New York’s Department of Financial Services is proposing to amend Suitability in Annuity Transactions, 11 NYCR 224 (the Annuity Suitability Rule). Proposed 1st Amendment of Regulation 187 (11 NYCRR 224) On December 27, 2017, an amendment to the Suitability Rule was published in the New York State Register (the Amendment). The Amendment would rename the Annuity Suitability Rule to the Suitability in Life Insurance and Annuity Transactions (the Life & Annuity Suitability Rule) and would impose a host of new requirements with which insurers and producers would be required to comply. Despite the breadth of the proposal, a multitude of questions remain unanswered with respect to interpretation of the Annuity Suitability Rule. A summary of the Amendment’s requirements includes:
- A broader scope of the Suitability Rule which would applying to life insurance policies as well as in-force policies and which would alter 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.” As is noted below, the Amendment is broader in application than the Department of Labor’s (DOL's) fiduciary investment advice rule (Fiduciary Rule).
- A more comprehensive suitability analysis to include 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.”
- Creation of a best interest standard requiring a prudent person standard of care and suitability of the transaction, 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.
- Expansive disclosures required to be provided to the consumer.
- A prohibition against producers stating or implying that a transaction is part of financial or investment management services unless the producer is adequately qualified in those areas.
- Enhanced application of 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.
- A mandate that insurers establish and maintain procedures to prevent financial exploitation and abuse.
- Disclosure of any type of, or amount of, compensation permitted under the New York insurance laws. Though current law already requires robust compensation disclosure, the Amendment seems to suggest additional disclosure would be required.
The proposed revisions are more fully addressed below as is a discussion of their likely impact on regulated entities and the marketplace in general.
The broadened scope of Life & Annuity Suitability Rule is likely to draw the most attention. The Life & Annuity Suitability Rule applies “to all transactions or recommendations with respect to a proposed or in-force policy,” and the 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.
Accordingly, if adopted in its currently proposed form, 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.
Recommendations underlying allocations among the different interest crediting options or among different variable investment options arguably would also be subject to the Life & Annuity Suitability Rule.
The revised definition of recommendation and the new definition of transaction also substantially broaden the scope of the Rule. “Recommendation” is defined to mean:
one or more statements or acts by a producer, or by an insurer where no producer is involved, to a consumer that:
- 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
- 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.
The proposed Rule further 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 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 Rule, is the receipt of compensation in connection with the advice given. There is no such trigger in the Life & Annuity Suitability Rule, all of which would render the Rule is adopted in this form far broader than the DOL Rule.
Under New York’s proposed Life & Annuity Suitability Rule’s definition of recommendation, insurers and producers would need to exercise 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 Amendment defines suitable and adds additional information that must be gathered to determine the suitability of a recommendation. In so doing, the 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 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 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. Both rules could be broadly interpreted to require 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 New York’s 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 intended by a consumer’s tolerance of non-guaranteed elements. Moreover, it is unclear what information would be indicative of a consumer’s tolerance level.
Best Interest of the Consumer
The Amendment also imposes 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 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.
Although there is already substantial disclosure required to be provided to consumers, the Amendment requires further disclosure. As part of the best interest standard, the Amendment adds the following to the list of items about which the consumer has to be reasonably informed:
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 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 New York Superintendent, of all available policies of the same product type offered by the insurer.
These enhanced disclosures significantly increase the level of product knowledge and due diligence to be demonstrated by selling producers, and each raises substantial questions regarding interpretation and breadth. For example, to what degree does the required disclosures of potential consequences of a transaction require the use of disclosures because personalized to the individual circumstances of the consumer? Similar concerns underlie recitation of the potential tax implications of a proposed product. Further, the scope of compensation to producers is not detailed in the proposed Amendment. New York law already calls for broad compensation disclosure. How much more could the Amendment contemplate?
Prohibiting Producer Statements on Implications of Financial or Investment Services
Despite the strict disclosure requirements, the Amendment nonetheless restricts the ability of a selling producer to describe the proposed products to a prospect. 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.
Precisely what "specific certification or professional designation" would permit producers to “provide financial planning, financial advice or related services currently is unclear.
All Producers in a Transaction are Subject to the Requirements of the Amendment
The Amendment also extends its application to 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 any compensation from a life policy or annuity transaction. Whether this requires duplicative disclosure so that 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 is also not clear.
The Life & Annuity Suitability Rule may be perceived as favorable to producers as it states that “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.”
Preventative Financial Exploitation and Abuse Procedures
The Amendment 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 is broader than 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, unlike the NAIC Model Act, New York’s Life & Annuity Suitability Rule does not arm insurers with the tools needed to assist them in preventing abuse. Specifically, the Amendment 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.
Further developments on the New York Life & Annuity Suitability Rule will likely influence and be influenced by the NAIC’s Suitability and Best Interest Model Act currently pending before the NAIC’s Annuity Suitability Working Group.
The public comment period on the Amendment expiries on February 26, 2018 unless further extended by DFS, which seems likely in view of the timing of implementation for the DOL’s July 1, 2019 delayed applicability date of certain requirements of its Fiduciary Rule’s Best Interest Contract Exemption and the Principal Transactions Exemption, and of certain amendments to Prohibited Transaction Exemption 84-24. Comments or questions (not exceeding 2000 words) should be submitted to:
James V. Regalbuto, Deputy Superintendent for Life Insurance One State Street New York, NY 10004 Telephone: (212) 480-5027 Email: James.Regalbuto@dfs.ny.gov