In the Matter of Independent Insurance Agents and Brokers of New York, Inc., et al., Respondents, et al., Petitioners, v. New York State Department of Financial Services et al., Appellants.
No. 73
State of New York Court of Appeals
October 20, 2022
SINGAS, J.
OPINION This opinion is uncorrected and subject to revision before publication in the New York Reports.
Sarah L. Rosenbluth, for appellants.
Howard S. Kronberg,
SINGAS, J.:
Petitioners challenge the validity of the recently amended Insurance Regulation 187 (
I.
Insurance Regulation 187 was first promulgated as an emergency regulation in 2010, and as a final regulation in 2013. The regulation was intended to ensure that “the insurance needs and financial objectives of consumers” were addressed when entering into annuity contracts, and to update New York‘s regulations to mirror national model rules (see
In 2018, following two rounds of public comment and a revised proposal and regulatory impact statement, DFS amended the regulation. The amendment addressed concerns that the purchase of annuities and life insurance had become increasingly complex with more products available to purchase. DFS reasoned that consumers, finding themselves more reliant on professional advice in order to understand the options available and to make purchasing decisions, had become more susceptible to producers and insurers recommending transactions that prioritized their own compensation over the consumer‘s best interest (see Revised Regulatory Impact Statement for
The amended regulation explains in detail what a producer or insurer must do to discharge this duty when making a recommendation with respect to sales transactions. The producer or insurer must, among other things: make “reasonable efforts” to obtain the consumer‘s “suitability information“; base any recommendation “on an evaluation of the relevant suitability information” that “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“; “[o]nly [consider] the interests of the
The original regulation did not define the term “suitable.” DFS noted that, in implementing the original version of the regulation, the lack of a definition for the term “suitable” had been a “significant shortcoming,” given that DFS had “encountered uncertainty and disagreement in the industry about what it means to be suitable” (Revised Impact Statement at 5). DFS therefore incorporated a new definition of the term into the amended regulation: “in furtherance of a consumer‘s needs and objectives under the circumstances then prevailing, based upon the suitability information provided by the consumer and all products, services, and transactions available to the producer” (
The amendment took effect in August 2019 for annuities and in February 2020 for life insurance policies (id.
II.
In November 2018, petitioners Independent Insurance Agents and Brokers of New York, Inc., and Testa Brothers Ltd.3 commenced this CPLR article 78 proceeding alleging that the amended regulation is unconstitutionally vague because certain key terms, including “best interest,” “recommendation,” and “suitability information,” are indefinite, ambiguous, and subjective, and thus, incapable of satisfying the test for constitutional vagueness.4 Petitioners also contended that DFS exceeded its authority in promulgating the amendment because
Supreme Court granted DFS‘s motion (65 Misc 3d 562 [Sup Ct, Albany County 2019]). The court held that the amendment was “a proper exercise of the powers granted to the DFS Superintendent, that it [was] not an attempt by DFS to improperly legislate, and that it [was] neither arbitrary [n]or capricious” (id. at 577). The court reasoned that “[a]gainst a backdrop of legitimate concerns for consumers, the burgeoning market of increasingly complex insurance and annuity products, and the rather remarkable lapse rate the market is experiencing, the [a]mendment is interstitial—consistent with underlying statutory purposes—and reflects a rational and reasonable movement towards consumer protection” (id. [citation omitted]). The court also rejected the argument that the amendment is unconstitutionally vague, holding that “in fact, it is clear and quite self-explanatory” in providing that the producer must act in the best interest of the consumer and “contain[ing] precise definitions of the issues highlighted by . . . petitioners,” including “consumer” and “recommendation” (id.). Petitioners appealed.
The Appellate Division unanimously reversed the judgment, granted the petition, and declared the amendment unconstitutional (195 AD3d 83 [3d Dept 2021]). The Court held that the amended regulation was unconstitutionally vague, reasoning that while its goals were “laudable, as written, [it] 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” (id. at 87). DFS appealed as of right to this Court (see
III.
“A statute, or a regulation, is unconstitutionally vague if it fails to provide a person of ordinary intelligence with a reasonable
Courts use a two-part test to determine whether a statute or regulation is unconstitutionally vague (see Stephens; 28 NY3d at 312-313; People v Stuart, 100 NY2d 412, 420 [2003]; Ulster Home Care, 96 NY2d at 509 [regulation]; People v Nelson, 69 NY2d 302, 307 [1987]). First, “[t]o ensure that no person is punished for conduct not reasonably understood to be prohibited, the court must determine whether the statute in question is ‘sufficiently definite to give a person of ordinary intelligence fair notice that [the person‘s] contemplated conduct is forbidden’ ” (Stuart, 100 NY2d at 420, quoting Nelson, 69 NY2d at 307 [internal quotation marks omitted]). Second, the court must “determine ‘whether the enactment provides officials with clear standards for enforcement’ so as to avoid ‘resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory application’ ” (Stephens, 28 NY3d at 312, quoting Stuart, 100 NY2d at 420-421). The two prongs of the test are “closely related“—“[i]f a statute is so vague that a potential offender cannot tell what conduct is against the law, neither can” the person charged with its enforcement (Stuart, 100 NY2d at 420-421).
No enforcement action has been taken against petitioners under the amendment, and their challenge to the regulation is therefore solely facial. “[F]acial challenges to statutes are generally disfavored” (id. at 422). “[A] facial challenge requires the court to examine the words of the statute on a cold page and without reference to the [complaining party‘s] conduct. In pursuing a facial challenge, the [complaining party] must carry the heavy burden of showing that the statute is impermissibly
Petitioners argue that three terms in the amended regulation render it unconstitutionally vague on its face because these terms fail to provide notice of what conduct is or is not permitted: “recommendation,” “suitability information,” and “best interest.”
The duty to act in the best interest of the consumer applies when a producer makes a “recommendation” regarding a transaction (
The regulation‘s text shows that DFS carefully considered what communications would and would not be considered “recommendations” and provided a clear definition employing standard legal terminology. With respect to the objective definition, petitioners argue that the phrase “may be interpreted by a consumer” is too amorphous and generalized to give notice of what conduct is prohibited, but ignore that the standard is explicitly limited to conduct that ”reasonably may be interpreted by a consumer to constitute advice” (id.
Under that section, a communication can be a “recommendation” only if the producer intends for a consumer to enter into or refrain from entering into a transaction based on the communication. Whether a communication falls within this definition therefore turns solely on the producer‘s own state of mind, of which the producer alone is in control. This rules out the possibility of violating the regulation “by accident, inadvertence, or chance” (see Stuart, 100 NY2d at 426-427).
Petitioners have failed to demonstrate that “recommendation” is unconstitutionally vague. Employing long-accepted terms, the definition establishes clear, objective legal guidelines to ensure that a communication‘s legal impact will not depend on the sensitivities of a communication‘s recipient, and is both sufficiently definite to provide notice to those regulated and to prevent arbitrary enforcement. The result is broad categories of conduct for which the application of the term “recommendation” is clear.
Second, petitioners argue that the term “suitability information” is vague. Acting in the “best interest” of the consumer requires a producer or insurer to collect and consider the consumer‘s “suitability information” and, taking that information
Before the amendment, the general definition of “suitability information” was the same: “information that is reasonably appropriate to determine the suitability of a recommendation” (compare id.
Within the definition of “suitability information,” petitioners argue that the terms “recommendation,” “materiality,” “consumer,” “financial situation,” and “complexity” are too vague to give notice of what is and is not “suitability information.” As discussed, the term “recommendation” has a specific definition within the regulation which is not vague. The same is true for
Petitioners’ final vagueness argument pertains to the term “best interest.” Petitioners first argue that it is unclear in whose best interest a producer must act when making a “recommendation.” The regulation provides an explicit answer: producers “shall act in the best interest of the consumer” (
Because petitioners have not established that the amendment will fail to give notice of its requirements in every application, we conclude that the amended regulation is not impermissibly vague on its face.
IV.
Petitioners raise three alternative arguments for invalidating the amendment that the Appellate Division did not reach: that DFS exceeded its authority in promulgating the amended regulation, that DFS violated SAPA, and that the amended regulation is arbitrary and capricious.6 Each of these arguments is unavailing.
A.
A governmental agency exceeds the scope of its delegated authority in promulgating a regulation when it engages in impermissible “legislative policy-making,” as opposed to permissible “administrative rule-making” (Boreali v Axelrod, 71 NY2d 1, 11 [1987]). Several factors assist courts in differentiating between the two:
“whether (1) the agency did more than balance costs and benefits according to preexisting guidelines, but instead made value judgments entailing difficult and complex choices between broad policy goals to resolve social problems; (2) the agency merely filled in details of a broad policy or if it wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance; (3) the legislature has unsuccessfully tried to reach agreement on the issue, which would indicate that the matter is a policy consideration for the
elected body to resolve; and (4) the agency used special expertise or competence in the field to develop the challenged regulation” (Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 NY3d 174, 179-180 [2016] [internal quotation marks, citations, and alterations omitted]; accord Boreali, 71 NY2d at 12-14).
These factors are flexible, do not constitute a checklist or a headcount, and are exemplary rather than exhaustive (see Matter of NYC C.L.A.S.H., 27 NY3d at 180). The Boreali analysis is, at its core, a recognition that “elected representatives, rather than appointed administrators” should resolve difficult social problems (id.).
We reject plaintiff‘s argument that DFS crossed the line into impermissible “legislative policymaking” (Boreali, 71 NY2d at 11). The legislature has given DFS the authority to supervise “persons providing[ ] financial products and services” (
B.
SAPA lays out rules that agencies must follow when promulgating regulations and creating agency guidance. Petitioners argue that DFS violated three of its provisions. First, SAPA requires agencies to include in a regulatory impact statement the “best estimate” of a regulation‘s projected costs (
“The amendment was specifically designed to allow producers to leverage existing practices and file management systems. . . . This amendment identifies certain suitability information that the producer should be asking their clients, if not already doing so. Although some producers and insurers have expressed an intention to create new forms or new file management systems, that is not required to comply with this amendment” (see Revised Impact Statement at 8-9).
Though DFS did not give a dollar figure of expected costs, SAPA does not require such an exact estimate. Moreover, providing a precise dollar figure would be contrary to DFS‘s approach of allowing producers to determine the best way to comply with the regulation‘s requirements in order to reduce their costs. In light of this approach, DFS predicted that the costs to producers “are expected to be minimal, because, as [DFS] understands it, many insurers have already developed procedures to prevent financial exploitation and abuse” and rejected the “leading industry trade group[‘s]” estimate of $5-10 million as “overinflated.” DFS also noted that “[t]he rule does not impose additional costs to [DFS] or other state government agencies or local governments. [DFS] will monitor and enforce the regulation within its existing enforcement authority”
Second, SAPA also requires that the regulatory impact statement identify “whether the rule exceeds any minimum standards of the federal government for the same or similar subject areas and, if so,” provide “an explanation of why the rule exceeds such standards” (
Finally, SAPA requires agencies to “consider utilizing approaches that will accomplish the objectives of applicable statutes while minimizing any adverse economic impact of the rule on small businesses” (
C.
We finally conclude that the amendment is not arbitrary or irrational. “[A]n administrative regulation will be upheld only if it has a rational basis, and is not unreasonable, arbitrary or capricious” (New York State Assn. of Counties v Axelrod, 78 NY2d 158, 166 [1991]). “If a regulation is to be nullified, the challenger must establish that it is so lacking in reason for its promulgation that it is essentially arbitrary” (Kuppersmith v Dowling, 93 NY2d 90, 96 [1999] [internal quotation marks omitted]). So long as the regulation is “genuine[ly] reasonable[ ] and rational[ ]” it should be upheld—courts should not scrutinize the “policy considerations underlying the” regulation (New York State Assn. of Counties v Axelrod, 78 NY2d 158, 166-167 [1991] [internal quotation marks omitted]). The goal of the amendment is straightforward and supported by the administrative record, and the amendment is plainly tailored to achieve those objectives. Ultimately, petitioners’ quarrel is with the policy and objectives of the regulation, not with its rationality. DFS reasonably concluded that the “best interest” framework was needed to protect consumers, and petitioners cannot show that the amended regulation is “essentially arbitrary.”
V.
Each of petitioners’ arguments for invalidating the regulation is unavailing. Petitioners have fallen woefully short of their burden to sustain a facial due process challenge on vagueness grounds, and the extensive administrative record supporting the amended regulation refutes their alternative challenges.
Accordingly, the order of the Appellate Division should be reversed, with costs, and the judgment of Supreme Court reinstated.
Order reversed, with costs, and judgment of Supreme Court, Albany County, reinstated. Opinion by Judge Singas. Acting Chief Judge Cannataro and Judges Rivera, Garcia, Wilson and Troutman concur.
Decided October 20, 2022