Draft: 7/2/09
Revisions to Model 275
Underlining and overstrikes show the changes from the existing model. Comments are being requested on this draft. Comments should be sent by Aug. 7, 2009 to Jolie Matthews at .
SUITABILITY IN ANNUITY TRANSACTIONS
MODEL REGULATION
Table of Contents
Section 1. Purpose
Section 2. Scope
Section 3. Authority
Section 4. Exemptions
Section 5. Definitions
Section 6. Duties of Insurers and Insurance Producers to Recommend Suitable Products
Section 7. Insurer Supervision System
Section 8. Insurer Supervision System for Non-FINRA Member Broker-Dealer Distribution
Section 9. Insurer Supervision System for Security Broker-Dealer Supervised Distribution
Section 10. Supervision by Responsible Insurance Agency
Section 11. FINRA Member Broker-Dealer Distribution and Supervision
Section 12. Insurance Agency and Insurance Producer Duties
Section 13. Responsible Insurance Agency and Insurance Producer Training Duties
Section 14. Standards for Qualified Reviewers
Section 15. NAIC Life Insurance Committee Guidance
Section 71116. Mitigation of Responsibility
Section 81217. [Optional] Recordkeeping
Section 1. Purpose
A. The purpose of this regulation is to set forth standards and procedures for recommendations to consumers that result in a transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.
B. Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation.
Drafting Note: The language of Subsectionsubsection B comes from the NAIC Unfair Trade Practices Act. If a stateState has adopted different language, it should be substituted for Subsectionsubsection B.
Section 2. Scope
This regulation shall apply to any recommendation to purchase or exchange an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the purchase or exchange recommended.
Section 3. Authority
This regulation is issued under the authority of [insert reference to enabling legislation].
Drafting Note: States may wish to use the Unfair Trade Practices Act as enabling legislation or may pass a law with specific authority to adopt this regulation.
Section 4. Exemptions
Unless otherwise specifically included, this regulation shall not apply to recommendations or transactions involving:
A. Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this regulation;
B. Contracts used to fund:
(1) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);
(2) A plan described by Sections 401(a), 401(k), 403(b), 408(k) or 408(p) of the Internal Revenue Code (IRC), as amended, if established or maintained by an employer;
(3) A government or church plan defined in Section 414 of the IRC, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization under Section 457 of the IRC;
(4) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;
(5) Settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or
(6) Formal prepaid funeral contracts.
Section 5. Definitions
A. “Annuity” means a fixed annuity or variable annuity that is individually solicited, whether the product is classified as an individual or group annuity.
B. “FINRA” means the Financial Industry Regulatory Authority or a succeeding agency.
C. “Includes,” “include” or “including” mean including, but not limited to.
D. (1) “Insurance agency” means a person or entity, other than an officer or employee of an insurer, which receives compensation, directly or indirectly, for managing the sales of an insurer’s annuities by insurance producers.
(2) “Insurance agency” includes field marketing organizations and independent marketing organizations.
E. “Insurance producer” means an individual required to be licensed under the laws of this State to sell, solicit or negotiate insurance, including annuities.
BF. “Insurer” means a company required to be licensed under the laws of this stateState to provide insurance products, including annuities.
C. “Insurance producer” means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities.
G. “NAIC Life Insurance Committee” means the committee or body of the National Association of Insurance Commissioners designated to develop and publish guidance related to this regulation.
H. “Qualified reviewer” means a firm or person who conducts an audit or inspection required under this regulation.
DI. “Recommendation” means advice provided by an insurance producer, or an insurer where no producer is involved, to an individual consumer that results in a purchase or exchange of an annuity in accordance with that advice.
J. “Responsible insurance agency” means an insurance agency that an insurer contractually requires to supervise insurance producers under section 10A of this regulation or, for the purpose of section 13D of this regulation, the insurer if the insurer agrees in its contract with the insurance agency to perform the functions required under section 13D of this regulation.
K. “Suitability information” means information that is reasonably appropriate to determine the suitability of a recommendation, including the following:
(1) Age;
(2) Annual income;
(3) Annual expenses;
(4) Financial situation and needs, including reasonably anticipated future changes in living circumstances;
(5) Investment experience;
(6) Investment objectives;
(7) Intended use of the annuity;
(8) Investment time horizon;
(9) Existing assets, including investment and life insurance holdings;
(10) Liquidity needs;
(11) Liquid assets;
(12) Liquid net worth;
(13) Risk tolerance;
(14) Source of funding, including:
(a) Cost and benefits of any replaced financial product, including death benefits, long term care and similar policy benefits; and
(b) Surrender charges, conditional deferred sales charges or other penalties or cost imposed;
(15) Tax status; and
(16) Any other information the insurer requires the insurance producer to consider prior to making a recommendation.
L. “Suitability requirement” means [insert reference to this regulation and to State law or regulations that govern advertising, misrepresentation or disclosures related to sales of annuities] and, with respect to products subject to regulation by FINRA, FINRA regulations governing the suitability of, or misrepresentation or disclosures in connection with, the sale of those products, including FINRA rules 2110, 2310, and 2821 or substantially similar FINRA rules.
M. “Supervision system” means a supervision system that complies with sections 7, 8 and 9 of this regulation.
Section 6. Duties of Insurers and of Insurance Producers to Recommend Suitable Products
A. SUITABLE RECOMMENDATION REQUIRED. A recommendation In recommending to a consumer theto purchase of an annuity, or theto exchange of an annuity that results in another insurance transaction or series of insurance transactions, theby a insurance producer, or the insurer where no producer is involved, shall havebe reasonable grounds for believing that the recommendation is suitable for the consumer based on a reasonable assessment of the basis of the facts disclosed by the consumer as to his or her investments and other insurance products and as to his or her financial situation and needs, including the consumer’s suitability information.
B. RECOMMENDATION MUST BE BASED ON CLIENT’S SUITABILITY INFORMATION. Prior to the execution of a purchase or exchange of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the suitability information concerning:(1) The consumer’s financial status;
(2) The consumer’s tax status;
(3) The consumer’s investment objectives; and
(4) Such other information used or considered to be reasonable by the insurance producer, or the insurer where no producer is involved, in making recommendations to the consumer.
C. INSURER DUTY TO MAKE SUITABLE SALES.
(1) An insurer shall not issue an annuity recommended to a consumer unless the annuity is suitable based on the suitability information provided by the consumer at the time of sale.
(2) Nothing in this regulation prohibits an insurer from issuing an annuity that is not recommended.
(3) Any penalty for violation of this subsection is subject to section 16 of this regulation.
NOTE: INTERESTED PARTIES ARE ASKED TO COMMENT ON WHETHER A PROVISION SHOULD BE INCLUDED THAT RESTRICTS OR PROHIBITS PRODUCER COMPENSATION FOR THE SALE OF AN ANNUITY THAT IS NOT RECOMMENDED AND WHEN THE PRODUCER DOES NOT OBTAIN THE CONSUMER’S SUITABILITY INFORMATION.
CD. INACCURATE OR INCOMPLETE SUITABILITY INFORMATION.
(1) Except as provided under Paragraph (2) of this subsection, neither Neither an insurance producer, nor an insurer where no producer is involved, shall have any obligation to a consumer under Ssubsection A related to any recommendation if a consumer:
(a) Refuses to provide relevant information requested by the insurer or insurance producer;
(b)(a) Decides to enter into an insurance transaction that is not based on a recommendation of the insurer or insurance producer; or
(c)(b) Fails to provide complete or accurate information, and the failure is unknown to the insurer or insurance producer.
(2) An insurer shall not issue a recommended annuity, and an insurance producer shall not recommend an annuity if the consumer fails to provide complete suitability information unless:
(a) The consumer provides information relating to each element of suitability information that is sufficient to allow the insurer or insurance producer to reasonably determine the annuity is suitable; and
(b) AnThe insurer or insurance producer’s recommendation subject to Paragraph (1) shall beis reasonable under all the circumstances actually known to the insurer or insurance producer at the time of the recommendation.
D. (1) An insurer either shall assure that a system to supervise recommendations that is reasonably designed to achieve compliance with this regulation is established and maintained by complying with Paragraphs (3) to (5) of this subsection, or shall establish and maintain such a system, including, but not limited to:
(a) Maintaining written procedures; and
(b) Conducting periodic reviews of its records that are reasonably designed to assist in detecting and preventing violations of this regulation.
(2) A general agent and independent agency either shall adopt a system established by an insurer to supervise recommendations of its insurance producers that is reasonably designed to achieve compliance with this regulation, or shall establish and maintain such a system, including, but not limited to:
(10) Maintaining written procedures; and
(11) Conducting periodic reviews of records that are reasonably designed to assist in detecting and preventing violations of this regulation.
(3) An insurer may contract with a third party, including a general agent or independent agency, to establish and maintain a system of supervision as required by Paragraph (1) with respect to insurance producers under contract with or employed by the third party.
(4) An insurer shall make reasonable inquiry to assure that the third party contracting under Paragraph (3) of this subsection is performing the functions required under Paragraph (1) of this subsection and shall take such action as is reasonable under the circumstances to enforce the contractual obligation to perform the functions. An insurer may comply with its obligation to make reasonable inquiry by doing all of the following:
(12) The insurer annually obtains a certification from a third party senior manager who has responsibility for the delegated functions that the manager has a reasonable basis to represent, and does represent, that the third party is performing the required functions; and
(13) The insurer, based on reasonable selection criteria, periodically selects third parties contracting under Paragraph (3) of this subsection for a review to determine whether the third parties are performing the required functions. The insurer shall perform those procedures to conduct the review that are reasonable under the circumstances.
(5) An insurer that contracts with a third party pursuant to Paragraph (3) of this subsection and that complies with the requirements to supervise in Paragraph (4) of this subsection shall have fulfilled its responsibilities under Paragraph (1) of this subsection.
E. RECOMMENDATIONS TO BE INCLUDED IN SUPERVISON SYSTEM. (6) An insurer, general agent or independentinsurance agency is not required by Paragraph (1) or (2) of this subsectionsection 7, 8 or 9 of this regulation to:
(14) Review, or provide for review of, all insurance producer solicited transactions; or
Include include in its supervision systemof supervision an insurance producer’s recommendations to consumers of products other than the annuities offered by the insurer, general agent or independentinsurance agency.
(7) A general agent or independent agency contracting with an insurer pursuant to Paragraph (3) of this subsection shall promptly, when requested by the insurer pursuant to Paragraph (4) of this subsection, give a certification as described in Paragraph (4) of this subsection or give a clear statement that it is unable to meet the certification criteria.
(8) No person may provide a certification under Paragraph (4)(a) of this subsection unless:
(a) The person is a senior manager with responsibility for the delegated functions; and
(b) The person has a reasonable basis for making the certification.
EF. COORDINATION WITH FINRA RULES. Compliance with the National Association of Securities DealersFINRA Conduct Rules pertaining to suitability shall satisfy the requirements under this section for the recommendation of variable annuities that are securities. However, nothing in this subsection shall limit the insurance commissioner’s ability to enforce the provisions of this regulation.
Drafting Note: This subsection is intended to grant a safe harbor under this section when the NASD has reviewed a transaction and found that itsuitability of recommendation of an annuity is regulated by, and complies with, the NASDFINRA Conduct Rules pertaining to suitability.
Section 7. Insurer Supervision System
A. SUPERVISION SYSTEMS AND PROCEDURES. An insurer that sells annuities shall establish and maintain systems and procedures that are reasonably designed to prevent, detect and remedy violations of the suitability requirement.
B. REVIEW OF COMPLAINTS AND ENFORCEMENT ACTIONS. An insurer shall include the following in its supervision system:
(1) Systems and procedures for complete and documented investigation and disposition of any State insurance department, State security regulator or FINRA enforcement action against an insurance producer or insurance agency involving the sale of the insurer’s annuity, including, [after June 30, 2011 or six (6) months after the effective date of this regulation, whichever is later] when reasonably appropriate, investigation of the insurance producer or insurance agency sales practices to identify and provide appropriate corrective action for any additional consumers harmed by misconduct; and