NYSDFS Regulations - Insurance: Final Adoption of First Amendment to Insurance Regulation 187 (11 NYCRR 224): Suitability and Best Interests in Life Insurance and Annuity Transactions

NEW YORK STATE

DEPARTMENT OF FINANCIAL SERVICES

FIRST AMENDMENT TO 11 NYCRR 224

(INSURANCE REGULATION 187)

SUITABILITY AND BEST INTERESTS IN LIFE INSURANCE AND ANNUITY TRANSACTIONS

I, Maria T. Vullo, Superintendent of Financial Services, pursuant to the authority granted by Sections 202

and 302 of the Financial Services Law and Sections 301, 308, 309, 2103, 2104, 2110, 2123, 2208, 3209, 4224,

4525, and Articles 24 and 42 of the Insurance Law, do hereby promulgate the following First Amendment to Part

224 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Insurance

Regulation 187), to take effect August 1, 2019, and to read as follows:

(New Matter Underscored; Matter In Brackets Deleted)

The title of Part 224 is amended to read: SUITABILITY AND BEST INTERESTS IN LIFE INSURANCE AND

ANNUITY TRANSACTIONS

Section 224.0 Purpose.

(a) [The purpose of this Part is to require insurers to set forth] Insurance Law article 24 permits the

superintendent to regulate trade practices in the business of insurance to prevent acts or practices that are unfair

or deceptive. The Insurance Law, including sections 2103, 2104, 2110, 2123 and 2208, establishes standards of

conduct for insurance producers, including that producers must act in a competent and trustworthy manner. The

Insurance Law, including Article 42, also establishes standards of conduct for insurers, including fraternal benefit

societies.

(b) This Part clarifies the duties and obligations of insurers, including fraternal benefit societies, by requiring

them to establish standards and procedures for recommendations to consumers with respect to [annuity contracts]

policies delivered or issued for delivery in this state so that any transaction with respect to those policies is in the

best interest of the consumer and appropriately addresses the insurance needs and financial objectives of

[consumers] the consumer at the time of the transaction [are appropriately addressed. These standards and

procedures are substantially similar to the National Association of Insurance Commissioners’ Suitability in

Annuity Transactions Model Regulation (“NAIC Model”) for annuities, and the Financial Industry Regulatory

Authority’s current National Association of Securities Dealers (“NASD”) Rule 2310 for securities. To date, more

than 30 states have implemented the NAIC MODEL, while NASD Rule 2310 has applied nationwide for nearly

20 years. Accordingly, this Part intends to bring these national standards for annuity contract sales to New York].

This Part also clarifies the nature and extent of supervisory controls that an insurer must maintain to achieve

compliance with this Part.

consumers with respect to policies delivered or issued for delivery in this state to help ensure that a transaction is

in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of

the consumer at the time of the transaction. The best interest standard set forth in this Part requires a producer, or

insurer where no producer is involved, to adhere to a standard of conduct to be enforced by the superintendent,

but does not guarantee or warrant an outcome.

§ 224.1 Applicability.

This Part shall apply to any transaction or recommendation [to purchase or replace an annuity contract made

to a consumer by an insurance producer or an insurer, where no insurance producer is involved, that results in the

purchase or replacement recommended] with respect to a proposed or in-force policy.

§ 224.2 Exemptions.

Unless otherwise specifically included, this Part shall not apply to transactions involving:

(a) [a direct response solicitation] purchase of a policy where the application is solicited and received in

response to a generalized offer by the insurer by mail, at the worksite, or under other methods without producer

involvement, other than customer service, administrative support, or enrollment services, and where there is no

recommendation made; [or]

(b) a [contract] policy used to fund:

(1) an employee pension or welfare benefit plan that is covered by the Employee Retirement and Income

Security Act (ERISA);

(2) a plan described by Internal Revenue Code sections 401(a), 401(k), 403(b), 408(k) or 408(p), as

amended, if established or maintained by an employer;

(3) a government or church plan defined in Internal Revenue Code section 414, a government or church

welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization

under Internal Revenue Code section 457;

(4) a nonqualified deferred compensation arrangement established or maintained by an employer or plan

sponsor; [or]

(5) a settlement or assumption of liabilities associated with personal injury litigation or any dispute or

claim resolution process[.]; or

(6) terminating employee pension plans or to assume liability of certain segments of ongoing plans, such

as for terminated vested participants, or existing accrued benefits for currently active participants;

all benefits under the policy are payable to the corporate or bank policy owner;

(d) any credit life insurance as defined in Part 185 of this Title (Insurance Regulation 27A) sold on a group

basis and in compliance with Part 185 of this Title (Insurance Regulation 27A); or

(e) any life settlement contract as defined in and subject to Article 78 of the Insurance Law.

§ 224.3 Definitions.

For purposes of this Part:

(a) Consumer means the owner or prospective purchaser of [an annuity contract] a policy.

(b) Insurer means a life insurance company as defined in Insurance Law section 107(a)(28)[,] or a fraternal

benefit society as defined in Insurance Law section 4501(a).

(d) Policy means a life insurance policy, an annuity contract, a certificate issued by a fraternal benefit society,

or a certificate issued under a group life insurance policy or group annuity contract.

(e) Recommendation means [advice provided by an insurance] one or more statements or acts by a producer,

or by an insurer where no [insurance] producer is involved, to a consumer that:

(1) reasonably may be interpreted by a consumer to be advice and that results in [a purchase or replacement

of an annuity contract] a consumer entering into or refraining from entering into a transaction in accordance with

that advice; or

(2) 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. A recommendation does not include general factual

information to consumers, such as advertisements, marketing materials, general education information regarding

insurance or other financial products and general administrative services to the consumer. A recommendation

also does not include use of an interactive tool that solely provides a prospective consumer with the means to

estimate insurance, future income, or other financial needs or compare different types of products or refer the

consumer to a producer, provided that the interactive tool is not used by a producer, or an insurer where no

producer is involved, to satisfy any requirement imposed by this Part.

[(d)] (f) Replace or replacement means a transaction subject to Part 51 of this Title (Insurance Regulation

60) and involving [an annuity contract] a policy.

[(e)] (g) Suitability information means [information that is reasonably appropriate to determine the suitability

of a recommendation, including the following]:

(1) For a policy solely providing term life insurance with no cash value, information that is reasonably

appropriate to determine the suitability of a recommendation commensurate with the materiality of the transaction

to a consumer’s financial situation at the time of the recommendation and the complexity of the transaction

recommended, including some or all of the following, as relevant to the consumer:

[(1)] (i) age;

[(2)] (ii) annual income;

[(3)] (iii) financial situation and needs, including the financial resources used for the funding of the

[annuity] policy;

[(4) financial experience;]

[(5)] (iv) financial objectives;

[(6)] (v) intended use of the [annuity] policy, including any riders attached thereto;

[(7)] (vi) financial time horizon, including the duration of existing liabilities and obligations;

[(8)] (vii) existing assets, including investment and [life] insurance holdings;

[(9) liquidity needs;

(10) liquid net worth;

(11) risk tolerance; and

(12)] (viii) willingness to accept non-guaranteed elements in the policy, including variability in

premium, death benefit, or fees; and

[(13) tax status] (ix) any other information provided by the consumer which in the reasonable judgment

of the producer, or the insurer where no producer is involved, is relevant to the suitability of the transaction.

(2) For any policy other than a policy solely providing term life insurance with no cash value, information

that is reasonably appropriate to determine the suitability of a recommendation commensurate with the materiality

of the transaction to a consumer’s financial situation at the time of the recommendation and the complexity of the

transaction recommended, including some or all of the following, as relevant to the consumer:

(i) age;

(ii) annual income;

(iii) financial situation and needs, including the financial resources used for the funding of the policy;

(iv) financial experience;

(v) financial objectives;

(vi) intended use of the policy, including any riders attached thereto;

(vii) financial time horizon, including the duration of existing liabilities and obligations;

(viii) existing assets, including investment and insurance holdings;

(ix) liquidity needs;

(x) liquid net worth;

(xi) risk tolerance;

(xii) willingness to accept non-guaranteed elements in the policy, including variability in premium, cash

value, death benefit, or fees;

(xiii) tax status; and

(xiv) any other information provided by the consumer which in the reasonable judgment of the producer,

or the insurer where no producer is involved, is relevant to the suitability of the transaction.

(h) 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 products, services, and

transactions available to the producer.

(i) Transaction means any sales transaction or in-force transaction.

(j) Sales transaction means the purchase or issuance of a policy, any replacement as defined by section

51.2(a) of Part 51 (Insurance Regulation 60), conversion, or any modification or election of a contractual

provision with respect to an in-force policy that generates new sales compensation. New sales compensation does

not include compensation provided to a producer when, after the initial premium or deposit under a policy, the

consumer pays further premiums or deposits pursuant to the policy.

(k) In-force transaction means any modification or election of a contractual provision with respect to an in-

force policy that does not generate new sales compensation. New sales compensation does not include

compensation provided to a producer when, after the initial premium or deposit under a policy, the consumer pays

further premiums or deposits pursuant to the policy.

§ 224.4 Duties of insurers and [insurance] producers with respect to sales transactions.

(a) In recommending a sales transaction to a consumer [the purchase or replacement of an annuity contract],

the [insurance] producer, or the insurer where no [insurance] producer is involved, [shall have reasonable grounds

for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the

consumer as to the consumer’s investments and other insurance policies or contracts and as to the consumer’s

financial situation and needs, including the consumer’s suitability information, and that] shall act in the best

interest of the consumer.

(b) The producer, or insurer where no producer is involved, acts in the best interest of the consumer when:

(1) the producer’s or insurer’s recommendation to the consumer is based on an evaluation of the relevant

suitability information of the consumer and reflects the care, skill, prudence, and diligence that a prudent person

acting in a like capacity and familiar with such matters would use under the circumstances then prevailing. Only

the interests of the consumer shall be considered in making the recommendation. The producer’s receipt of

compensation or other incentives permitted by the Insurance Law and the Insurance Regulations is permitted by

this requirement provided that the amount of the compensation or the receipt of an incentive does not influence

the recommendation;

(2) the sales transaction is suitable; and

(3) there is a reasonable basis to believe [all of the following]:

[(1)] (i) the consumer has been reasonably informed of various features of the [annuity contract] policy

and potential consequences of the sales transaction, both favorable and unfavorable, such as the potential

surrender period and surrender charge, any secondary guarantee period, equity-index features, availability

of cash value, potential tax implications if the consumer sells, modifies, surrenders, lapses or annuitizes

the [annuity contract] policy, death benefit, mortality and expense fees, cost of insurance charges,

investment advisory fees, policy exclusions or restrictions, potential charges for and features of riders,

limitations on interest returns, guaranteed interest rates, insurance and investment components, [and]

market risk, any differences in features among fee-based and commission-based versions of the policy,

and the manner in which the producer is compensated for the sale and servicing of the policy in accordance

with Part 30 of this Title (Insurance Regulation 194) and Insurance Law section 2119;

[(2)] (ii) the consumer would benefit from certain features of the [annuity contact] policy, such as tax-

deferred growth of any cash values, annuitization, or death or living benefit;

[(3)] (iii) the particular [annuity contract] policy as a whole, the underlying subaccounts to which funds

are allocated at the time of [purchase or replacement of the annuity contract] the sales transaction, and

riders and similar product enhancements, if any, are suitable [(and in the case of a replacement, the

transaction as a whole is suitable)] for the particular consumer based on the consumer’s suitability

information; and

[(4)] (iv) in the case of a replacement of [an annuity contract] a policy, the replacement is suitable

including taking into consideration whether:

[(i)] (a) the consumer will incur a surrender charge, increased premium or fees, decreased coverage

duration, decreased death benefit or income amount, adverse change in health rating, be subject to the

commencement of a new surrender period, lose existing benefits (such as death, living or other

contractual benefits), be subject to tax implications if the consumer surrenders or borrows from the

[annuity contract] policy, or be subject to increased fees, investment advisory fees, premium loads or

charges for riders and similar product enhancements;

[(ii)] (b) the consumer would benefit from [annuity contract] policy enhancements and improvements,

such as a decreased premium or fees, increased coverage duration, increased death benefit or income

amount; and

[(iii)] (c) the consumer has had another [annuity] policy replacement, in particular, a replacement

within the preceding 36 months.

multiple factors that are relevant to the best interests of the consumer including, but not limited to, the benefits

provided by the policy, the price of the policy, the financial strength of the insurer, and other factors that

differentiate products or insurers.

[(b)] (d) Prior to the recommendation of a [purchase or replacement of an annuity contract] sales transaction,

[an insurance] a producer, or an insurer where no [insurance] producer is involved, shall make reasonable efforts

to obtain the consumer’s suitability information.

[(c) Except as provided under subdivision (d) of this section, an insurer shall not issue an annuity contract

recommended to a consumer unless there is a reasonable basis to believe the annuity contract is suitable based on

the consumer’s suitability information.]

[(d)] (e)(1) Except as provided under paragraph (2) of this subdivision, neither [an insurance] a producer[,]

nor an insurer[,] shall have any obligation to a consumer under subdivision (a) [or (c)] and (b) of this section or

under subdivision (a) of section 224.6 of this Part related to any [annuity] transaction if:

(i) no recommendation is made;

(ii) a recommendation was made and was later found to have been prepared based on materially

inaccurate material information provided by the consumer;

(iii) a consumer refuses to provide relevant suitability information and the [annuity purchase or

replacement] transaction is not recommended; or

(iv) a consumer decides to enter into [an annuity purchase or replacement] a sales transaction that is not

based on a recommendation of the insurer or the [insurance] producer.

(2) An insurer’s [issuance of an annuity contract] effectuation of a sales transaction with respect to its

policies subject to paragraph (1) of this subdivision shall be [reasonable] suitable [under all the circumstances]

based on all the information actually known to the insurer at the time of the [annuity contract is issued] sales

transaction.

[(e)] (f) [An insurance] A producer, or an insurer[,] where no [insurance] producer is involved, shall at the

time of [purchase or replacement] a recommendation:

(1) disclose to the consumer in a reasonable summary format all relevant suitability considerations and

product information, both favorable and unfavorable, that provide the basis for any recommendations;

[(1)] (2) document the basis for any recommendation made, subject to [subdivision] subdivisions (a) and

(b) of this section and the facts and analysis to support that recommendation;

[(2)] (3) document, if relevant, the consumer’s refusal to provide suitability information, if any; and

[(3)] (4) document that [an annuity purchase or replacement] a sales transaction is not recommended if a

consumer decides to enter into [an annuity purchase or replacement] a sales transaction that is not based on the

[insurance] producer’s or insurer’s recommendation.

[(f)] (g) [An insurer shall establish a supervision program system that is reasonably designed to achieve the

insurer’s and insurance producers’ compliance with this Part. An insurer may contract with a third party to

establish and maintain a system of supervision with respect to insurance producers.] A producer shall not make

a recommendation to a consumer to enter into a sales transaction unless the producer has a reasonable basis to

believe that the consumer has the financial ability to meet the financial commitments under the policy.

[(g) An insurer shall be responsible for ensuring that every insurance producer recommending the insurer’s

annuity contracts is adequately trained to make the recommendation.]

(h) [No insurance] A producer shall not make a recommendation to a consumer to [purchase an annuity

contract] enter into a sales transaction about which the [insurance] producer has inadequate knowledge.

(i) [An insurance] Neither a producer nor an insurer shall [not] dissuade, or attempt to dissuade, a consumer

from:

(1) truthfully responding to an insurer’s request for confirmation of suitability information;

(2) filing a complaint with the superintendent; or

(3) cooperating with the investigation of a complaint.

(j) A producer shall not use a title or designation of financial planner, financial advisor or similar title unless

the producer is properly licensed or certified and actually provides securities or other non-insurance financial

services. Although a producer may state or imply that a sales recommendation is a component of a financial plan,

a producer shall not state or imply to the consumer that a recommendation to enter into a sales transaction is

comprehensive financial planning, comprehensive financial advice, investment management or related services

unless the producer has a specific certification or professional designation in that area.

(k) Any requirement applicable to a producer pursuant to this Part shall apply to every producer who

materially participated in the making of a recommendation and received compensation as a result of the sales

transaction, regardless of whether the producer has had any direct contact with the consumer, provided that

product wholesaling or product support based on generic client information, or the provision of education or

marketing material, does not constitute participating in the making of a recommendation.

(l) Nothing in this Part shall be construed to prohibit the payment to a producer of any type or amount of

cash or non-cash compensation including pension and welfare benefits, and any other form of compensation that

is otherwise permitted under the Insurance Law and the Insurance Regulations.

(m) A producer may limit the range of policies recommended to consumers based on a captive or affiliation

agreement with a particular insurer, where the producer prominently discloses to each consumer in writing prior

to a recommendation, in a form acceptable to the superintendent, the nature of the agreement and the

circumstances under which the producer will and will not limit the recommendations. For example, without

limitation, these circumstances may include where a producer primarily recommends policies of a particular

insurer and secondarily recommends policies from one or more other insurers when: (1) the primary insurer does

not offer a policy that meets the consumer’s needs or objectives, (2) the type of policy in the best interest of the

consumer is not available from the primary insurer, (3) the underwriting criteria of the primary insurer are not

favorable for the consumer, or (4) the offer made by the primary insurer is not acceptable to the consumer. The

producer shall adhere to the conditions in the disclosure with each consumer. The disclosure is insufficient if it

merely states that the producer may limit recommendations without specific disclosure of the extent to which

recommendations are, in fact, limited.

Section 224.5 is renumbered to Section 224.6 and a new section 224.5 is added as follows:

§ 224.5 Duties of insurers and producers with respect to in-force transactions.

(a) In recommending an in-force transaction to a consumer, the producer, or the insurer where no producer

is involved, shall act in the best interest of the consumer.

(b) The producer, or insurer where no producer is involved, acts in the best interest of the consumer when:

(1) the producer’s or insurer’s recommendation to the consumer reflects the care, skill, prudence, and

diligence that a prudent person acting in a like capacity and familiar with such matters would use under the

circumstances then prevailing. Only the interests of the consumer shall be considered in making the

recommendation. The producer’s receipt of compensation or other incentives permitted by the Insurance Law

and the Insurance Regulations is permitted by this requirement provided that the amount of the compensation or

the receipt of an incentive does not influence the recommendation; and

(2) there is a reasonable basis to believe the consumer has been reasonably informed of the relevant

features of the policy and potential consequences of the in-force transaction, both favorable and unfavorable.

the producer is properly licensed or certified and actually provides securities or other non-insurance financial

services. Although a producer may state or imply that a sales recommendation is a component of a financial plan,

a producer shall not state or imply to the consumer that a recommendation to enter into a sales transaction is

comprehensive financial planning, comprehensive financial advice, investment management or related services

unless the producer has a specific certification or professional designation in that area.

(d) Any requirement applicable to a producer pursuant to this Part shall apply to every producer who

materially participated in the making of a recommendation and received compensation as a result of the sales

transaction, regardless of whether the producer has had any direct contact with the consumer, provided that

product wholesaling or product support based on generic client information, or the provision of education or

marketing material, does not constitute participating in the making of a recommendation.

(e) A producer shall not make a recommendation to a consumer to enter into an in-force transaction about

which the producer has inadequate knowledge.

§ [224.5] 224.6 Insurer responsibility and supervision.

(a) In addition to the requirements of subdivisions (a) and (b) of section 224.4 of this Part and except as

provided in subdivision (e) of section 224.4 of this Part, an insurer shall not effectuate a sales transaction with

respect to its policies unless there is a reasonable basis to believe that the sales transaction is suitable based on

the suitability information provided by the consumer and without regard to the availability of products, services,

and transactions of companies other than the insurer. This subdivision (a) shall not apply to a sales transaction

that results from the exercise of a contractual right in a policy.

(b)(1) An insurer shall establish, maintain, and audit a system of supervision that is reasonably designed

to achieve the insurer’s and producers’ compliance with subdivisions (a) through (k) of section 224.4 of this Part,

including standards and procedures for:

(i) the collection of a consumer’s suitability information with respect to sales transactions involving the

insurer’s policies;

(ii) the documentation and disclosure of the basis for any recommendation with respect to sales

transactions involving the insurer’s policies;

(iii) the review of complaints received by the insurer regarding recommendations inconsistent with the

best interest of the consumer;

(iv) the auditing and/or contemporaneous review of recommendations to monitor producers’

compliance with subdivisions (a) and (b) of section 224.4 of this Part with respect to the insurer’s policies.

An insurer may use a reasonable risk-based approach to audit and/or contemporaneously review

producers’ recommendations to identify recommendations of the greatest risk of violation of subdivisions

(a) and (b) of section 224.4 of this Part so long as the approach does not focus solely on recommendations

posing the greatest risk with no auditing or review of other recommendations.

(2) With respect to a sales transaction that results from the exercise of a contractual right in a policy, an

insurer may comply with subparagraphs (b)(1)(i) and/or (b)(1)(ii) of this section by relying on a written

certification of compliance with subparagraphs (b)(1)(i) and/or (b)(1)(ii) provided by the producer.

recommendations of sales transactions involving the insurer’s policies.

(d)(1) An insurer may maintain within and across product lines variations in compensation or other

incentives that comply with the Insurance Law and the Insurance Regulations provided that the insurer’s

compensation and incentive practices, when taken as a whole, are designed to avoid recommendations by

producers that are not in the best interest of consumers.

(2) A difference in compensation and incentives based solely on the amount of premium paid among

policies shall not be deemed to violate paragraph (1) of this subdivision.

(e) An insurer shall be responsible for ensuring that every producer recommending any transaction with

respect to the insurer’s policies is adequately trained to make the recommendation in accordance with the

provisions of this Part, but an insurer shall not be required to warrant that a producer is acting in the consumer’s

best interest.

(f) An insurer shall establish and maintain procedures designed to prevent financial exploitation and abuse.

For purposes of this subdivision, “financial exploitation and abuse” means 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 denial of access to assets.

(g) An insurer of an in-force policy shall provide to a consumer all policy information reasonably requested

by the consumer.

(h) Where a producer is authorized by an insurer to offer different versions of an insurer’s product, one with

a fee-based structure and one with a commission-based structure, an insurer shall provide to the consumer a

comparison, in a form acceptable to the superintendent, showing the differences between the products. An insurer

may also include additional information related to the differences in the producer’s compensation structure for

the different versions of the insurer’s product.

(i) In the case of a proposed replacement:

(1) the replaced insurer shall provide to a producer all relevant policy information that is necessary for the

evaluation of the replacement; and

(2) the replacing insurer shall provide policy information in accordance with Part 51 of this Title

(Insurance Regulation 60), regardless of whether there exists any specific section for the inclusion of the

information within the disclosure statement set forth in Appendices 10A and 10B of Part 51.

(j) The insurer shall take appropriate corrective action for any consumer harmed by a violation of this Part

by the insurer, the [insurance] producer, or any third party [that] with whom the insurer contracts [with pursuant

to subdivision (f) of section 224.4 of this Part]. In determining any penalty or other disciplinary action against

[the] an insurer, the superintendent may consider as mitigation any appropriate corrective action taken by the

insurer, or whether the violation was part of a pattern or practice on the part of the insurer.

§ [224.6] 224.7 Recordkeeping.

All records required or maintained under this Part, whether by [an insurance] a producer, an insurer, or other

person shall be maintained in accordance with Part 243 of this Title (Insurance Regulation 152).

§ [224.7] 224.8 Violations.

A contravention of this Part shall be deemed to be an unfair method of competition or an unfair or deceptive

act and practice in the conduct of the business of insurance in this [State] state and shall be deemed to be a trade

practice constituting a determined violation, as defined in Insurance Law section 2402(c) [of the Insurance Law],

except where such act or practice shall be a defined violation, as defined in Insurance Law section 2402(b) [of

the Insurance Law], and in either such case shall be a violation of Insurance Law section 2403 [of the Insurance

Law].

§ 224.9 Effective date

The amendments to this Part made on July 17, 2018 shall be effective August 1, 2019. As of the effective

date, insurers and producers shall comply with the requirements of this Part for any transaction with respect to an

annuity contract. Six months from the effective date, insurers and producers shall comply with the requirements

of this Part for any transaction with respect to a life insurance policy.