Proposed Regulation 187 (Suitability in Life Insurance and Annuity Transaction)


I am sure by now most of you have read the proposed revision to NY’s suitability regulation – or at least a news article about it. There have been quite a few. Because the comment period is still open, it is not too late to make your views known to NYSDFS. 

I have many opinions and thoughts about this proposal – some of which I wrote about in an earlier blog post. The longer I sit with it, the more thoughts and opinions I have. Here is one that I did not write about in my earlier post and that I have been ruminating on the last couple of weeks… 

Many of us who are involved in annuity filings, and have made DOL-related fee-only or reduced-commission filings, have heard from DFS in recent months that the DOL compliance obligations of producers should not impact what products are offered, by those producers, to consumers. They have pulled out a circular letter from 1955 and are once again focused on all individual products being “generally available.” They are adamant that they will not approve products that are developed for one distributor. Where they will allow some flexibility by distribution channel, they have stated in objection letters that a distribution channel means, for example, all banks in NY, not all Citizen Banks in NY. Absent a recognized distribution channel, our clients have been told, the product must be “generally available.” 

In that context, what does the definition of suitable mean? “Suitable means 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” (emphasis added). Does “all available products” mean all generally available products? Read with §224.5(c)(1)(i) of the Reg., it appears they do mean only those products, services, and transactions of a single company because that paragraph states that an insurer shall provide consumers with “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; …”

Presumably the intent is for the information provided by the insurer to line up with the products considered by the producer for recommendation to the consumer. Leaving aside the question of how many insurers’ products must be considered and therefore how many disclosures must be provided to each individual consumer, what about all the distributor-specific products that one insurer might have? Is part of the intent of the regulation to bring us back to the days before the 2000 OGC opinion on class distinctions by making an onerous disclosure and suitability standard? Is this a way to go back to what the DFS has often waxed nostalgic for? That time when one company had only one UL policy or one FPDA because the DFS felt having two, unless the second fell into a small number of clearly recognized distribution channels, was unfairly discriminatory? Perhaps not, but the more I think about it the more it seems so to me. How else can these compliance burdens be met? And more than anything, doesn’t that limit product availability to consumers based on producer and insurer compliance burdens? 

VT Bulletin 198

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On Monday, January 8, 2018 Vermont joined Iowa and Tennessee and issued detailed guidance on providing advice for securities and insurance products. Insurance Bulletin 198 (and Securities Bulletin S-2018-01) is a joint bulletin that the Department of Financial Regulation felt was necessary in order to provide financial professionals additional guidance on what activities are and are not permissible when it comes to providing advice on securities and insurance products.

The Department had issued more general guidance back in 2011, however, they stated two specific reasons for providing more detailed information now.

First, the Department said, there has been “an increase in investigations and enforcement actions relating to unregistered investment advice.”

Second, the “continuing evolution of state and federal suitability laws that now require an extensive financial analysis of a consumer’s financial affairs and a discussion of broad financial trends prior to making a recommendation on an insurance product or an investment/securities product.”

One point I found interesting is that, in the past, we’ve thought of this guidance as related to “source of funds”; that is, a specific focus on where the funds are coming from, and who can provide what level advice on those funds. While that’s still something that is being addressed in this bulletin, the #2 reason the department cited is related but broader than just source of funds. It goes to the growing discussions and developing regulations around how financial services are provided to consumers and what standard of care is owed to those consumers of financial services.

With NY’s proposed changes to their suitability regulation (which includes a number of significant changes, one of which is including life insurance within the suitability standards) as well as the questions of what will become of the DOL rule and what will the SEC do, as well as the NAICs current work on incorporating “best interest” standards into the suitability model, it’s clear that there are lots of questions around how financial transactions should be handled and what the burdens of the financial professionals are to ensure consumers are getting the “best” products and services for their needs.

With this bulletin, VT is stepping into the arena to add a bit more clarity at least around who can provide what services, and what types of discussions are permissible depending on the licensing and/or registration the financial professional holds. While only two other states have issued nearly identical guidance, we think it’s prudent for financial professionals to follow these guidelines regardless of what states they live in.

Why? Because this language is the most detailed we’ve seen, except in TN and IA and by using it as a benchmark of how financial discussions should be had and what the limits of those discussions may be, it allows financial professionals to say that they are trying their best to provide advice that they’re qualified to give without stepping over any boundaries. It shows a commitment to using integrity with consumers, and that even for states outside of VT, IA, and TN, it may provide a “safe haven” of sorts to be able to show documentation of complying with these regulations.

Proposed revisions to Suitability in NY: What next?

You may have missed the publication of Proposed revisions to NY’s Regulation 187 as it came out as many of us were celebrating holidays and taking a few well-deserved days off. However, we are all back to work now and as we continue to grapple with implementing the mandates of Regulation 210 (regarding non-guaranteed elements), we have a new proposal: Suitability in Life Insurance and Annuity Transactions. Yep, you read that correctly, Suitability in Life Insurance and Annuity Transactions.

In some ways, suitability is a misnomer because one thing this regulation does is equate suitability and best interest in a new, direct way. Before the DOL rule, I often spoke to groups about what seemed to be a degree of regulatory confusion about the difference between a suitable recommendation and a best interest recommendation. There are many examples in disciplinary actions and published statements where insurance regulators, often at the commissioner level, have used those terms and phrases interchangeably and therefore, in my opinion, inaccurately. NY now intends to make it accurate. And apply this new concept of suitability to life insurance. 

So, what does “best interest of the consumer” mean in NY’s suitability proposal?

First, it is transactional, which makes more sense in the context of insurance than the relationship-based concept of the DOL fiduciary rule. A transaction is “any purchase, replacement, modification, or election of a contractual provision with respect to a proposed or in-force policy.” Note the inclusion of “election of a contractual provision”, which would typically be post-issue.

There must be a recommendation. Recommendation is defined as “one or more statements or acts…to a consumer” by a producer or insurer if there is no producer involved. The statements or acts “reasonably may be interpreted as advice” and the consumer enters into or refrains from entering into a transaction. Finally, there is an intent element to the definition. The recommendation must include an intent by the producer/insurer, which is interesting, especially when we are talking about an insurer. Is it possible for a corporate entity to have an intent? (They can make campaign contributions as people, after all.) Are sales goals the same as intent?

In all states plus in the federal securities suitability standards, there are 12 factors to be considered, but NY is proposing to add a lucky 13th: “Tolerance of non-guaranteed elements in the policy, including variability in premium, cash value, death benefit or fees.”  They also modify the wording of some of the other 12 as well to make some policy features explicit suitability factors. Very significantly, the definition of “suitable” also requires consideration of “all available products, services, and transactions.” What is meant by “available?” What the producer is licensed/appointed to sell? What is available anywhere by anyone with an appropriate license? How can a producer consider products that they do not sell with the level of diligence apparently required by the regulation?

A producer/insurer acts in the consumer’s best interest under this proposal when the recommendation reflects due care and skill and is based on an evaluation of the suitability information provided and is made “without regard to the financial or other interests of the producer, insurer, or any other party.” The consumer must have been “reasonably informed” of the features of the product – whether favorable or unfavorable. In addition, the consumer has to have been informed of the producer’s compensation, which is not really a new requirement since Reg 194 has required notification for several years now. The producer/insurer must determine that the consumer would benefit from features in the policy (which includes both life insurance and annuities).

In addition to these best interest/suitability standards, a few additional rules are incorporated.  The producer cannot “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.” That seems more than reasonable when it comes to financial planning and investment management. However, isn’t any recommendation covered by this regulation financial advice? What certification or designation is contemplated for that element of this prohibition? 

The regulation also states that it applies to “every producer in the transaction, regardless of whether the producer has had any direct contact with the consumer.” This seems to be a warning to general agents and IMOs that they need to be very careful in this regard and have good oversight in place to make sure that they are not inadvertently brought into a violation because of an override payment on a sale that was not suitable.

Insurers are required not only to have policies and procedures around suitability and the implementation of the above rules, but also, they must establish procedures “designed to prevent financial exploitation and abuse.”

Finally, in contrast with the DOL rule, this proposal specifically endorses commission sales as consistent with both the suitable and best interest standard. It 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.”  That is consistent with the DFS position that the compensation limits set forth in §4228 are reasonable. 

This proposal is currently in the public comment period.

We have had conversations with clients about making comments on their behalf. If you are interested in discussing this proposal and how it might impact your company, please contact me at 518-692-2494 or We will also be discussing this in more detail at our upcoming symposium on February 6 in Irvine, CA

AICP Heartland Chapter E-day

AIPC Heartland Chapter E-day at the Des Moines Marriott Downtown

With the AICP 2017 Heartland Chapter E-Day right around the corner, I look forward to the opportunity to see many familiar faces as well as meeting those I haven’t yet had the pleasure. I’ve never been to Iowa, so the short trip to Des Moines will knock another off my list of states yet to visit. Rain seems to be likely, so my visit may not extend far from the hotel, but it still counts as a visit, right??

For us “Lifers” the Life, Health & Annuity topics should prove to be very interesting! The DOL Fiduciary Rule is something keeping many of us at CCS busy, so learning what others are doing to help their clients prepare will be insightful. The implications are so broad; from advertising to issue processes – one can only wonder how things will look when everything is said and done. And of course, I am very interested in hearing more about my home-state, California! I don’t know anyone who can talk about their CA filing without a groan or sigh – it is one fun state!! For those of you who don’t know, I live in CA and travel to the CCS Greenwich, NY office regularly. I love being bicoastal; each month, I get to experience the best of both worlds from sunny So Cal beaches to quaint upstate villages – what more could a girl want? 

If you know me, you know that I will be so very happy to see you in just a day or two. If we haven’t yet met, please come by the CCS exhibit and introduce yourself! I will have our famous Compliance Heroes as well as our super cute CCS Cows to send home with you, plus chocolate and CCS info if you are interested, so come on by – I look forward to seeing everyone soon! Iowa, here I come!