James V. Regalbuto
Deputy Superintendent for Life Insurance
New York State Department of Financial Services
One State Street
New York, NY 10004
Submitted Electronically – email@example.com
The Association for Advanced Life Underwriting (“AALU”) and the National Association of Independent Life Brokerage Agencies (“NAILBA”) appreciate the opportunity to comment on the proposed First Amendment to 11 NYCRR 224 (Insurance Regulation 187) establishing a new “best interest” standard for life insurance and annuity transactions (“the Proposal”) modeled on the U. S. Department of Labor’s (“DOL”) fiduciary regulation and associated prohibited transaction exemptions (collectively, the “DOL Rule”). The potential impact of the Proposal is very significant, and we are grateful that public comments will inform the Department of Financial Services’ (“DFS”) review of the proposed amendment and its impact on life insurance and annuity transactions.
AALU is the leading organization of life insurance professionals—our 2,200 members are primarily producers engaged in providing life insurance planning and annuity solutions for individuals, families, and businesses nationwide. We represent nearly 300 members and their firms who work diligently with thousands of New York clients to help them make informed insurance decisions to meet their financial needs. As life insurance professionals, we work in the best interest of our clients every day, enabling individuals and families from all economic brackets to maintain independence in the face of potential financial catastrophe, and to build and guarantee retirement income.
NAILBA is the premiere insurance industry organization promoting financial security and consumer choice through the use of independent brokerage distribution. NAILBA serves as the national association of life, health, and annuity insurance distributors; NAILBA’s 300 member agencies appoint roughly 300,000 brokers to sell insurance through their agencies. We represent 21 brokerage general agencies in the State of New York.
While we support the goals of the Proposal, we have serious concerns about the details of the proposal and the potential for unintended consequences, particularly given the ongoing efforts by other State and federal regulators considering similar standards. The DOL is in the process of reviewing the DOL Rule, and will likely make material changes to the “best interest” standard on which the Proposal is modeled. The Securities and Exchange Commission (“SEC”) will shortly propose a uniform fiduciary standard that will also be applicable to many annuities that are regulated as securities. Moving forward with a change of this magnitude, in a regulatory environment with this dynamic, risks exposing New York consumers to unintended consequences that could negate the purpose of the Proposal. Accordingly, we ask that DFS take additional time to closely coordinate with other regulators and not move forward unilaterally.
In addition, we have very serious concerns about the application of the proposed best interest standard to life insurance solutions. The sales and underwriting process for life insurance products is fundamentally different. The suitability factors that the proposed best interest standard would mandate as part of the life insurance recommendation process are not applicable to most life insurance transactions, and could result in unnecessary complexity, confusion, and costs for life insurance consumers in New York.
New York regulates the life insurance marketplace very effectively today. It is not clear from the proposal why modifying this well-functioning system with a new and untested conduct standard that was developed for another purpose is necessary.
Finally, we believe there are technical drafting concerns with the Proposal that will increase liability and enforcement risks for producers acting in good faith, reducing consumer access and increasing consumer cost. These technical issues also raise concerns about the ability of producers to recommend proprietary products or to receive traditional forms of compensation otherwise permitted by New York law. Therefore, if DFS does decide to continue to move forward, we request that DFS issue its revised regulation as a new proposal rather than a final regulation. An additional round of comments on the DFS revisions would be essential to limiting unintended consequences and enhancing the benefits to NY consumers.
We appreciate your consideration of the following additional comments.
The Regulatory Impact Statement (“RIS”) claims that “Since 2013, the purchase of annuities and life insurance has become a more complex financial transaction, resulting in a greater need for consumers to rely on professional advice, to seek assistance in understanding available life insurance and related products, and in making purchase decisions” (RIS Sec. 3, pg. 3). We respectfully disagree that either life insurance or annuity products have grown more complex in the past four years. We note that the RIS cites no specific evidence in support of this contention.
In fact, the vast majority of life insurance and annuity products sold in the United States fall into well-established and readily defined product categories. For example, 40% of new individual life insurance policies purchased in 2016 were term life insurance policies.1 Further, as part of DFS’ review and approval of every insurance policy form before it can be sold, the contract must pass “readability” tests designed to ensure its language is understandable to consumers. Given DFS’ strong regulatory oversight, the information it receives about new products and services in the marketplace, and its existing tools for appropriately analyzing and slowing adoption of new insurance products, we do not understand why DFS has not previously indicated any concerns about rapidly accelerating product complexity.
Additionally, the RIS states that DFS is moving forward “…because of the urgency to achieve uniformity of a best interest standard of care for all transactions in New York State” (RIS Sec. 8, pg. 6). However, given the current activity of other federal and other state regulatory bodies, we urge DFS to adopt a posture of caution. For example, DOL is reexamining its Rule and may well make substantive changes, stating three months ago:
“The examination will help identify any potential alternative exemptions or conditions that could reduce costs and increase benefits to all affected parties, without unduly compromising protections for retirement investors. The Department anticipates that it will have a much clearer sense of the range of such alternatives only after it completes a careful review of the responses to the RFI. The Department also anticipates that it will propose in the near future a new streamlined class exemption.”2
The rapid promulgation of the Proposal concerns us because at the current time, many State and Federal regulators are considering different variations on a “best interest” standard for securities transactions that may lead to conflicting interpretations, different required procedural considerations in developing a recommendation, and different enforcement postures. For example, a variable annuity transaction in an Individual Retirement Account (“IRA”) could be subject to the Proposal along with the new, soon-to-be-promulgated SEC best interest rule and the currently-applicable, but likely to be further revised, DOL Rule. The potential for conflicting standards and requirements is very real if these efforts are not properly coordinated, an outcome that will harm the very consumers such laws and regulations are intended to protect.
As demonstrated by our recent experience in complying with the DOL Rule, unilateral action by a single regulator that has not been coordinated sufficiently with other regulators could cause significant harm and disruption in the marketplace. Indeed, the effect of the DOL Rule, even in its current form, has been to increase costs and to reduce access to professional advice and to investment products.
Extensive information documenting these increased costs and reduced access to professional advice and investment products resulting from the Rule was provided to the DOL in response to its requests (and played a significant role in DOL’s decision to extend the Transition Period while it conducts a review of the Rule). For example, according to a study by Deloitte & Touche evaluating the response of financial service providers to the DOL Rule, 95% of surveyed institutions reduced access to products offered to retirement savers, including annuities.3 Variable annuity distribution continues to decline sharply even though sales typically increase in rising markets—from $130.4 billion in 2015 (before the DOL Rule) to $102.1 billion in 2016 (following the DOL Rule’s promulgation), and based on the first three quarters of 2017, may fall to less than $95 billion in 2017 (following the DOL Rule’s implementation).4
While the DOL recently deferred some of the most onerous provisions that otherwise would have taken effect on January 1, 2018, there is little doubt that the Rule as already implemented has reduced consumer access to annuity and other retirement security products.
The NAIC has proposed a new suitability standard for annuity transactions, and is in the midst of considering comments it received in connection with the proposed new Model Rule. The New York Proposal and the Model Rule address many of the same issues—indeed, New York has been an active voice in the NAIC debate. Rather than acting on its own in advance of this uniform effort, we urge DFS to work collaboratively with the NAIC on developing a workable Model Rule that recognizes marketplace and industry perspectives.
The NAIC process is active and timely. By acting first and alone, New York runs the risk, no matter how well-intentioned its actions, of setting forth a standard that does not properly intersect with Federal regulations and that prevents important uniformity across State lines. This would not be in the best interest of New York consumers.
As indicated above, the DOL Rule is currently a moving target, as the Rule applies in its present form only until July 2019.
We also are concerned that the RIS asserts that “…the area of potential duplication is very narrow” because the DOL Rule only applies to commissions paid from a “tax-qualified source” with respect to “…either a variable annuity or an equity indexed annuity” (RIS Sec. 7, pg. 5). In fact, the area of potential duplication, or regulatory overlap, is much greater than that, as the RIS understates the DOL Rule’s applicability.
The DOL Rule that became applicable on June 9th, 2017, is not product specific—it applies to recommendations of many types of products and services, including annuity and life insurance contracts, in certain instances. The DOL Rule applies to recommendations with regard to products purchased within a qualified plan or IRA, and it also applies to recommendations to purchase financial products using the proceeds of a rollover or other distribution from a plan or IRA. For example, recommending the purchase of a permanent life policy with the proceeds of a Required Minimum Distribution from a plan or IRA would be subject to the DOL Rule as well as the Proposal.5
While the Proposal does not apply to policies used to fund ERISA plans, deferred compensation arrangements, and certain other transactions, the reality is that the Proposal would apply to Individual Retirement Accounts, a major segment of the insurance and annuity marketplace, and to recommended transactions utilizing distributions from ERISA plans and IRAs. As a result, DFS is risking material conflicts in two ways not properly taken into account in the RIS: first, by underestimating the scope of the DOL Rule and its applicability to transactions regulated by the Proposal, and second, by not recognizing that the DOL Rule is under active review by DOL and likely will change in material ways.
Variable annuities and certain other products are regulated as securities as well as insurance products, a fact recognized by the current annuity suitability regulation in New York adopted in 2013. Unfortunately, the Proposal would deviate from the securities rules that govern such recommendations to create a new and conflicting standard. We urge the DFS to reconsider this action, and to work closely with the SEC and FINRA.
The SEC has announced that it is developing a new uniform fiduciary standard for registered investment advisors and broker dealers. This new best interest standard is likely to be proposed in the next several months, and will apply to many of the same transactions as the Proposal.
FINRA is expected to follow suit by issuing new rules consistent with the new SEC regulation.
These regulatory efforts are not low-priority projects mentioned in passing by a disinterested regulator—they are active and ongoing projects initiated by the SEC Chairman to much public fanfare. We urge DFS to work with the SEC and FINRA on these standards rather than racing ahead independently. At a Practicing Law Institute forum on February 23, 2018, SEC Chairman Clayton said, “I don’t think it’s any secret that we’re going to make a big effort to try to bring clarity and harmony to the investment adviser, broker-dealer standard of conduct regulation — something that’s important to me…It’s something that the market needs. I think it’s something that regulators need.”
Not only would coordination between New York and Federal regulators reduce the likelihood of conflicting standards, but New York will benefit from the information gathered in the SEC’s regulatory process that will augment DFS’ own efforts. Moving forward quickly with the Proposal without the benefit of the full range of the debate on the topic does not benefit New York’s consumers.
New York DFS’s enforcement and oversight of life insurance products and producers is robust. The Life Bureau closely monitors the market conduct of carriers and producers, conducts regular examinations of sales and marketing practices, and actively oversees targeted activities and consumer protection.
In fact, the DFS’ website emphasizes its role in consumer protection:
“Annuity products approved for sale in New York generally provide greater consumer protections than products sold elsewhere. The minimum account values are higher, charges are lower and annuitization and death benefits are more favorable.”6
Prior to issuing the Proposal, we are unaware of any data in the DFS Annual Reports or other public materials that indicated concerns with the adequacy of enforcement tools under current DFS regulations. For example, according to the 2016 Financial Frauds and Consumer Protection Report, DFS processed nearly 41,000 consumer complaints—of the more than 6,000 of these that resulted in enforcement recoveries, only 52 involved life insurance products.7
We are concerned that the DFS Proposal would delete the provisions in the current regulation adopted in 2013 that already provide significant consumer protection in annuity transactions to replace them with a standard that is expected to materially change.
The current DFS annuity regulations coordinate with the SEC and FINRA rules governing variable annuities. FINRA Rule 2330 sets forth extensive and detailed sales practice requirements for recommended purchases or exchanges of variable annuities, including:
As a result of these rules, the current scope and level of regulation is clearly strong for variable annuity products.
While we reiterate that the Proposal as a whole should not proceed until coordination with DOL, the SEC, and the NAIC has resulted in harmonized annuity standards, any final rule DFS adopts should not be broadly applicable to life insurance transactions.
As previously noted, DFS argues that increased complexity in annuity offerings necessitated the Proposal’s change from the 2013 regulation regarding the annuity suitability standard. While we do not believe this analysis is correct for the annuity marketplace, it is even less true in the life insurance marketplace. We are unaware of fundamental changes in life insurance products or in DFS’ enforcement experience that justify an expanded regulatory regime for life insurance products.
In fact, applying the best interest standard will itself result in increased complexity and consumer difficulty in purchasing needed life insurance protection. To comply with the process elements of the best interest standard in life insurance transactions, producers will have to ask many intrusive and unnecessary questions of consumers. Requiring a detailed inquiry into matters unrelated to the purchase of insurance to protect against loss will increase the cost and complications of purchasing life insurance without offering any increased consumer protection.
While the Proposal would lump life insurance and annuity transactions together under one standard, the reality is the best interest standard regarding investment advice simply does not fit with the insurance analysis our producers utilize to assist clients in selecting life insurance products. Many of the required 13 suitability factors under Sec. 224.3(g) in the Proposal are inapplicable to life insurance transactions, yet would likely have to be considered and documented in order to demonstrate compliance with the new best interest standard. These added procedural hurdles will serve no consumer protection purpose, but will increase costs and compliance complexity, ultimately paid for by consumers. For example, helping a consumer determine how much 20-year level term life insurance to purchase to protect his or her family in the event of untimely death should not involve an extensive analysis of investment goals and objectives, of investment risk tolerance, or of the diversification in his or her existing investment portfolio. Yet the Proposal requires these suitability factors to be considered in connection with a recommendation to purchase life insurance.
We believe life insurance should be removed entirely from the Proposal’s scope, and urge DFS to make this change. However, if DFS does proceed with including life insurance recommendations, it should modify the best interest standard to address the very real differences between categories of life insurance, and between life insurance products and annuities—and closely work with the life insurance community to do so for the benefit of New York’s consumers.
The Proposal appropriately excludes life insurance and annuities purchased by employers for non-qualified deferred compensation arrangements. We agree with this exclusion, yet the Proposal does not exclude similar business uses of life insurance by other types of sophisticated purchasers. In our view, a rule designed for retail consumers should not apply to business- owned life insurance transactions, like those funding executive compensation arrangements, as these transactions are not retail consumer purchases. Given its purpose, and given the nature of the purchaser, corporate-owned life insurance (COLI) and similar products should be excluded from the Proposal.
On September 19, 2017, DFS finalized Regulation 210: Life Insurance and Annuity Non- Guaranteed Elements, which takes effect on March 18, 2018. The principles established by DFS in this regulation towards business uses of life insurance are appropriate for this marketplace, and they should be applied to the DFS’s current fiduciary proposal.
The Proposal’s definition of “transaction” in Sec. 224.3(i) incudes “…any purchase, replacement, modification or election of a contractual provision with respect to a proposed or in- force policy.” This overly broad definition would apply the best interest standard to many conversations with producers regarding existing policy features. However, the Proposal does not explain how a producer would comply with the best interest standard or deal with the very real practical problems that will arise from these conversations.
If a person calls a producer to exercise an allowable loan feature, for example, how is the producer supposed to develop and document its best interest recommendation for this transaction? Must the producer run through all of the suitability factors again to gather a current set of information regarding the policyholder before providing a recommendation? Does the answer depend on how much time has passed since recommending the initial transaction to purchase the product? Or must it be done with each interaction because material information may have changed? How difficult will it be for the consumer to exercise his or her rights under the contract given the need of the producer to demonstrate either that no recommendation was made, or that a compliant best interest recommendation was made?
The documentation and process requirements related to in-force decisions will be very burdensome on the consumer and the producer, and is likely to disrupt longstanding relationships with advisors—ultimately hurting the consumer. We believe the Proposal should not apply to in- force policies.
While we appreciate that the Proposal states in Sec. 224.4(n) that it should not be construed to prohibit any payment to producers otherwise permitted by insurance law, we are concerned that the adoption of the DOL Rule language that a best interest recommendation is “without regard to the financial or other interests” of the producer introduces both liability and enforcement risk.
Specifically, we are concerned about the effect on recommendations of proprietary products and on common compensation practices.
While DFS may not intend to prohibit any currently permissible compensation methods, it has created an argument that such practices may nonetheless be evidence that a recommendation was not in the best interest of the consumer. This is exactly the contradiction presented by DOL Rule and its exemptions that has already caused harm to retirement savers. Where legal compensation methods result in a producer receiving more money in connection with a recommendation, either private plaintiffs or DFS may allege that the recommendation did not meet the best interest standard, even if the recommendation was in the best interest of the consumer. In other words, a form of compensation may not be prohibited, but it may nonetheless violate the best interest standard (or be alleged to do so). It is not at all clear how DFS will view recommendations of proprietary products, or recommendations involving unlevel compensation, if the Proposal were implemented.
Accordingly, we recommend that the “without regard” language should be removed from the Proposal.
In addition to concerns about the application of a new best interest standard to all life insurance transactions, the Proposal contains a number of technical and practical implementation issues. We do not think a brief two-month window for consideration and comment will be sufficient to ensure unintended consequences do not harm New York consumers.
The Proposal does not adequately describe the scope of the best interest obligation. For example, does it create a duty to monitor the recommended annuity (or life insurance contract) after the transaction? When features of the annuity provide elective rights for the policy holder in the future, what obligation does that place on the producer to affirmatively advise on those features?
The DOL Rule allows the provider of fiduciary advice to define the scope of any fiduciary duty to monitor, including disclaiming the obligation. It does not appear that can be done under the Proposal. This is an example of the many technical ways in which the Proposal and other applicable standards may conflict, leading to very different enforcement and liability consequences.
Under section 224.4(l) of the Proposal, the requirements of the Proposal apply to “…every producer in the transaction, regardless of whether the producer has had any direct contact with the consumer.” This requirement appears to be internally inconsistent with the Proposal’s other requirements. In order for the Proposal to apply to a producer, the producer must recommend the transaction to the consumer. If a producer has never had any contact with the consumer, it seems impossible that the producer could have made a recommendation, and thus there is no basis for applying the requirements of the Proposal. Further, the scope is unclear—this provision could be interpreted to apply to a non-resident producer who is not licensed in New York.
Under sec. 224(l), a producer “shall not state or imply” that the recommendation for a life insurance or annuity “…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.”
However, the suitability elements in 224.3(g) inherently require the producer to take into account factors expressly related to financial planning or advice, such as: annual income; financial situation and needs, including the financial resources used for the funding of the policy; financial experience; financial objectives; intended use; financial time horizon, including the duration of existing liabilities and obligations; existing assets, including investment and insurance holdings; liquidity needs; and liquid net worth. It is practically impossible for a producer to make a best interest recommendation based on these factors that does not at least “imply” that the recommendation is part of the consumer’s financial planning, assuming proper credentials.
The Proposal would expose producers possessing only an insurance license to significant liability under this provision. If a consumer wants life insurance as part of estate planning, the producer will necessarily have to consider the details of the consumer’s financial needs and recommend a policy that is part of their financial plan. If the consumer then asks, “Is this policy going to fit my financial goals for my estate planning, and how does it fit into my overall financial plan?” how can the producer respond that this recommendation is in the consumer’s best interest without “implying” that the recommendation is part of financial planning?
Further, it is not clear what constitutes an acceptable “specific certification or professional designation” for the purposes of the Proposal. Producers possessing a credential are unable to determine how DFS will interpret this vague provision with respect to their specific credential. This overbroad prohibition is inconsistent with the requirements of a best interest standard, and should be deleted.
Under Sec. 224.3(h), “suitable” is defined as “…in furtherance of a consumer’s needs and objectives under the circumstances then prevailing, as based upon the suitability information provided by the consumer and all available products, services, and transactions [emphasis added].”
We are concerned that this definition is too broad, and may be read to mean that a producer must take into account all products and services available in the marketplace, not just those regarding which the producer is licensed to advise, or in which the producer personally deals. For example, a producer with an insurance license cannot take into account and advise on securities and other investments available in the marketplace when recommending a suitable insurance policy. Similarly, a producer cannot consider every insurance policy offered by every insurance carrier when recommending a suitable policy. Many producers are agents for only one carrier, or act as agents for only specific carriers. The definition should be narrowed to make it clear that the producer is only considering the products and services that producer offers, not everything available in the marketplace.
The experience of our members in implementing the DOL Rule makes it very clear that if DFS adopts the Proposal, it must provide for at least one year to implement the necessary changes.
The amount of work necessary to implement a change in the standard of care is significant. Not only must training materials be developed and thousands of producers trained and certified, but the infrastructure behind developing and processing applications must be redesigned, and new compliance procedures developed and implemented. These are material undertakings that cannot be easily completed in just 90 days.
Our members act in the best interest of the families they serve every day. However, the best interest of consumers will not be served if multiple regulators develop simultaneously applicable, but uncoordinated or conflicting rules which define standards in an unworkable or impractical manner. The Proposal is based on a DOL Rule that is itself about to change, and DFS has not yet had the benefit of seeing the SEC’s proposed rule that will also affect securities-registered products sold in New York.
It is vital that the DFS takes the time to work with the NAIC, SEC, FINRA, DOL, and the life insurance community to reach consensus on the right approach to a best interest standard that encourages the appropriate use of annuities and other securities-registered products, that makes it possible for producers to continue to provide the highest level of service and assistance to their clients, and that protects consumers from those who would do them harm.
We appreciate the opportunity to comment, and appreciate your consideration of our concerns. We look forward to working with DFS, and always happy to answer any questions.
David J. Stertzer
Chief Executive Officer
Chief Executive Officer
The Association for Advanced Life Underwriting
11921 Freedom Drive, Suite 1100
Reston, VA 20190
The National Association of Independent Life Brokerage Agencies
11325 Random Hills Road Suite 110
Fairfax, VA 22030
For questions about the letter, contact David Hollingsworth (firstname.lastname@example.org, 202.742.4589)
1 2017 Life Insurers Fact Book, American Council of Life Insurers, pg. 64.
2 Final Regulation Extending the Transition Period, 82 Fed. Reg. 56,548, November 29, 2017.
3 The DOL Fiduciary Rule: Study on How Financial Institutions have Responded and the Resulting Impacts on Retirement Investors, August 9, 2017, Deloitte & Touche LLP.
4 See., “IRI Issues Fourth-Quarter 2016 Annuity Sales Report,” March 30, 2017, and “IRI Issues Third-Quarter 2017 Annuity Sales Report,” December 8, 2017.
5 See., U.S. Department of Labor’s Conflict of Interest FAQs, January 2017, Q4.
6 “Annuity Products in New York” webpage for consumer information, accessed on February 19, 2018 at http://www.dfs.ny.gov/consumer/cli_annuity_guide.htm.
7 New York State Department of Financial Services 2016 Financial Frauds and Consumer Protection Report, March 15, 2017, at 19-20.
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