing financial planning, financial advice or related services.

All Producers in a Transaction are Subject to the Requirements

The First Amendment extends its merrymaking by inviting all producers involved in a life policy or annuity contract transaction to the party. Under the Life & Annuity Suitability Rule:

Any requirement applicable to a producer shall apply to every producer in the transaction, even if that producer does not have direct conduct with the consumer.

This new provision was apparently added to reach all those who may receive an override or other compensation from a life policy or annuity transaction. Does this mean every duty imposed on producers must be performed by each producer in the transaction, or is this merely a means to impose penalties against every producer in the transaction in the event of a transaction that was not in the best interest of the consumer? 

Preventative Financial Exploitation and Abuse Procedures

As if there was not enough carousing with all the other requirements added by the First Amendment, the Life & Annuity Suitability Rule also requires insurers to:

establish and maintain procedures designed to prevent financial exploitation and abuse . . [i.e.,] the improper use of an adult’s funds, property, or resources by another individual, including fraud, false pretenses, embezzlement, conspiracy, forgery, falsifying records, coerced property transfers or denials of access to assets.

This requirement goes further that the proposed NAIC Suitability and Best Interest Model which merely requires financial exploitation of seniors and other vulnerable adults be added as a new training topic. While imposing a heavy burden on insurers to establish and maintain procedures, the Life & Annuity Suitability Rule does not provide insurers with tools to assist them in preventing abuse. For example, it does not allow insurers to delay disbursement of funds if the insurer has a reasonable belief that the disbursement would result in financial exploitation. It also does not provide immunity to insurers who report suspected financial abuse to government agencies or immunity from administrative or civil liability who in good faith and exercising reasonable care implement procedures to prevent financial abuse. 

Compensation of Producers

Producers may wish to raise a glass in celebration of the First Amendment’s lack of compensation limits. The Life & Annuity Suitability Rule states “nothing in this part shall be construed to prohibit the payment to a producer of any type or amount of compensation otherwise permitted under the Insurance Law.”

Next Steps

The public comment period on the First Amendment expiries on February 12, 2018. Based on what happened for Regulation 210, after the NY DFS reviews the submitted comments, it is likely that it will publish additional proposed amendments with the goal of finalizing the Life & Annuity Suitability Rule by the end of the summer and having an effective date in 2019, perhaps to coincide with the July 1, 2019 delayed applicability date of certain requirements of the Fiduciary Rule’s Best Interest Contract Exemption and the Principal Transactions Exemption, and of certain amendments to Prohibited Transaction Exemption 84-24. 

What happens next on New York’s Life & Annuity Suitability Rule as the ball drops at midnight and 2018 begins will likely have an impact on the NAIC’s Suitability and Best Interest Model. We will continue to monitor the report on the activities of the NY DFS and the NAIC’s Annuity Suitability Working Group.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carlton Fields | Attorney Advertising

Written by:

Carlton Fields
Contact
more
less

Carlton Fields on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.