Compliance September 2, 2011

N.Y. Insurance Broker Groups Appeal Compensation Ruling

Two New York insurance agent and broker groups appealed a judge's decision upholding a state regulation that requires producers to disclose incentive compensation. 
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The Independent Insurance Agents & Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) made a formal appeal this week of a trial court ruling that upheld a state regulation. Attorneys from the law firm of Keidel, Weldon & Cunningham, LLP submitted a brief on the trade groups’ behalf with the New York State Supreme Court Appellate Division, Third Department in Albany this morning.

The dispute centers around New York Insurance Regulation 194, which took effect on January 1. Regulation 194 requires agents and brokers to tell clients how insurance companies pay them, whether the clients have asked or not. Should a client have questions about the producer’s compensation, the producer must provide, in addition to that information, many other details about the policy sold and policies the client rejected. This means the producer would have to disclose, among other things:

  • Differences in types and amounts of coverage
  • Contrasts in policy terms
  • The pay he would have received had the client chosen a different policy

IIABNY, which in 2004 called on insurance agents and brokers to voluntarily disclose to their clients the existence and nature of all their compensation, has opposed mandated disclosures as burdensome for producers and of little benefit to consumers. IIABNY and CIBGNY, the only producer trade groups to launch a legal challenge to the regulation, argued that New York State insurance law does not give the Insurance Department the power to make these demands. They also said that the regulation is arbitrary and imposes large, needless compliance costs on producers.

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However, the court upheld the regulation in November 2010, and the groups filed a notice of appeal with the Third Department the next month, preserving their right to formally appeal. After months of gathering new information to strengthen the case, the IIABNY board of directors voted last May to file the appeal.

“We still believe that the Insurance Department exceeded its authority by issuing this burdensome, unnecessary regulation,” said IIABNY Chair of the Board Christopher A. Brassard. “Regulation 194 places unprecedented obligations on law-abiding insurance producers, and it provides no additional benefit to consumers. We fully expect to prevail after the appellate court hears our arguments.”

State law permits the Insurance Department time to file a response with the court. IIABNY said that it expects the court will schedule oral arguments for sometime in the fall.

Products September 2, 2011

White Paper Discusses Use of Proprietary Funds

Including a retirement plan provider’s affiliated funds as part of a plan’s investment lineup is not a fiduciary conflict of interest or prohibited transaction under ERISA, writes ERISA attorney Fred Reish, in a new white paper. 
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In the paper, “The Prudence Standard: Affiliated Products and Services,” Reish, an employee benefits attorney with Drinker Biddle & Reath, says that “simply dismissing from consideration the funds offered by an affiliate of a record keeper is potentially a breach of one’s fiduciary responsibility.”  

“Many plan providers offer recordkeeping, administrative services and communication services as well as investment funds managed through an affiliate,” said Charlie Nelson, president of Great-West Retirement Services, which commissioned the paper. “A provider can be compensated from both recordkeeping fees and asset management fees from affiliated funds. The ability of the provider to offset some of its fees can mean significant cost savings for a plan.”

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Reish, along with co-authors Bruce Ashton and Summer Conley, analyzed fiduciary requirements regarding investment selection in ERISA and similar state standards, as well as applicable court decisions and Department of Labor advisory opinions. They noted that affiliated funds may provide other benefits to participants, such as guaranteed minimum withdrawal benefits or added investment education services.

The authors concluded that when fees received by a record keeper and affiliated fund are reasonable and the fiduciaries do not receive a personal benefit from selecting the fund, there is no prohibited transaction. The paper also notes that any conflict with respect to a service provider and affiliated fund can be managed through disclosures to the plan fiduciaries and participants.

The full paper is available here.

 

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