NYS Attorney General’s Brief on Reg 187 and the Regulation of a Consideration
By Cailie Currin
How many things do you consider in a day? Dictionary.com has multiple definitions of “consider,” including “to think carefully about,” “to think about (something that one might do, accept, buy, etc.),” “to pay attention to,” and “to think, believe or suppose.”
I consider lots of things on any given day. I think carefully about some things I consider, and others are merely passing thoughts or beliefs. I often think carefully about my lunch and have a passing thought about something much more important in the long term; for example, “Maybe I should downsize my home because then I wouldn’t have to pay a plow guy.” Sometimes I pay attention to the thought for a while, letting it settle in and develop. I disregard some considerations quickly. “No, even though they are cute, I should not buy a herd of goats.”
The common thread in these definitions and my experience of considering things is that it all happens in my head. I may choose to give voice to an idea, but the consideration itself is nonverbal. It is a thought. There is no way for anyone to know what I do and don’t consider in a day. If I do not speak about it, the only way for anyone to judge what I considered is to look at my actions and guess what I may have thought about before acting. Regulation 187 ensures that “guessing” will happen when the best interest standard is enforced because there is no other option.
The attorney general’s brief uses an unrealistic and straightforward example on page 24.
“Most fundamentally, the “best interest” standard prohibits producers from prioritizing their own financial incentives ahead of consumers’ interests, even if the product recommended is minimally suitable for the consumer. [cite omitted] An example may make this point clear. Suppose that a consumer is shopping for a product suited to her goal of guaranteed growth with no risk of losing the principal. Suppose also that a producer has two annuities that he could recommend to the consumer: Annuity A offers a 3% guaranteed interest rate for the life of the contract while Annuity B offers only a 1% guaranteed interest rate. While both annuities would further the consumer’s goal of guaranteed growth, Annuity A – with the higher interest rate – would better meet that goal. Now suppose, too, that Annuity B pays the producer a higher commission than does Annuity A. The consumer will lose out on a better interest rate if the producer decides to recommend Annuity B over Annuity A in order to capture the higher commission for himself. The “best interest” standard, therefore, requires the producer to refrain from considering his own financial interest when deciding whether to recommend Annuity A or Annuity B.” (Emphasis added).
That is the only instance in the entire brief where it references this “consider” element of “best interest.” Based on the “care, skill, and prudence” aspect of the best interest requirements, I would argue that recommending a 1% lifetime guarantee over a 3% lifetime guarantee would fail. It isn’t necessary to reach into the producer’s mind to know that. But what if Annuity A and Annuity B have the same 1% guarantee: a much more likely scenario. Maybe Annuity B has a current rate that is .1% lower than Annuity A. Maybe Annuity B is issued by a company with a higher rating. Maybe Annuity B is issued by a company with a more consumer-friendly website and more easily accessible information after issue. And maybe Annuity B does pay slightly higher comp. Or maybe Annuity A pays the same comp but pays a little faster. Suppose the producer “considers” these two elements of compensation. How do we know? Do we want DFS or any regulator trying to determine what was “considered” and then which definition of considered was meant by the regulation; the one where that producer thought carefully or the one where there was a mere thought, belief, or supposition? If a complaint is filed or a question raised on exam, won’t they have to reach into the producer’s thoughts to know if the reg’s test is met: That the producer did refrain from considering his financial interest?
My personal opinion is that the only way to comply with the “consider” element is to always recommend the product with the lowest compensation among the “minimally suitable” products. Of course, to know which has the lowest commission, the producer must spend time thinking about – considering – his compensation. I would have focused exclusively on this one element of best interest had I brought the challenge.
After much consideration, I think this regulation is indeed unconstitutional.