Seriously, who wouldn’t want virtually unfettered discretion?
By Cailie Currin
In our experience, the regulations that are the most effective are those that provide clarity and specificity around the substantive requirements, and then leave the procedural compliance within the discretion of the regulated entity. Here is what you must do. How you do it is up to you.
To its credit, the New York Department of Financial Services seems to have wanted something that left the procedural approach to compliance with its Suitability reg. up to the regulated entity. Perhaps those doing the drafting did not see the ways that the substantive mandates were vague and unclear? It was very clear to many of us who tried to implement Regulation 187. Many of the substantive mandates – adequate training and a best interest standard focused on what was not considered, to name just two – are virtually impossible to place compliance controls around.
A New York court apparently felt as we did. The New York State Appellate Division, Third Department, opinion dated April 29, 2021, struck down NY’s Regulation 187, the Suitability and Best Interests in Life Insurance and Annuity Transactions. The court said that the regulation’s “virtually unfettered discretion,” even when designed for a “laudable goal,” is still unconstitutional.
When the court writes that: “as written, the amendment fails to provide sufficient concrete, practical guidance for producers to know whether their conduct, on a day-to-day basis, comports with the amendment’s corresponding requirements for making recommendations and compiling and evaluating the relevant suitability information of the consumer,” it could be seen as just limited to Reg. 187.
To some of us it may feel bigger than Reg. 187, because that regulation is but one example, clearly an important one, of what appears to be a regulatory philosophy based on being vague and leaving a lot of room for regulatory interpretation.
There are many other examples of DFS putting out vague statements and putting “desk drawer rules” in outlines and then enforcing them as if they were law, as if their meaning should be crystal clear to anyone reading them. Problems like those identified in the court opinion are pervasive in the outlines:
Definitions are so broad it is difficult to discern what is acceptable.
Subjective terms are prevalent.
Lists marked as examples are interpreted to be exhaustive.
Lists marked as exhaustive are interpreted to be illustrative.
Statutes and regulations that on their face apply to just one type of product are applied to very different products, as if anyone would realize that any law could be applied to any product, regardless of the law’s explicitly stated scope.
We don’t know the ultimate fate of Reg. 187 yet, as there is another level of appeal possible. This opinion is very interesting and, if it stands, would be a major development in New York. But sadly, it would only address the tip of the vagueness iceberg. We are hopeful that DFS will not view this opinion as a mandate to be super-prescriptive on all issues in a “be careful what you wish for” moment. That could happen. But this could also be the beginning of a different approach to regulation where the substantive mandates are very clear so any reasonable reader would understand what they mean. In other words, give us a clear statement of the regulatory “what” and then let each regulated entity develop the “how.” That is our hope for the outcome of this litigation, whether this decision stands or not.
