NY Reg 60

“1035 exchanges are about to get easier. Is that a good thing?”

This title is not original. It is the title of an article written by Greg Iacurci in InvestmentNews’ January 21, 2019 edition. It is an interesting piece about the effort to use technology to speed up the 1035 annuity-to-annuity transfer on a tax-free basis. Whenever I see 1035, I think replacement and when I think replacement, I think about Regulation 60 in NY. When I read this article, I kept thinking how likely it is to lead to Reg 60 violations and fines.

While not mentioned in the article, I am hopeful that those working on this streamlining effort are familiar with Reg 60 and its mandates. The article states “Annuity products are often derided as being expensive, complicated products, a criticism that’s compounded by cumbersome industry infrastructure that often creates a month-long exchange process. Technology can reduce the time line substantially, executives said, likely to within a week, start to finish.” That does not appear to be enough for all that is required by Reg 60.

Sheryl Moore, CEO of Moore Market Intelligence does point out that it is possible that “more bad actors would get missed” due to the streamlined process, and that is certainly true, but my concern is a compliance one. I do not see how it will be possible to comply with the disclosure requirements of Reg 60 within that process. So perhaps NY is outside the scope of these efforts? Perhaps once the rest of the country has successfully expedited the replacement process, pressure can be brought to bear on the NY DFS to revise Reg 60 to increase the speed of these transactions.


However, that seems a long shot given recent experience with Reg 60 procedures filings. In most cases, if not all, an expedited process for replacements requires revisions to a company’s DFS-filed procedures. Those filings are reviewed in granular detail and changes are often requested along with every screen shot of an electronic process. If changes are also required to the application to accommodate a new process, the slowdown at DFS is dramatically increased. Both the policy form reviewers and Reg 60 reviewers hold these types of changes to an extremely rigorous scope of review, far in excess of anything that exists in the review of paper processes. The chance that 1035 exchanges will get easier in NY seems remote.

The Value of Living and Death Benefits

The cover of the May 14-18 issue of InvestmentNews has an article by Darla Mercado titled: VA Surrenders jumped after Hartford bowed out. She states: “The unusual increase in surrenders, which has happened at other carriers that have left the business, shows that some brokers use the exits as a rationale to encourage legacy VA holders either to cash out their contracts or exchange them for new annuities.” She goes on to point out that “At the same time, [such actions] benefit brokers selling new contracts, which carry commissions of as high as 7%, depending on the carrier and share class.”

The article leads to a very interesting discussion of the value of living and death benefits in existing contracts and how much individual owners can lose when they exchange for a new contract. Of course, there are many individual variables, and insurers should expect these replacements to be scrutinized by regulators. However, I am skeptical about the ability of current replacement disclosure forms to adequately set out the trade-offs at play in these cases. I think particularly of the forms under New York’s Reg 60. It is clear that they were developed long before the most valuable benefits in today’s annuity contracts, and with each passing year and each new benefit, it gets more and more difficult to clearly convey the trade-offs to a consumer on those forms, now so dated. Those forms illustrate the downside to forms that require a lot of specific information rather than a more free-form disclosure. If the specific information that is required is not the most important information, the consumer gets the mandated disclosure, but not always effective disclosure. Of course there are risks to leaving more discretion in what is disclosed, but if accompanied by active regulatory oversight, it can lead to better actual disclosure.

There are some market players who have an interest in seeing that the contracts stay in force and Ms. Mercado reports that some broker/dealers are “considering a program in which clients with certain rich contracts receive regular reminders of their VA’s attributes and benefits.” In the past, thinking about replacements has assumed that the carrier with the contract in-force would have an interest in retaining the business, but that is not always the case. This article concludes with a quote from Tom Hamlin, founder of Somerset Wealth Strategies and branch manager with Raymond James Financial Services Inc.: “The insurance companies aren’t protecting their existing clients, because they want to get out from underneath the exposure to living and death benefits. There is no legitimate excuse to exchange or liquidate these annuities; nobody who is informed would do it.”