Last year the New York Department of Financial Services issued a regulatory amendment that enforced a uniform standard of care on all financial professionals who provide investment advice. The Supreme Court of New York has now upheld this in the face of two petitions.

The NYDFS issued the amendment to Regulation 187, entitled Suitability and Best Interests in Life Insurance and Annuity Transactions, 11 NYCRR 224.0 et seq, on 15 March last year. It mirrors the federal Fiduciary Rule enacted by the US Department of Labour under President Obama which a federal court subsequently invalidated.

Private banks are frequent users of annuities and life insurance contracts on their clients' behalves and often advise them to take them up. Life insurance is an essential product in the area of wealth management – for saving, for investing and for passing on wealth to the next generation. Tailor-made contracts are common. The right life assurance policy can help people meet their inheritance tax liabilities. HNW patriarchs can transcend the dilemma of how much wealth to hand over to their offspring while they are still alive by purchasing life assurance policies that pay out lump sums in a way that reduces said liability. The policies are typically held in trust.

Independent (the Independent Agents and Brokers of New York and others) argued that the amendment constituted "improper regulatory policymaking," broke the State Administrative Procedures Act, was unreasonable, arbitrary and capricious, lacking a rational basis, and improperly extended the agent/broker relationship. The regulation, according to Independent, lumps advisors and/or private banks doing the advising in with 'producers' and says that any communication given by a producer could be considered advice or a recommendation. A produer that does this has to look at the customer's financial situation and needs, financial time-line and financial objectve, but R187 does not define any of these things - a fact that Independent thought might lead to lawsuits. It also noted in passing that insurance is a contract between the insurer and the insured, but the amendment to R187 places a continuing duty on the producer, who is not a party (i.e. is a 'legal stranger') to the contract.

The National Association of Insurance and Financial Advisors or NAIFA, for its part, asserted that the amendment improperly ignores the important distinction between an agent and a producer and that the 'best interest' standard that it imposes upon producers is actually a fiduciary duty, requiring the producer to go beyond the statutory standard of truthfully representing the terms and provisions of a policy. NAIFA also called the amendment irrational as it inexplicably exempts direct sales (by post, telephone and email) from that fiduciary duty.

The court dismissed each petition, finding that the amendment was a proper exercise of the powers granted to the Superintendent of the DFS and that it was not arbitrary or capricious. It complied with the State Administrative Procedures Act. It did not imopse a standard that is inapposite to common law or the purpose of various New York statutes. The court was not persuaded by the petitioners' arguments or exception to being equated with fiduciaries - particularly when considering the assertion by NAIFA petitioners that they should be allowed to call themselves (as some have) investment advisors - nor did it think the amendment ambiguous. The court also noted that the members of NAIFA already adhere to a code of ethics that requires them to consider the best interests of their clients.