5th Circuit Decision Highlights Importance Of New York Insurance Law Proposal

March 28, 2018 at 8:54 am Leave a comment

A recent decision by the Court of Appeals for the 5th Circuit – Chamber of Commerce of United States of Am. v. United States Dep’t of Labor, No. 17-10238, 2018 WL 1325019, (5th Cir. Mar. 15, 2018) – highlights the importance of a New York State proposal initiative to expand the fiduciary obligations of insurance providers. It’s the latest example of the state proactively trying to fill in perceived regulatory gaps where the Federal government has rolled back regulations. This of course has a direct impact on New York credit unions but also provides a template for those of you in states where policy makers may be itching to take similar steps.

In 2016, the Obama Administration Department of Labor expanded the fiduciary obligations imposed on individuals offering products under Title II of ERISA to any individual who offers investment advice for free, who is compensated in connection with a recommendation as to the advisability of buying, selling, or managing an investment product. See, 29 CFR §2510.3-21(a)(1).

Furthermore, this duty to offer fiduciary advice was triggered any time advice is directed to a specific recipient of such advice. Cut through all the legal mumbo jumbo and what the DOL wanted to do was protect consumers against buying insurance products they didn’t need based on advice which was not being offered to help them, but rather to help the broker make a sale. Its direct impact on most credit unions was limited unless they operated an insurance CUSO.

The financial advice investment industry went apoplectic over this new mandate. Last week, it scored an important victory when the Court of Appeals for the 5th Circuit ruled that the DOL exceeded its regulatory authority when it promulgated this rule. For example, the court noted that “The Rule expressly includes one-time IRA rollover or annuity transactions where it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers. Through the BIC Exemption, the Rule undertakes to regulate these and myriad other transactions as if there were little difference between them and the activities of ERISA employer-sponsored plan fiduciaries. Finally, in failing to grant certain annuities the long-established protection of PTE 84-24, the Rule competitively disadvantages their market because DOL believes these annuities are unsuitable for IRA investors.”

Which brings us back to the Empire State. Our Department of Financial Services has been concerned since President Trump took office that the Republican DOL would gut the regulation and with good reason it has already delayed its implementation. So in late December, the DFS proposed regulations which would extend best interest fiduciary obligations to individuals and companies that sell a broad range of insurance and annuity products. This proposal would have an even greater impact on credit unions than the DOL’s regulations were going to have since it applies to Credit Life insurance, one of the most common products offered by the industry. In making the proposal, the Governor explained that, “As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field.”

The DFS is in the process of reviewing comments on its proposal including a letter from the Association, pointing out the damage that the regulation could have for consumers and credit unions alike. It’s possible that proposed amendments will once again be published for comment.

Entry filed under: Legal Watch, New York State, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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