Top State Court Revives New York Annuity Sales Standards

The Labor Department’s Employee Benefits Security Administration adopted a fiduciary rule package that included a best-interest standard for annuities in 2016, while former President Barack Obama was in office.

A best-interest standard requires an annuity producer to put the interests of the consumer first.

Some annuity advisors now collect fees from consumers for helping the consumers buy annuities. In most cases, however, the agents and brokers who sell annuities to consumers earn sales commissions.

Some have questioned whether commission-based compensation is compatible with a best-interest standard.

The administration of former President Donald Trump declined to protect the Obama-era standard against legal attacks, and that standard died in federal court in 2018.

In 2019, during the Trump era, the SEC adopted a different sales standard update, Regulation Best Interest, and many states have updated their state-level annuity suitability standard regulations to implement Reg BI.

The Employee Benefits Security Administration is now trying to return to developing retirement services sales standards based on the agency’s Obama-era work.

Opinion Details

The New York department implemented the best-interest standard by adding an amendment to an existing regulation, Insurance Regulation 187.

The amended regulation requires annuity producers to consider suitability information when evaluating and making annuity purchase recommendations and determining whether a recommendation is in the best interest of a consumer.

Big I NY contended that terms such as “recommendation,” “suitability information” and “best interest” are vague, and that annuity producers trying to use the regulations won’t know what conduct is or is not permitted.

“‘A statute, or a regulation, is unconstitutionally vague if it fails to provide a person of ordinary intelligence with a reasonable opportunity to know what is prohibited, and it is written in a manner that permits or encourages arbitrary or discriminatory enforcement,’” Singas writes, quoting a 2001 New York State Court of Appeals opinion.

Singas says that terms such as “recommendation” have objective meanings, and that the updated version of Insurance Regulation 187 provides a detailed list of the kinds of suitability information an annuity recommender ought to consider, such as the consumer’s age, annual income, tax status, risk tolerance and liquidity needs.

“Petitioners have fallen woefully short of their burden to sustain a facial due process challenge on vagueness grounds,” Singas writes.

Judge Madeline Singas. (Photo: Ryland West/ALM)