Risk & Reward

A Striking Shot Across the Bow: New Jersey Launches Uniform Fiduciary Standard Rulemaking

New Jersey can be credited as the first state to take up a uniform fiduciary standard applicable to broker-dealers and investment advisers in the wake of Regulation Best Interest and the rest of the Securities and Exchange Commission’s (SEC) major standard of care proposal. On October 15, the New Jersey Bureau of Securities (Bureau) announced, in the form of a notice of pre-proposal, that it is soliciting comments on whether to adopt rule amendments to require that broker-dealers, agents, investment advisers, and investment adviser representatives be subject to an express fiduciary duty. The rule amendments likely would apply to all persons who conduct brokerage services in New Jersey, including federally registered broker-dealers. It likely would also apply to state-registered investment advisers, but it is not clear whether the rule amendments would apply to SEC-registered investment advisers.

According to the notice, while investment advisers already owe a fiduciary duty to their clients under case law,1 broker-dealers are held only to a suitability standard2 (i.e., broker-dealers and their agents are required to have a reasonable basis to believe a recommended transaction or investment strategy involving securities is suitable for the customer).3 The notice expresses concern that investors remain without adequate protection from broker-dealers who, under the suitability standard, are permitted to consider their own interests ahead of their client’s interests when making investment recommendations.4 In particular, the notice warns that investors are often unaware of whether and to what extent those they trust to make financial recommendations are receiving undisclosed financial benefits in exchange for steering their clients to certain products.

The pre-proposal does not include specific regulatory language, but the notice indicates that the Bureau is considering “making it a dishonest or unethical business practice for failing to act in accordance with a fiduciary duty when recommending to a customer, an investment strategy, or the purchase, sale, or exchange of any security or securities, or providing investment advisory services to a customer.” The Bureau contemplates a uniform standard that would protect investors against the abuses that can result when financial professionals place their own interests above those of their customers, but does not set out the precise scope of the duties that would apply.

By opening up a comment period before issuing a rule proposal, and holding two public hearings in November, New Jersey appears to recognize the complexities associated with a uniform fiduciary rule. Specifically, the Bureau is seeking comment on:

  1. The legal and factual bases for applying a fiduciary standard to all financial services professionals;
  2. The scope of the duty in terms of duration and when it arises;
  3. The types of recommendations that would trigger the duty; and
  4. The scope of the duty in terms of to whom it is owed.

Comments should be sent by December 14, 2018, to: Christopher W. Gerold, Bureau Chief, Bureau of Securities, PO Box 47029, Newark, New Jersey 07101, or electronically.

The Bureau will also host two “informal conferences to take testimony from interested parties to gather facts to inform a rulemaking and to afford ample opportunity for the receipt of public comment from the regulated communities, industry representatives, and the public at large.” These conferences will take place on November 2 and November 19 from 9:30 am – 4:30 pm at 124 Halsey Street, 6th Floor, Morris Room, Newark, NJ 07101.

We expect that, following its consideration of public comments, the Bureau will issue a formal rule proposal, which will be subject to notice and comment.

A copy of the pre-proposal can be found here.

This is not the first time New Jersey has waded into these waters post-Department of Labor (DOL) fiduciary rule. Earlier this year, the New Jersey Senate considered a bill that would impose a disclosure obligation on “non-fiduciary investment advisors,” including broker-dealers, that would consist of a Plain English declaratory statement that those entities do not owe fiduciary duties to their clients. This legislation has since stalled. A nearly identical bill was introduced in the New York Assembly and has similarly stalled.

New Jersey Governor Phil Murphy, a Democrat, announced last month that the Bureau would initiate a rulemaking that “would impose a fiduciary duty on all New Jersey investment professionals, requiring them to place their clients’ interests above their own when recommending investments.” While the October 15 pre-proposal merely solicits comments on what a uniform fiduciary standard should look like under New Jersey law, it comes at a time when the SEC is currently working to address federal standards of conduct. As we noted recently, the SEC could issue a final rule in the first half of next year. Though it remains to be seen how the SEC will ultimately address the numerous concerns stakeholders have over Regulation Best Interest and other aspects of the rulemaking, the Governor and the Bureau are not waiting for the SEC to address these concerns.

As with some other states and public officials, the Governor may be holding up the DOL fiduciary rule as a model. He charged the DOL with “abandoning” its controversial fiduciary rule by not appealing the decision of the Fifth Circuit Court of Appeals to vacate the rule. It is possible that this apparent affinity for the DOL rule could presage what a final New Jersey rule could look like.

It is also possible that other states will move forward with disparate fiduciary standards and duties before the SEC has the chance to publish a final rule. Ever since the President’s Inauguration, a handful of blue states have cast the Trump Administration as being adverse to Main Street investors, even though both SEC Chairman Jay Clayton and DOL Secretary Alex Acosta have solicited state participation. Nevertheless, several state bills, including those of Illinois, Massachusetts and New York (nearly all of which failed), attempted to address the different standards of conduct of investment advisers and broker-dealers. Enforcement efforts, particularly out of Massachusetts, have also been active during this period.

Not all state efforts in imposing a uniform fiduciary standard, however, have stalled. Nevada, for instance, amended its financial planner statute in 2017 to impose a fiduciary standard on broker-dealers. As we previously noted, Nevada’s amended law raises a number of material interpretive issues, which were supposed to have been addressed in a regulation. To date, no such regulation has been proposed.

Standards of care applicable to broker-dealers and investment advisers remain an entirely fluid area at the federal and state levels. We expect ongoing state regulatory and enforcement developments while the SEC continues to work on its own rulemaking, with the DOL most likely awaiting a final SEC rule before issuing any new guidance in this area. The question then becomes not if a major fiduciary standard of care development will occur in the near future, but by whom and when.


1 A fiduciary duty for investment advisers has been implied under the Investment Advisers Act of 1940. See Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 17 (1979); SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).

2 In fact, available case law in New Jersey, following precedent from other states, says that broker-dealers generally are not fiduciaries, but do have fiduciary duties if they have investment discretion. See McAdam v. Dean Witter Reynolds, 896 F.2d 750, 767 (3d Cir. 1990); Estate of Parr v. Buontempo Insurance Services, 2006 WL 2620504, at *5 (N.J. Super. Ct. App. Div. 2006) (unpublished opinion).

3 Both New Jersey and FINRA rules require securities recommendations to meet a suitability standard. See N.J. Admin. Code § 13:47A-6.3(a)(3); FINRA Rule 2111.

4 Although the notice states that broker-dealers can consider their own interests ahead of their client’s interests when making investment recommendations, FINRA has stated that the suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interests prohibits a broker from placing his or her interests ahead of the customer’s interests. FINRA Regulatory Notice 12-25 (May 2012).

Watch yesterday’s Fiduciary Governance Group webcast on the SEC Standards of Conduct proposal

On Thursday, October 4th, Investment Company Institute Associate General Counsel Sarah A. Bessin, Fidelity Investments Senior Vice President & Deputy General Counsel Helen E. Rizos, David Grim and I presented a webcast titled “The Latest on the SEC Standards of Conduct Initiative.” Watch a replay of the webcast here:


Staff Withdraws Proxy Voting Guidance for Investment Advisers

On September 13, 2018, the Chairman announced a review of staff guidance to determine if prior positions “should be modified, rescinded or supplemented in light of market or other developments.”1 In conjunction with the Chairman’s statement, IM staff withdrew two interpretive letters that gave guidance to investment advisers seeking to comply with the proxy voting requirements of rule 206(4)-6 under the Investment Advisers Act of 1940, which, among other things, requires investment advisers to vote client securities in the best interest of clients and to describe how they address material conflicts of interest between themselves and the clients on whose behalf they are voting.2 While rule 206(4)-6 does not dictate how an investment adviser must address conflicts, the adopting release discusses options, including engaging a third party to vote a proxy involving a material conflict or voting in accordance with a pre-determined policy based on recommendations of an independent party.  The letters addressed how investment advisers that have a material conflict can determine that a proxy advisory firm is capable of making impartial recommendations in the best interests of the adviser’s clients. The SEC left in place 2014 staff guidance that enshrines the principles of the two interpretive letters.3

Sara Crovitz

IM staff indicated in its statement that its withdrawal of the letters was designed to “facilitate discussions” at the Roundtable on the Proxy Process,4 which is expected to be held in November, and that staff was seeking views on the 2014 staff guidance. The U.S. Chamber of Commerce and some corporate secretaries have criticized proxy advisory firms for years, claiming proxy advisory firms lack transparency and accountability, and as part of these efforts, the corporate community has lobbied to withdraw the letters.5  Legislative efforts to directly regulate proxy advisory firms also have been proposed.6 For further information on the impact of the current and potential future SEC and staff actions, and advice on how to respond, please contact us at Stradley.

1 “Statement Regarding SEC Staff Views, available at: https://www.sec.gov/news/public-statement/statement-clayton-091318.  The Chairman noted that other federal financial agencies had instituted similar reviews of staff guidance.

2 Statement Regarding Staff Proxy Advisory Letters, available at: https://www.sec.gov/news/public-statement/statement-regarding-staff-proxy-advisory-letters.  Commissioner Jackson issued a statement in conjunction with the Investor Advisory Committee meeting critical of IM staff’s withdrawal of the letters.  Statement on Shareholder Voting, available at: https://www.sec.gov/news/public-statement/statement-jackson-091418.

3 Staff Legal Bulletin No. 20 (June 30, 2014), available at: https://www.sec.gov/interps/legal/cfslb20.htm.

4 Statement Announcing SEC Staff Roundtable on the Proxy Process available at: https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.

5 See, e.g., Statement of the U.S. Chamber of Commerce on the Market Power and Impact of Proxy Advisory Firms (June 5, 2013) (“For a number of years, the Chamber has expressed its long-standing concerns with . . . proxy advisory firms”), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/2013-6.3-Pitt-Testimony-FINAL.pdf; James K. Glassman and J.W. Verret, “How to Fix our Broken Proxy Advisory System,” (2013) (recommending that the letters be rescinded to “[e]nd the preferential regulatory treatment that proxy advisors currently enjoy in the law”). Both the corporate community and the asset management industry discussed their views on the letters and proxy advisory firms generally in a prior SEC roundtable in 2013. See Transcript of  the Proxy Advisory Firms Roundtable (Dec. 5, 2013), available at: https://www.sec.gov/spotlight/proxy-advisory-services/proxy-advisory-services-transcript.txt

6 For example, HR 5311 was introduced in May 2016 and later folded into the Financial CHOICE Act. More recently, in October 2017, HR 4015, which is mostly a resubmission of HR 5311 was introduced.  These bills generally require registration of proxy advisory firms with the SEC, and require firms to meet extensive disclosure requirements relating to methodologies and conflicts of interest, require firms to hire an ombudsperson to handle complaints, and give corporate issuers the ability to vet proxy advisory firms’ recommendations before the recommendations are released.

International investing considerations for ERISA fiduciaries

Section 404(b) of ERISA provides that a fiduciary may not maintain the indicia of ownership of plan assets outside the jurisdiction of the U.S. district courts. But, clearly, investments in non-U.S. securities may be entirely reasonable and prudent for an ERISA plan’s participants and beneficiaries. The DOL’s regulation (29 CFR 2550.404b-1) sought to both ensure the U.S. district courts’ jurisdictional arm reached plan assets while expressly recognizing and preserving the importance of international investments, particularly for diversification purposes.

Fiduciaries have three decision-making points.

  1. Are the proposed investments qualifying assets (e.g., securities issued by a company that is neither organized in the United States nor has its place of business in the United States) under the DOL regulation?
  2. What are, in fact, the indicia of ownership of the international investments?
  3. Which pathway is the fiduciary taking to ensure that it complies with Section 404(b) of ERISA?

It is often not a straightforward decision as to what exactly are the plan’s indicia of ownership of particular non-U.S. investments. The most classic example would be stock and bond certificates. But in other types of investments, such as privately offered securities, subscription documents and limited partnership agreements may be enough. Still in other cases, trade confirmations or account statements may be the best indicia of the plan’s ownership in the investment. There is, unfortunately, not always a simple answer to what exactly are the indicia of ownership of a particular investment.

There are essentially four pathways for the fiduciary to satisfy its duties under Section 404(b) of ERISA under the DOL regulation, each of which are subject to myriad conditions. The first and most common method is where the fiduciary that has management and control over (i.e., decision-making authority to purchase, hold or dispose of) the non-U.S. plan assets is a U.S. bank, insurance company or investment adviser. A second pathway is where the indicia of ownership are maintained in a global custodial relationship. However, one key condition is that the U.S. bank-custodian needs to be liable to the plan as if it retained physical possession over the indicia of ownership in the U.S. Yet a third pathway is where the indicia of ownership are maintained by a broker-dealer registered under the Exchange Act and in the custody of a “satisfactory control location,” as defined under U.S. securities laws. The fourth and final pathway is where a US. Bank or broker-dealer registered under the Exchange Act physically possesses the indicia of ownership.

ERISA fiduciaries should consider the requirements under Section 404(b) as they apply to international investments. From a practical standpoint, investment managers, when negotiating their investment management agreements, should be on the lookout for attempts to impose upon them the duty to ensure compliance with Section 404(b) of ERISA, rather than the plan’s custodian, which may be the more appropriate party.

Federal District Court Declines To Exercise Jurisdiction Over Massachusetts’ Action Against Scottrade

On August 16, 2018, the United States District Court for the District of Massachusetts granted a motion for remand filed by the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (“Enforcement Section”) in Enforcement Section’s action against Scottrade, Inc. (“Scottrade”).  By way of background, the Enforcement Division commenced an action against Scottrade in the Massachusetts Securities Division in February 2018.  In the Complaint, the Enforcement Division alleged that Scottrade violated internal procedures Scottrade enacted to comply with the impartial conduct standards of the DOL’s “fiduciary rule” by conducting incentivized sales contests.  According to the Enforcement Section, Scottrade’s failure to comply with its internal procedures amounted to a violation of two Massachusetts statutes.  Those statutes prohibit “unethical or dishonest conduct or practices” in the securities business and require an entities in the securities industry to “reasonably . . . supervise agents, investment adviser representatives or other employees.”

Scottrade removed the action from the Securities Division to federal district court on federal question grounds.  Distilled to its essence, Scottrade’s position was that it could remove the Enforcement Division’s complaint because it raised a question that “arises under and is governed by ERISA.” Specifically, Scottrade argued that ERISA preempted the MA Enforcement Division’s complaint.

William F. Galvin,
Secretary of the Commonwealth of Massachusetts

In remanding the action, the district court first noted that the case did not require the resolution of any issues under ERISA.  The court held that the claims did not implicate ERISA or the DOL’s fiduciary rule because the only determination that would need to be made is whether Scottrade violated its internal policies and, if so, whether those violations were illegal under Massachusetts law.  The district court went on to further hold that ERISA preemption was not satisfied because the Enforcement Division was not within the class of persons who are eligible to bring claims under ERISA.  Finally, the district court held that an action before the Securities Division was not brought in “state court,” as required to trigger removal under the federal removal statute, because the Securities Division is not a “court.”

While Scottrade’s arguments presented some relatively novel legal issues regarding removal and federal court jurisdiction, the outcome is not terribly surprising.  The Enforcement Division’s claims, although based on policies adopted in response to the DOL’s fiduciary rule, do not require a court to address whether ERISA or the fiduciary rule were violated in resolving the case on the merits.  Rather, as the district court held, the adjudication of the claims only requires a determination as to whether Scottrade’s alleged violations of its internal procedures constitutes a violation of the Massachusetts statutes the Enforcement Division is relying upon.

In terms of next steps, it is likely that the case will proceed before the Securities Division.  Any attempt by Scottrade to appeal the remand order is unlikely to succeed.  An appellate court can review an order for remand only under very limited circumstances, none of which appear to be present here.

ESG Update for Asset Managers

I was particularly excited when I learned that Callan had published its 2018 ESG survey.  I encourage all ESG managers to review the survey in its entirety, not only to see the trajectory of adoption rates among retirement plans (governmental and ERISA), but trends of other important institutional investors, such as endowments and foundations. In terms of take-aways, incorporation of ESG factors increased by 95% since 2013 (22% then vs. 43% today) by respondents. This is great news, but ERISA plans (both DB and DC) lag other institutional investors in terms of growth rates and overall adoption. Interestingly, Callan found that DB plans were more than 3x more likely to incorporate ESG factors into investment decisions than DC plans. 13% of DC plans have an ESG fund in its lineup (we’ll have to wait until next year to see how the recent DOL guidance will affect this). Inflows into ESG options in DC plans continue to be less than desired.

The survey also found that one of the top ways institutional investors are implementing ESG is by conveying its importance to investment managers (though many fewer asset owners reported using actual metrics to score managers on using ESG). These showings are consistent with what I have been hearing, both from the asset owner and manager standpoint. A struggle to standardize a cross-manager analysis based on ESG metrics has proved challenging. I know that investment managers are fielding more and more questions on their ESG credentials.

There seems to be different reactions by institutional investors to the data that is coming out on the link between ESG and investment performance. The top reason cited by those who incorporated ESG was an expectation that it would improve their risk profile, followed by fiduciary responsibility. Yet, the principal reason why some institutional investors are holding back on ESG incorporation is the perceived paucity of data linking one or more ESG factors to investment performance. This also showed up in a recent NEPC survey.

I would urge fiduciaries to review the governing documents of the institutional investor regarding ESG and make sure that the implementation process squares with the stated objectives of the investor. This could be a higher risk when investors pursue E, S and G factors discretely.

PRI is probably happy to see more and more interest from managers and asset owners on becoming signatories. Managers should be mindful that PRI will want to see some concrete steps taken and not a “set-it-and-forget-it” approach.

The asset management community may wish to consider whether the DOL should be pressed to issue additional guidance in this area. The GAO has already indicated that the DOL is open to that possibility.

Is New York’s Newly Adopted “Best Interest Standard” for the Sale of Life Insurance and Annuity Products an Outlier or a Sign of Things to Come in Other Jurisdictions?

Earlier this year, we noted that 2018 promised to be an active regulatory year at state level for the standards that govern the sale of life insurance and annuity products. (See our prior coverage of this issue here.) On July 18, 2018, New York made the most significant move of the year to date by issuing its much anticipated final regulation imposing a “best interest” standard on the sale of life insurance and annuity products in the Empire State. In promulgating the final regulation, the New York Department of Financial Services (NYDFS) heightened the existing “suitability” standard of care and vastly expanded the scope of the products covered under its existing regulations.

The NYDFS made it clear that it was acting in response to a perceived rollback of regulations at the federal level, including the vacatur of the Department of Labor’s so-called “fiduciary rule” in March 2018.1 It remains to be seen whether the New York regulation, combined with a perceived rollback of federal regulation, will have an impact on other jurisdictions. The timing of New York’s release of its final regulation is significant because of its potential to influence the debate on the National Association of Insurance Commissioners’ (NAIC) forthcoming model regulation. A committee of NAIC is scheduled to address the model regulation at a meeting in Boston on August 4, 2018. The freshly-minted New York regulation will certainly be a topic of discussion as NAIC attempts to finalize its draft model regulation.

New York’s “Best Interest Regulation”

The newly-adopted “best interest” standard places a number of requirements on “insurers” and “producers” in connection with the sale of life insurance and annuity products in New York. The regulation, among other things:

  • Places a duty on a “producer” or, where there is no producer, on the “insurer,” to ensure that a “recommendation” for “a proposed or in-force” life insurance policy or annuity is in furtherance of the consumer’s needs and objectives when taking into consideration only the interests of the consumer and without regard to the producer’s or insurer’s financial compensation or incentives.
  • Provides specific criteria for determining if a recommendation is in the best interests of a consumer. These criteria include, without limitation, that the “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,” the “interest of the consumer” is the only consideration in making the recommendation, and the recommended transaction is “suitable,” as defined by the regulation.
  • Requires certain disclosures to be made to the consumer at the time of the recommendation, including specific disclosures by producers who have a captive or affiliation with a particular insurer. Such a disclosure must be in a form acceptable to the Superintendent of the NYDFS and identify the circumstances under which the producer will and will not limit recommendations.
  • Prohibits a producer from using the 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.” Further, while the regulation allows a producer to “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.”
  • Obligates an insurer, before it effectuates the sale of a life insurance or annuity product, to determine if 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.”
  • Mandates that insurers enact a comprehensive program of supervision “that is reasonably designed to achieve the insurer’s and producer’s compliance” with the regulation when recommending the purchase of a covered product. The regulation specifically requires insurers to maintain standards for the “collection of a consumer’s suitability information,” the “documentation and disclosure of the basis for any recommendation with respect to sales transactions involving the insurer’s policies,” the review of complaints alleging a recommendation was “inconsistent with the best interests of the consumer,” and the “auditing and/or contemporaneous review of recommendations to monitor producers’ compliance” with certain provisions in the regulation.
  • Requires insurers to ensure that “every producer recommending any transaction with respect to the insurer’s policies is adequately trained to make the recommendation in accordance” with the requirements of the regulation.
  • Places a duty on insurers to establish procedures designed to “prevent financial exploitation and abuse.”
  • Deems a violation of the regulation to be “an unfair method of competition or an unfair or deceptive act and practice in the conduct of business of insurance” in violation of Section 2403 of the New York Insurance Law, thereby creating the potential risk for enforcement actions and associated penalties for noncompliance.
  • Becomes effective for annuity contracts on August 1, 2019 and for life insurance products on February 1, 2020.

In light of the stringent and detailed requirements the regulation imposes, insurers and producers who sell life insurance and annuity products in New York will need to begin developing comprehensive policies, procedures, and programs to ensure compliance by the applicable effective dates. The potential for aggressive enforcement action by the NYDFS should not be taken lightly, as evidenced by the statements of the Superintendent for the NYDFS. In announcing the regulation, the Superintendent made it clear that she views the regulation as “essential” because of “the key role insurance products play in providing financial security to middle class New Yorkers” and to “fill in regulatory gaps to protect New York consumers from the elimination of the federal Department of Labor’s Conflict of Interest Rule, which the Trump Administration failed to protect on appeal after a ruling from the U.S. Fifth Circuit Court of Appeals.”2

Potential Impact on NAIC Model Regulation

As noted above, NAIC will discuss its proposed “best interest” model regulation at its upcoming meeting on August 4, 2018. The NAIC proposed rule, as currently drafted, differs from the New York regulation in material respects, including that it applies only to annuity products that are regulated by state insurance commissioners.

When New York announced its proposed best interest regulation in late in 2017, it generated a significant amount of buzz among industry and consumer groups. This largely stemmed from the uncertainty surrounding the “fiduciary rule,” an emphasis on deregulation under President Trump’s administration, and the expanded scope of products covered by New York’s proposal. As a result, NAIC received pressure from New York, as well as certain consumer groups, to expand the scope of its proposed rule to, at a minimum, include life insurance products.

It is uncertain as to whether New York’s regulation will have any material impact on NAIC’s forthcoming model regulation. The initial pressure placed on the NAIC has dissipated some since New York’s announcement of its proposed rule in December 2017. Among other developments in the interim, the Securities and Exchange Commission has taken the lead on investment advice reform at the federal level by releasing its own proposed “best interest” rule for public comment in the spring of 2018. While there will continue to be pressure on NAIC from consumer groups and certain states, such as New York, that would like to see a more expansive approach, it remains to be seen if NAIC will, in line with its current model regulation, continue the focus on annuitized products only or if it will expand the model regulation to include life insurance products.


1 See NYDFS Press Release of July 18, 2018 (“As the federal government continues to roll back essential financial services regulations, New York once again is leading the way so that consumers who purchase life insurance and annuity products are assured that their financial services providers are acting in their best interest when providing advice. …”)

2 See NYDFS Press Release of July 18, 2018.


Bill Mandia

Steve Davis

Elizabeth Kuschel

New York issues final regulation placing “best interest standard” on the sale of life insurance products and annuities

As we previously noted, 2018 promises to be an eventful year at the state level for the regulation of the sale of life insurance and annuity products.  Today, New York issued its much anticipated final regulation that imposes a “best interest” standard.  The regulation requires insurers to, among other things, put in place policies and procedures to ensure that agents and brokers put the interests of consumers ahead of their own when making a recommendation regarding a life insurance product or annuity.  The New York rule comes out before the National Association of Insurance Commissioners (NAIC) holds its August 4, 2018 meeting to address revisions to its existing annuity suitability rule, which could impact the laws of numerous states.  Unlike New York’s new regulation, NAIC’s existing suitability regulation and proposed “best interest” regulation to be addressed at the August 4, 2018 meeting apply only to the sale of annuity products.  Stay tuned for our forthcoming analysis of the New York regulation, its implications for the life insurance/annuity industry, and its potential impact on the discussions at the upcoming NAIC meeting.

Bill Mandia on Latest DOL Fiduciary Rule Intervention Attempt

When the Fifth Circuit finally entered its mandate and judgment on June 21, 2018 “vacat[ing] the Fiduciary Rule in toto”, the DOL’s fiduciary rule, as a matter of law, officially became a dead letter.  But on remand, the United States District Court for the Northern District of Texas created a narrow opening through which, in theory, the parties who unsuccessfully sought to intervene in the Fifth Circuit could make yet another attempt to save the fiduciary rule.  Specifically, the district court issued an Order on June 28, 2018 requiring any party seeking “further relief” to notify the court by July 12, 2018.  The court further stated that “[i]f no notice is received, the case will be dismissed with prejudice and without further notice.”  The District Court did not specify any “further relief” that it believes could be sought, but the court may want to determine whether the unsuccessful attempted intervenors in the Fifth Circuit will file a petition for a writ of certiorari with the United States Supreme Court.  The deadline for the attempted  intervenors to do so is July 31, 2018.

The odds that the Supreme Court would grant certiorari to the attempted intervenors are extremely long because, among other reasons, the petitions to intervene were not well founded, as the Fifth Circuit recognized.  Nevertheless, the parties, including the DOL, in Thrivent Financial for Lutherans v. R. Alexander Acosta, et al., U.S.D.C. Minn., Civ. A. No. 16-cv-03289, have asked the United States District Court for the District of Minnesota to continue a previously entered stay in that litigation pending the July 12 deadline set by the United States District Court for the Northern District of Texas.  While it is highly unlikely that a petition for certiorari by the attempted intervenors will succeed, they may nonetheless seek further review as noted by the parties in Thrivent Financial.  It is important, however, to keep in mind that the fiduciary rule should still be deemed vacated, even if a petition for certiorari is filed, because the Fifth Circuit’s mandate remains effective absent a stay, which seems extremely unlikely at this point.  We will have a further update on June 12 regarding whether the attempted intervenors respond to the North District of Texas’ Order.

Jim Podheiser on state of play re. prohibited transaction exemption relief for investment advice

“With the DOL’s fiduciary rule and the new and amended exemptions associated therewith (the “Rule”) officially vacated, many are wondering about the implications of the DOL’s last statement of its (and the IRS’) temporary enforcement policy (FAB 2018-02).  In the absence of the Rule we are back to the old “5-part test” for determining whether one is an investment advice fiduciary.  If one is an investment advice fiduciary under the 5-part test, the temporary enforcement policy would seem to provide what is the equivalent of a prohibited transaction exemption that did not exist prior to the Rule (for example, to permit the investment advice fiduciary to receive third-party compensation assuming the “impartial conduct standards” are satisfied).  Whether the DOL would agree with this analysis in all cases and how long this temporary enforcement policy will be maintained remains to be seen.”