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New York Life Insurance and Annuity Corporation

Market Conduct
Tuesday, August 23, 2005
Docket No. 05-028-I

DOCKET NO. 05-028-1

In Re: New York Life Insurance and Annuity Corporation, NAIC # 91596


NOW COMES John P. Crowley, Commissioner of the Vermont Department of Banking, Insurance, Securities and Health Care Administration, and hereby issues the following Order adopting the Market Conduct Examination Report in the above referenced docket number, subject to the exceptions and qualifications discussed below.


1. Pursuant to the authority granted by Vermont law, including, but not limited to, that contained in 8 V.S.A. §§ 10-13, 18,3564-3574 and 4726, the Commissioner of the Department of Banking, Insurance, Securities and Health Care Administration (the "Department") is charged with administering and enforcing the insurance laws and regulations of the State of Vermont and is authorized to conduct examinations of insurers and licensees to determine whether they are in compliance with said laws and regulations.

2. New York Life Insurance and Annuity Corporation (the "Company'') is authorized to transact business in Vermont under Foreign Insurance Company License No. 9280P.

3. A final target1 market conduct examination report was issued by examiners Jennifer Greenway, Robbie Kriplean and James Montgomery entitled MARKET CONDUCT EXAMINATION REPORT OF NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION NEW YORK, NEW YORK AS Of DECEMBER 31, 2002 BY VERMONT DEPARTMENT OF BANKING, INSURANCE, SECURITIES & HEALTH CARE ADMINISTRATION (the "Report").

4. In accordance with the requirements of 8 V.S.A. § 3574(b), the Report was transmitted to the Company and the Company was afforded a reasonable period of time to submit a formal written response to the findings of Report. The Company submitted a formal response (the "Response") addressing the issues raised the Report. Upon review of the Response, the Department has undertaken additional investigation and sought additional information from the Company.

5. Pursuant to 8 V.S.A. § 3574(c), the undersigned Commissioner has fully considered the Report, the Response and additional information provided.


6. To the extent comments made by the Company are not discussed below, such comments are expressly rejected. The examiners' Report, including their recommendations, are adopted unless noted otherwise below.

7. In the (V) CLAIMS PROC OURES ANO PROCESSING - (A) Claims Practices and Procedures- Not In Compliance with 8 V.S.A. § 3665 section of the Report (pages 7-8), the examiners discuss the Company's failure to comply with 8 V.S.A. § 3665. 8 V.S.A . § 3665(c)(2) requires life insurers to pay interest on benefits from the date of the insured's death at 6% or the rate paid on proceeds left on deposit, whichever is higher. In turn, 8 V.S.A. § 3665(d) requires all insurers to pay claims within thirty days of a properly executed proof of loss. Under 8 V.S.A. § 3665(d), if an insurer does not pay a claim within 30 days, it shall pay interest on the proceeds at the judgment rate.2 In contrast, the Company has not calculated interest at 6% for timely paid claims, nor has the Company paid the 12% rate in late paid claims. The examiners recommend that the Company revise its claim procedures to conform with Vermont law and recalculate and pay improperly withheld interest from 1993 until the present. (Recommendation Nos. 1 and 2, Report at page 18.)

In its Response, the Company notes that it has been paying interest consistent with 8 V.S.A. § 3665 since November 2003, when the Company discovered the discrepancy. The Company argues that 8 V.S.A. § 3665 only requires the application of the judgment rate if the matter has gone through litigation and that logically the 6%3 interest rate applies to late paid claims which have not been litigated. Further, the

Company urges the application of the "rule of lenity" pursuant to State of Vermont v. Greg L. Goodhue, 175 Vt. 457, 833 A.2d 861, 868 (Vt. 2003) and related case law.

The undersigned rejects the Company's arguments regarding the interpretation of 8 V.S .A. § 3665. Life insurance proceeds cam interest from the date of death at six percent (8 V.S.A . § 3665(c)(2)) and if an insurer fails to pay those benefits within 30 days of properly executed claim forms,4 interest then begins to accrue at 12% (8 V.S.A . § 3665(d)). The statute both clarifies when interest begins to run for life insurance claims (whether late paid or otherwise) and also provides additional incentive for all lines of insurance to timely pay claims by imposing a greater interest rate if claims arc not paid timely. Further, the undersigned finds the cases cited by the Company arc inapplicable to an administrative proceeding such as this. However, it must be noted that it appears the Company addressed the discrepancy in a timely manner upon discovery and has corrected its procedures for claims received after November 2003.

Nonetheless, the Company shall perform an audit and issue a report to the Department. The audit shall be of all life insurance claims received by the Company from January 1, 1999 to the date the Company began complying with 8 V.S.A. § 3665, arising out of policies issued in Vermont. For each claim, the Company shall report the date of death, the date the proof of loss was received, the amount of insurance at the time of death, the amount paid to the beneficiary, the date payment was made to the beneficiary,5 the amount that should have been paid if interest had been calculated in accordance with 8 V.S.A . § 3665, the policy number, and the claim number. The audit shall be provided to the Department no later than December 15, 2005 and shall be transmitted both in hardcopy and electronically in the form of an Excel spreadsheet. Upon approval, the Company shall refund all underpaid interest owing which exceeds $25 at the time the benefits were paid.6 Upon successful remediation, it is not anticipated any administrative penalty would be warranted.

8. In the (VII) REPLACEMENTS section of the Report (pages 11 - 12), the examiners discuss various violations of the replacement regulations7 discovered in sampled files. The examiners recommend assigning a specific staff member the responsibility to review each replacement file and ensure compliance with applicable regulations. (Recommendation No. 3, Report at page 23.)

In its Response (page 2), the Company notes that it has always been the Company's policy to comply with the replacement regulations. The Company details the extensive procedures in place to help ensure that policies will be sold in compliance with the replacement regulations, including having the Administrative Manager review all replacement applications, educating its agents and regularly reminding agents and staff of the requirements of the replacement regulations. Further, the Company notes that it has implemented a new business tracking sheet with reminds the staff that processes the application of replacement regulations requirements.

Upon consideration, the undersigned adopts this portion of the Report and the examiners recommendation. According to the information provided in the Response, it appears that Company has implemented the examiners recommendations into its processes. In light of the apparent isolated nature of the violations discovered, it does not appear that any penalty is warranted at this time.

9. In the (IX) UNDERWRITING - HIV CONSENT FORMS section of the Report (page 14), the examiners note that they discovered two violations of8 V.S.A. § 4724(20)(8), out of a total sample of fifty files. The examiners recommend the Company exercise additional care in the future to ensure that proper HIV information and consent forms are used in all cases. (Recommendation No. 5, Report at page 24.)

In its Response (page 3), the Company indicates it will review the importance of using the correct VT specific HIV information forms with its agents and processing staff.

Upon consideration, the undersigned adopts this portion of the Report and the examiners' recommendation. It appears the Company is taking proactive steps to address the problem and no further action is necessary beyond that which the Company has indicated will occur. Because the violations discovered appear to be isolated and few in number, the undersigned concludes no administrative penalty is warranted.

10. In the (X) LI FE INSURANCE ILLUSTRAT IONS section of the Report (page 15), the examiners note that Regulation 99- 1 § 10 provides: "If an adverse change in non­guaranteed elements that could affect the pol icy has been made by the insurer since the last annual report, the annual report shall contain a notice of that fact and the nature of the change prominently displayed" (emphasis added). The examiners note that some of the Company's reports contain such notices, but not prominently. For example, in one notice, an increase in the monthly contract charge was included in an inconspicuous footnote. The Company did not agree with the examiners' characterization, but nonetheless volunteered to make the information more prominent by increasing the font size.

The Company did not specifically refer to this portion of the examination in its Response.

Upon consideration, the undersigned finds this a clear violation of the Regulation.  Although no additional remedial efforts are necessary beyond what the Company has voluntarily undertaken, the undersigned finds this appropriate for a $1,000 penalty for the violation discovered by the examiners. Although the examiners only note one specific violating form, such form was presumably provided to numerous customers. Further, this is precisely the type of policyholder communication prohibited by the Regulation.

11. In the (XII) SALES AND MARKETING - (A) INCOMPLETE/INCORRECT APPLICATIONS section of the Report (page 17), the examiners discuss a problem with a specific form used by both the Company and New York Life Insurance Company. The form provides for a box at the top to be checked to indicate the issuing company. The examiners note that in four files, the application had the wrong company name or did not have any company nan1e selected in that section. The examiners make no specific recommendation, but do note that the Company indicated it will reaffirm with the Administrative Manager the necessity of completing the form correctly.

In its Response (page 3), the Company asserts that two of the four violations should not be included in the report because they involve NYLIC policies and further notes that three of the four files contained reference to the correct issuing company, even if the application was not filled out or filled out correctly .

Upon consideration, the undersigned adopts this portion of the Report, subject to the following revision. As requested by the Company, the reference to Policy 46624317 shall not be considered a part of the Report because it is a NYLIC policy. The reference to Policy 46850092 shall be adopted because although the policy was issued by NYLIC, it was a Company policy conversion. The undersigned rejects the Company's argument that a violation should not be noted if there is a reference to the appropriate company in the policy file. The application is an integral and vital portion of the process and certain legal rights are determined by the application alone. Confusing the customer and potential beneficiaries about the actual issuing company should not be disregarded as a mere technicality. The undersigned finds tins appropriate for a $1500 administrative penalty ($5OO for the three listed violations). Although this is less than the statutory maximum, the Company appears to have taken a proactive approach to reaffirming its commitment to accurate applications.

12. In the (XII) SALES ANO M ARKETING (8) SUITABILITY - (i) SmartMatch section of the Report (page 18), the examiners describe the Company's comprehensive suitability computer program called SmartMatch. The Company obtains information from the applicant by having the applicant fill out a form which specifies risk tolerance and investment objective. The application is then put through SmartMatch as part of the application processing. SmartMatch then analyzes the application and ensures that the applicant's investment objectives are consistent with the applicant's selection of investments for premium allocation. If they are inconsistent, the application is "pended" and potential inconsistencies are resolved.

The examiners note, however, that because of certain parameters of the SmartMatch system, an applicant that is determined to have a "moderate" risk tolerance can end up with up to 60% of his or her investments in "high" or “highest" risk investments. The examiners posit that a majority of investments in the high or highest risk categories is inconsistent with a moderate tolerance level and recommend the SmartMatch system be modified to d1sallow such a high percentage of investments in the "high" and "highest" risk categories when the risk tolerance level has been identified as "moderate".8 (Recommendation No.8, Report at page 24.)

In its Response (pages 3-4), the Company asserts SmartMatch's "current standard ensures that the relationship between risk tolerance and investment objective is consistent." (Response at page 3.) The Company explains that although an applicant might have a "moderate" risk tolerance, he or she must also select an investment objective (capital preservation, income or long-term growth). Depending on the investment objective, SmartMatch allows differing allocations for high and highest risk investments. The Company explains that if an applicant selects a long term growth investment objective, SmartMatch will allow up to a 60% allocation of premium to higher risk investments because of the longer term nature of the goal. Further, the Company asserts that the relationship between risk tolerance and investment objective is "clearly displayed in the Investor Profile" (Response at page 4), including pie charts which illustrate acceptable allocation levels. Further, the Company notes that the risk classification of each investment choice is clearly specified. The Company asserts that "the suitability standard for individuals who have moderate risk tolerance and seek to achieve long-term growth by investing up to 60% of their investment in high or highest risk investment divisions is reasonable." (Response at page 4.) Finally, the Company notes that SmartMatch is regularly reviewed to assure compliance with regulatory requirements and that the examiners' proposed revision will be considered at the next review.

Upon consideration, the undersigned adopts this portion of the Report, but rejects the examiners recommendation. From the information provided in the Report and the Response, it appears the SmartMatch program is a useful tool for analyzing suitability requirements and effectively assures that customers are consistently directed towards investment decisions that are suitable for their needs. The undersigned finds persuasive the Company's argument that under certain circumstances an investor with long term objectives and a moderate risk profile could be appropriately invested in up to 60% high risk investments. However, although the undersigned agrees that in certain circumstances a 60% high risk investment allocation for a moderate risk tolerance may be appropriate, such an allocation would only be acceptable in a limited set of circumstances and such allocation should be relatively uncommon. 9 As such, although no change to the allocation models accepted by SmartMatch is specifically directed, the Company is on notice that such an allocation could result in a determination that a particular sale is, in fact, unsuitable and in violation of the Insurance Trade Practices Act.

13. In the (XII) SALES AND MARKETING· (B) SUITABILITY - (ii) MainStay Variable Annuities section of the Repo1t (page 9), the examiners discuss the fact that although the Company has excellent suitability mechanisms for products sold directly by the Company, no monitoring system is in place to ensure that variable products sold by the Company through independent broker-dealers ("Dealers") are being sold in compliance with applicable suitability standards imposed by the insurance laws. The examiners note that the Company is responsible to ensure its products are not sold when unsuitable, even if sold by Dealers (the Company's appointed producers) . The examiners recommend that the Company establish suitability guidelines and standards or utilize SmartMatch suitability standards for products sold by Dealers and implement a monitoring system to ensure that such guidelines are being followed . (Recommendation No. 9, Report at page 24.)

In response, the Company argues that the Dealers are subject to an extensive regulatory structure imposed by securities laws and as such should not be subject to the insurance laws. In tum, the Company asserts that if the Department were to require the Company to monitor that its product (sold through the Dealers) be only sold when suitable, such a requirement would be a break from existing law and must be vetted through the formal rule making process or the Company's due process tights will be violated.

The undersigned expressly rejects the Company's argument that application of the securities suitability laws eliminates the application of insurance laws. Bulletin 129, referred to by the Company in support of its argument, expressly states that variable products are subject to both the secu1ities and insurance laws. As such, requiring the Company to assure that variable products are sold in compliance with insurance laws and securities laws is not a change in the law, it is application of the law referenced in Bulletin 129 and expressed in the statutes.

The examiners are correct that although the Company may rely on the Dealers to sell its product, it is still responsible to make sure the product is only sold when suitable. Pursuant to 8 V.S.A. § 4813c, the Company is responsible for its appointed producers. Pursuant to 8 V.S.A. §4724, the Company must not sell unsuitable products. Bulletin 129 emphasizes the dual nature of the regulations applicable to variable products and highlights the fact that the sale of such products are subject to both insurance and securities regulations. If the Company fails to have any means to monitor the suitability of its variable sales through the Dealers, the Company cannot ensure compliance with the law.

That said, the Company appears to assume that application of the insurance laws to variable products sold by the Dealers would be incredibly onerous. However, the insurance suitability requirements are not inconsistent with the applicable securities laws and the Company could simply implement guidelines which complement the existing securities framework. These guidelines do not need to be as elaborate as that employed by the SmartMatch program. Further, having a monitoring system in place to ensure that Dealers are selling products in a suitable fashion does not need to be unduly burdensome.

In order for the Company to ensure that its products are not sold in violation of the Vermont Insurance Practices Act it must have the ability to monitor those sales. This could be through random spot checks, monthly reviews, complaint reviews, all of the above or some other reasonable method. Monitoring the Dealers does not require that the implicated variable products be subjected to SmartMatch review.

No later than December 15, 2005 the Company shall confirm, in writing, to the Department that it has taken steps to monitor that its variable products arc only being sold in compliance with applicable insurance laws, even when sold by Dealers. Because the examiners did not identify unsuitable sales through the Dealers and the Department has no evidence of problems with Company products being sold in violation of the Insurance Trade Practices Act, no penalty is warranted under these circumstances.

14. In the (XII) SALES AND MARKET ING- (B) SUITABILITY - (iii) Rectifying Unsuitable Applications section of the Report (pages 19 - 20), the examiners discuss perceived problems with applications that have been placed on "pend" status by SmartMatch. The examiners report that when there is a discrepancy between an investor's stated investment objective and investment choices, the Company changes the investment objective so that the application passes the SmartMatch analysis. The examiners conclude that this undermines the effectiveness of the SmartMatch program and results in the Company using the product to dictate the need, as opposed to using the need to dictate the product, as required by law.

Further, the examiners note that by changing the investment objective stated on the application, the Company is making a material change to the application. As such, the examiners recommend the issue be referred to the Securities Division to determine whether or not the applications should be amended and signed by the applicant when the investment objective is changed to match the applicant's premium allocation. (Recommendation No. 10; Report at page 24.)

The Company disagrees with the examiners' characterization of how pended applications are handled. The Company explains that applications which have a pend status are referred to a NASD Series 6 or 7 reviewer tor manual review. The Company notes that "a discussion with the registered representative and/or customer must occur in order to resolve the pend condition ."10 (Response at page 7.) As a result of that discussion, the customer's investor profile will be changed and the application approved or the application will be denied. The Company further explains that Company procedures allow the customer to change either the premium allocation (to match the objective) or the profile. In addition, the reviewer must confirm that any changes to the objective are consistent with the risk tolerance; changes to the investment objectives are confirmed in writing and the customer is informed they should call a toll free number if they object to the changes. A procedure is in place to handle investor profile change disputes. Company registered representatives can be subject to disciplinary action if it is determined that they knowingly provided incorrect info1mation to resolve the pend.

Finally, the Company disputes the examiners recommendation that a change in the investment profile is a material change to the application and must be signed by the applicant, but agrees to defer to the determination of the Securities Division.

Upon consideration, the undersigned adopts this portion of the Report, but expressly notes that the procedures in place as described by the Company appear to address the pend applications substantively.

As recommended by the examiners, the Insurance Division consulted with the Securities Division regarding the appropriate resolution of a pended application through changing the stated investment objectives to match investment decisions. The Securities Division recommended that such changes be confirmed with an amended application signed by the customer. However, upon discussions with the Company, it appears that the operative document designating the investment objective is not the application, but the investor profile and the Company has requested that, if a customer signature is required to confirm the change, it be included on the document specifying the investment objective. Such a request appears reasonable, subject to the requirement that the Company retain the document in its records in the same manner required for applications and other policy records. The Company shall change its procedures to be consistent with the recommendation, subject to the modification noted. No later than December 15, 2005, the Company shall submit to the Insurance Division for review a copy of the "confirmation letter" notifying the insured of the change to his or her investment objectives, the meaning of such change and the method for disputing the change (as referred to in the Company's Response at page 7) and confirm that procedures which require a customer to proactively sign off on any change to his or her investment objective has been implemented consistent with this Order. No administrative penalty appears warranted under these circumstances.

15. In the (XIII) VARIABL.E UNIVERSAL LIFE - REPORTS TO POLICYHOLDERS section of the Report (pages 21 and 22), the examiners discuss two violations of Regulation 88-3, Regulation 88-3 §, Art. IX, § (1) requires that reports to policyholders show both projected cash value and cash surrender value as of one year from the period covered by the report. The examiners note that they discovered 68 policy reports which reported "N/A" in the portion of the report which was supposed to provide these values.

The examiners also report that Regulation 88-3, Art. IX, § (l)(iii) requires that if the projected value is less than zero a warning message must be included "which states that the policy may be in danger of terminating without value in the next twelve (12) months unless additional premium is paid." The examiners note that the Company's warning does not comply with the Regulation and recommend appropriate amendments. (Recommendation No. 11, Report at page 25.)

During the course of the exam, the Company explained that the "N/A" notation on certain policyholder reports was a function of some premium payments not clearing prior to the statement date, thus causing the N/A reference. However, during the exam, the Company indicated to the examiners that revisions to the statement generating system would be made to address the problem and N/A would no longer appear on the statements.

In its Response (page 8), the Company disputes the examiners' assertion that the warnings provided to the policyholders fail to comply with the Regulation. Specifically, they Company notes that in addition to the warning referenced by the examiners, policy statements that are in danger of terminating include the following warning "Based on these assumptions your policy may be in danger of terminating without value in the next 12 months unless additional premiums are paid." (Response at page 8.) As such, the Company asks that the third and sixth paragraphs of the Report not be adopted.

Upon consideration, the undersigned adopts this portion of the Report, but does not adopt the third and fifth paragraphs of this section (Report pages 2 1 and 22) as requested by the Company. It appears that the policy statements do, in fact, comply with Regulation 88-3, Art. IX, § (1)(iii). No administrative penalty appears warranted under these circumstances.


16. The Report is adopted in its entirety without modification unless expressly stated to the contrary herein.

17. As discussed more fully in Paragraph 7 above, discussing the (V) CLAIMS PROCEDURES AND PROCESSING - (A) Claims Practices and Procedures Not in Compliance With 8 V.S.A. § 3665 section of the Report, the Company shall conduct an audit and report to the Department no later than December 15, 2005. As discussed above, upon approval of the report, the Company shall undertake a remediation program paying withheld interest that exceeds $25.00 per policy.

18. As more fully discussed in Paragraph 10 above, discussing the (X) LIFE INSURANCE ILLUSTRATIO S section of the Report , the Company shall pay an administrative penalty of$1,000 for the noted violations of Regulation 99-1 § 10. Such payment should occur no later than ten days from the expiration date of the appeal deadline of Order.

19. As more fully discussed in Paragraph II above, discussing the (XII) SALES AND MARKETING- (A) INCOMPLETE/INCORRECT APPLICATIONS section of the Report, reference to Policy 46624317 shall not be considered part of the Report because it does not involve the Company.

20. As discussed in Paragraph II above, addressing the (XII) SALES AND MARKETING -(A) INCOM PLETE/INCORRECT APPLICATIONS section of the Report, the Company shall pay a $1,500 administrative penalty for the application errors noted by the examiners.

21. As discussed more fully in Paragraph 13 above, addressing the (XII) SALES AND MARKETING- (B) SUITABILITY- (i) MainStay Variable Annuities section of the Report, no later than December 15, 2005, the Company shall confirm, in writing, that it has implemented methods to allow it to monitor sales made through Dealers in order to ensure compliance with applicable insurance laws.

22. As discussed more fully in Paragraph 14 above, discussing the (XII) SALES AND l\1ARKE TI JIIG- (B) SUITABILITY- (iii) Rectifying Unsuitable Applications section of the Report, the Company shall implement procedures requiring a customer signature to amend the investment objective if the objective is changed to match the chosen premium allocation. The Company shall submit, no later than December 15, 2005, written confirmation to the Department indicating that such a procedure has been implemented. The Company shall also submit to the Department, for its approval, the confirmation letter used to notify insureds that the investment objective has been modified. Such confirmation shall be submitted no later than December 15, 2005.

23. All penalties described above shall be paid to the Department no later than 10 days after the expiration of the appeal deadline of this Order, or other administrative or judicial order as appropriate.


1 The market conduct examination focused on marketing and sales, consumer complaints, claims procedures and processing, and replacement procedures from January 1, 2000 to December 31, 2002. (Report at page 3.)

2 The judgment rate in Vermont is 12% interest per annum. 9 V.S.A. § 4la.

3 Or the rate paid on proceeds left on deposit if higher.

4 The Company's attention is further directed to 27 V S A § 1210 which imposes certain obligations on life and annuity companies even when a final executed proof of loss has not been received.

5 The date of payment shall refer to either the date that the check was issued or, in the event of an electronic transfer, the date the transfer was made.

6 Refunds shall also accrue interest from the date the benefits were paid until the refunds are paid. Pursuant to 9 V.S.A. § 41a interest shall be calculated on the refunds exceeding $25.00 at 12% simple interest per annum.

7 For policies and contracts issued before March 1, 2002, files were examined for compliance with Regulation 88-2; for contracts issued after March 1, 2002, files were examined for compliance with Regulation I-2001-3.

8 The examiners specifically recommend that if a person has a “moderate” risk profile, the majority of their investments should not be in high or highest risk investments.

9 Representatives of the Securities Division confirm that a 60% allocation in higher or highest risk investments for a customer with a moderate- risk tolerance would be unusual.

10 Although this sentence is somewhat ambiguous, the Company has indicated that the reviewer must discuss the matter with either the registered representative that sold the policy or the customer.