BILL NUMBER: AB 689 CHAPTERED
BILL TEXT
CHAPTER 295
FILED WITH SECRETARY OF STATE SEPTEMBER 21, 2011
APPROVED BY GOVERNOR SEPTEMBER 20, 2011
PASSED THE SENATE AUGUST 22, 2011
PASSED THE ASSEMBLY AUGUST 25, 2011
AMENDED IN SENATE JUNE 27, 2011
AMENDED IN ASSEMBLY MAY 27, 2011
AMENDED IN ASSEMBLY MAY 4, 2011
AMENDED IN ASSEMBLY APRIL 26, 2011
AMENDED IN ASSEMBLY MARCH 31, 2011
INTRODUCED BY Assembly Member Blumenfield
(Principal coauthor: Senator Calderon)
(Coauthors: Assembly Members Carter, Feuer, Hagman, Solorio, and
Wieckowski)
(Coauthors: Senators Anderson, Correa, Gaines, Lieu, Lowenthal,
Price, and Wyland)
FEBRUARY 17, 2011
An act to add Article 9 (commencing with Section 10509.910) to
Chapter 5 of Part 2 of Division 2 of the Insurance Code, relating to
annuity transactions.
LEGISLATIVE COUNSEL'S DIGEST
AB 689, Blumenfield. Insurance: annuity transactions.
Existing law requires agents and insurers to fulfill certain
requirements with regard to the replacement of existing life
insurance policies and annuities.
This bill would require insurers and insurance producers, as
defined, to comply with specified requirements regarding the
purchase, exchange, or replacement of an annuity recommended to a
consumer, including, but not limited to, having reasonable grounds
for the insurance producer believing the annuity transaction would be
suitable for the consumer, as provided. The bill would also prohibit
an insurance producer from selling annuities unless he or she has
received Insurance Commissioner-approved training, and would
authorize the commissioner to require certain actions by, and impose
sanctions and penalties on, insurers and their agents for a violation
of the bill's provisions.
The bill would further provide that sales by a Financial Industry
Regulatory Authority (FINRA) broker-dealer that comply with the
suitability and supervision requirements of FINRA shall be deemed to
satisfy the suitability and supervision requirements of this bill, as
specified.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. The Legislature finds and declares all of the
following:
(a) The Legislature recognizes that annuities are complex,
long-term financial insurance products designed to provide payments
to the consumer at specified intervals, usually after retirement.
(b) The Legislature also recognizes that seniors and other
California consumers who seek to safeguard funds for retirement and
other purposes may be targeted for the sale of unsuitable annuities,
resulting in their purchasing annuities that are unsuitable for their
financial goals and circumstances, without understanding the complex
provisions of the annuities that they purchased.
(c) The Legislature further finds that as a result of purchasing
unsuitable annuities without understanding their complex provisions,
a consumer who has circumstances arise that require him or her to
withdraw funds from the annuity may find himself or herself unable to
withdraw significant funds from the annuity without paying expensive
charges, large surrender penalties, and the forfeiture of income and
other benefits of the insurance, thus making the consumer more
dependent on the advice, skill, and training of his or her insurance
producer and insurer, hence the concern to strengthen annuity
suitability requirements in California.
(d) The Legislature recognizes that President Obama signed the
federal Dodd-Frank Wall Street Reform and Consumer Protection Act
(Public Law 111-203), a historic and comprehensive financial
regulatory reform bill, which in Section 989J promotes the adoption
of laws and regulations based on the National Association of
Insurance Commissioners' (NAIC) "Suitability in Annuity Transactions"
Model that governs suitability requirements in the sale of annuities
in order to preserve the authority for state insurance regulators to
oversee the sales practices of these products.
(e) The Legislature further recognizes that the NAIC "Suitability
in Annuity Transactions" Model establishes a regulatory framework
that requires insurers to establish a system to supervise
recommendations so that the insurance needs and financial objectives
of consumers are appropriately addressed and that holds insurers
responsible for ensuring that annuity transactions are suitable,
whether or not the insurer contracts with a third party to supervise
or monitor the recommendations made in the marketing and sale of
annuities.
(f) The Legislature further recognizes that preservation of the
current exemption from federal regulation of fixed annuities is
beneficial to both consumers and the insurance businesses of this
state.
SEC. 2. Article 9 (commencing with Section 10509.910) is added to
Chapter 5 of Part 2 of Division 2 of the Insurance Code, to read:
Article 9. Suitability Requirements for Annuity Transactions
10509.910. The purpose of this article is to require insurers to
establish a system to supervise recommendations and to set forth
standards and procedures for recommendations to consumers that result
in transactions involving annuity products, so that the insurance
needs and financial objectives of consumers at the time of the
transaction are appropriately addressed.
10509.911. (a) This article shall apply to any recommendation to
purchase, exchange, or replace an annuity made to a consumer that
results in the purchase, exchange, or replacement that was
recommended.
(b) Nothing in this act shall be interpreted to preclude, preempt,
or otherwise interfere with the application of any other laws of
this state that may apply in any matter involving the sale of an
annuity that is subject to this article.
10509.912. Unless otherwise specifically included, this article
shall not apply to transactions involving any of the following:
(a) Direct response solicitations where there is no recommendation
based on information collected from the consumer pursuant to this
article.
(b) Contracts used to fund any of the following:
(1) An employee pension or welfare benefit plan that is covered by
the federal Employee Retirement and Income Security Act (ERISA) (29
U.S.C. Sec. 1001 et seq.).
(2) A plan described by Section 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.
(6) Formal prepaid funeral contracts.
10509.913. (a) "Annuity" means an annuity that is an insurance
product under California law that is individually solicited, whether
the product is classified as an individual or group annuity.
(b) "Commissioner" means the Insurance Commissioner.
(c) "Continuing education credit" or "CE credit" means one
continuing education credit hour as defined in Section 2188.2(i) of
Title 10 of the California Code of Regulations.
(d) "Continuing education provider" or "CE provider" means an
individual or entity that is certified to offer continuing education
courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of
the California Code of Regulations.
(e) "Insurance producer" means a person required to be licensed
under California law to sell, solicit, or negotiate insurance,
including annuities. An insurance producer is also referred to in
this article as a "producer."
(f) "Insurer" means a company required to be licensed or to hold a
certificate of authority, or both, under California law to provide
insurance products, including annuities.
(g) "Recommendation" means advice or guidance provided or made, by
an insurance producer or by an insurer, to an individual consumer
that results in a purchase, exchange, or replacement of an annuity in
accordance with that advice or guidance.
(h) "Replacement" means a transaction in which a new policy or
contract is to be purchased, and it is known or should be known to
the proposing producer, or to the proposing insurer, whether or not
there is a producer, that by reason of the transaction, an existing
policy or contract has been or is to be any of the following:
(1) Lapsed, forfeited, surrendered or partially surrendered,
assigned to the replacing insurer, or otherwise terminated.
(2) Converted to reduced paid-up insurance, continued as extended
term insurance, or otherwise reduced in value by the use of
nonforfeiture benefits or other policy values.
(3) Amended so as to effect either a reduction in benefits or a
reduction in the term for which coverage would otherwise remain in
force or for which benefits would be paid.
(4) Reissued with any reduction in cash value.
(5) Used in a financed purchase.
(i) "Suitability information" means information that is reasonably
appropriate to determine the suitability of a recommendation,
including all of the following:
(1) Age.
(2) Annual income.
(3) Financial situation and needs, including the financial
resources used for the funding of the annuity.
(4) Financial experience.
(5) Financial objectives.
(6) Intended use of the annuity.
(7) Financial time horizon.
(8) Existing assets, including investment and life insurance
holdings.
(9) Liquidity needs.
(10) Liquid net worth.
(11) Risk tolerance.
(12) Tax status.
(13) Whether or not the consumer has a reverse mortgage.
10509.914. (a) In recommending to a consumer the purchase of an
annuity or the exchange of an annuity that results in another
insurance transaction or series of insurance transactions, the
insurance producer, or an insurer if no producer is involved, shall
have reasonable grounds for believing that the recommendation is
suitable for the consumer on 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, and that there is a reasonable
basis to believe all of the following:
(1) The consumer has been reasonably informed of various features
of the annuity, such as the potential surrender period and surrender
charge, potential tax penalty if the consumer sells, exchanges,
surrenders, or annuitizes the annuity, mortality and expense fees,
investment advisory fees, potential charges for and features of
riders, limitations on interest returns, insurance and investment
components, and market risk.
(2) The consumer would receive a tangible net benefit from the
transaction.
(3) The particular annuity as a whole, the underlying subaccounts
to which funds are allocated at the time of purchase or exchange of
the annuity, and riders and similar product enhancements, if any, are
suitable, and in the case of an exchange or replacement, the
transaction as a whole is suitable, for the particular consumer based
on his or her suitability information.
(4) In the case of an exchange or replacement of an annuity, the
exchange or replacement is suitable, including taking into
consideration all of the following:
(A) Whether the consumer will incur a surrender charge, be subject
to the commencement of a new surrender period, lose existing
benefits, such as death, living, or other contractual benefits, or be
subject to increased fees, investment advisory fees, or charges for
riders and similar product enhancements.
(B) Whether the consumer would benefit from product enhancements
and improvements.
(C) Whether the consumer has had another annuity exchange or
replacement and, in particular, an exchange or replacement within the
preceding 60 months.
(b) Prior to the execution of a purchase, exchange, or replacement
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 consumer's suitability information.
(c) Except as permitted under subdivision (d), an insurer shall
not issue an annuity recommended to a consumer unless there is a
reasonable basis to believe the annuity is suitable based on the
consumer's suitability information. The preceding sentence and
subdivision (d) notwithstanding, neither a producer nor an insurer
shall in any event recommend to a person 65 years of age or older the
sale of an annuity to replace an existing annuity that requires the
insured to pay a surrender charge for the annuity that is being
replaced, where purchase of the annuity does not confer a substantial
financial benefit over the life of the policy to the consumer, so
that a reasonable person would believe the purchase is unnecessary.
(d) (1) Except as provided under paragraph (2), neither an
insurance producer nor an insurer shall have any obligation to a
consumer under subdivision (a) or (c) related to an annuity
transaction if any of the following occur:
(A) No recommendation is made.
(B) A recommendation was made and was later found to have been
prepared based on materially inaccurate information provided by the
consumer.
(C) A consumer refuses to provide relevant suitability information
and the annuity transaction is not recommended.
(D) A consumer decides to enter into an annuity transaction that
is not based on a recommendation of the insurer or the insurance
producer.
(2) An insurer's issuance of an annuity subject to paragraph (1)
shall be reasonable under all the circumstances which are actually
known, or which after reasonable inquiry should be known, to the
insurer or the insurance producer at the time the annuity is issued.
(e) An insurance producer or, where no insurance producer is
involved, the responsible insurer representative, shall at the time
of sale do all of the following:
(1) Make a record of any recommendation subject to subdivision
(a).
(2) Obtain a customer-signed statement documenting the customer's
refusal to provide suitability information, if any.
(3) Obtain a customer-signed statement acknowledging that an
annuity transaction is not recommended if the customer decides to
enter into an annuity transaction that is not based on the insurance
producer's or insurer's recommendation.
(f) (1) An insurer shall establish a supervision system that is
reasonably designed to achieve the insurer's and its insurance
producers' compliance with this article, including, but not limited
to, all of the following:
(A) The insurer shall maintain reasonable procedures to inform its
insurance producers of the requirements of this article and shall
incorporate the requirements of this article into relevant insurance
producer training manuals.
(B) The insurer shall establish standards for insurance producer
product training and shall maintain reasonable procedures to require
its insurance producers to comply with the requirements of Section
10509.915.
(C) The insurer shall provide product-specific training and
training materials which explain all material features of its annuity
products to its insurance producers.
(D) The insurer shall maintain procedures for review of each
recommendation prior to issuance of an annuity that are designed to
ensure that there is a reasonable basis to determine that a
recommendation is suitable. The review procedures may apply a
screening system for the purpose of identifying selected transactions
for additional review and may be accomplished electronically or
through other means, including, but not limited to, physical review.
An electronic or other system may be designed to require additional
review only of those transactions identified for additional review by
the selection criteria.
(E) The insurer shall maintain reasonable procedures to detect
recommendations that are not suitable. This may include, but is not
limited to, confirmation of consumer suitability information,
systematic customer surveys, interviews, confirmation letters, and
programs of internal monitoring. Nothing in this subparagraph
prevents an insurer from complying with this subparagraph by applying
sampling procedures or by confirming suitability information after
issuance or delivery of the annuity.
(F) The insurer shall annually provide a report to its senior
management, including to the senior manager responsible for audit
functions, which details a review, with appropriate testing,
reasonably designed to determine the effectiveness of the supervision
system, the exceptions found, and corrective action taken or
recommended, if any.
(2) (A) Nothing in this subdivision restricts an insurer from
contracting for performance of a function, including maintenance of
procedures, required under paragraph (1). An insurer is responsible
for taking appropriate corrective action, and may be subject to
sanctions and penalties pursuant to Section 10509.916 regardless of
whether the insurer contracts for performance of a function and
regardless of the insurer's compliance with subparagraph (B). An
insurer is responsible for the compliance of its insurance producer
with the provisions of this article regardless of whether the insurer
contracts for performance of a function required under this
subdivision and regardless of the insurer's compliance with
subparagraph (B).
(B) An insurer's supervision system under paragraph (1) shall
include reasonable supervision of contractual performance under this
subdivision. This includes, but is not limited to, both of the
following:
(i) Reasonable monitoring and, as appropriate, conducting audits
to ensure that the contracted function is properly performed.
(ii) Annually obtaining a certification from a senior manager who
has responsibility for the contracted function that the manager has a
reasonable basis to represent, and does represent, that the function
is properly performed.
(3) An insurer is not required to include in its system of
supervision an insurance producer's recommendations to consumers of
products other than the annuities offered by the insurer.
(g) An insurance producer or insurer shall not dissuade, or
attempt to dissuade, a consumer from any of the following:
(1) Truthfully responding to an insurer's request for confirmation
of suitability information.
(2) Filing a complaint.
(3) Cooperating with the investigation of a complaint.
(h) (1) This subdivision applies to FINRA broker-dealer sales of
variable and fixed annuities.
(2) Sales by FINRA broker-dealers that comply with the suitability
and supervision system requirements set forth in FINRA Rule 2330, or
any successor rule, shall satisfy the suitability and supervision
system requirements of this article, provided that the suitability
criteria used also include both of the following:
(A) The consumer's income.
(B) The intended use of the annuity.
(3) Except as provided in paragraphs (1) and (2), all other
provisions of this article remain applicable to these broker-dealer
sales.
(4) Nothing in this subdivision shall limit the commissioner's
ability to enforce, including conducting investigations related to,
the provisions of this article.
(5) "FINRA" means the Financial Industry Regulatory Authority or a
successor agency.
10509.915. (a) An insurance producer shall not solicit the sale
of an annuity product unless the insurance producer has adequate
knowledge of the product to recommend the annuity and the insurance
producer is in compliance with the insurer's standards for product
training. An insurance producer may rely on insurer-provided
product-specific training standards and materials to comply with this
subdivision.
(b) (1) An insurance producer who is otherwise entitled to engage
in the sale of annuity products shall complete a one-time eight
credit-hour annuity training course approved by the commissioner and
provided by a commissioner-approved education provider, prior to
commencing the transaction of annuities, pursuant to subdivision (a)
of Section 1749.8.
(2) In addition to the requirement set forth in paragraph (1),
every producer who engages in this state in the sale of annuity
products shall satisfactorily complete four continuing education
credits prior to license renewal every two years, pursuant to
subdivision (b) of Section 1749.8.
(3) The training required under this subdivision shall include
information on all of the following topics:
(A) The types of annuities and various classifications of
annuities.
(B) Identification of the parties to an annuity.
(C) How fixed, variable, and indexed annuity contract provisions
affect consumers.
(D) The application of income taxation of qualified and
nonqualified annuities.
(E) The primary uses of annuities.
(F) Prohibited sales practices, the recognition of indicators that
a prospective insured may lack the short-term memory or judgment to
knowingly purchase an insurance product, and fraudulent and unfair
trade practices, as well as replacement and disclosure requirements
for sales of annuities, all as provided under California law,
including, but not limited to, this article.
(4) Providers of courses intended to comply with this section
shall cover all topics listed in the prescribed outline and shall not
present any marketing information or provide training on sales
techniques or provide specific information about a particular insurer'
s products. Additional topics may be offered in conjunction with and
in addition to the required outline.
(5) A provider of an annuity training course intended to comply
with this section shall register as a CE provider in this state and
comply with the rules and guidelines applicable to insurance producer
continuing education courses as set forth in Section 1749.8, in
subdivisions (d) and (e) of Section 1749.1, and in Sections 2188,
2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and
2188.9 of Title 10 of the California Code of Regulations.
(6) Annuity training courses may be conducted and completed by
classroom or self-study methods in accordance with Sections 2188.2
and 2188.3 of Title 10 of the California Code of Regulations.
(7) Providers of annuity training shall comply with the reporting
requirements and shall issue certificates of completion in accordance
with Section 2188.8 of Title 10 of the California Code of
Regulations.
(8) An insurer shall verify that an insurance producer has
completed the annuity training required under this section before
allowing the producer to sell an annuity product for that insurer. An
insurer may satisfy its responsibility under this paragraph by
obtaining certificates of completion of the training course or
obtaining reports provided by commissioner-sponsored database systems
or vendors or from a reasonably reliable commercial database vendor
that has a reporting arrangement with approved insurance education
providers.
10509.916. (a) An insurer is responsible for compliance with
this article. If a violation occurs, either because of the action or
inaction of the insurer or its insurance producer, the commissioner
may, in addition to any other available penalties, remedies, or
administrative actions, order any or all of the following:
(1) An insurer to take reasonably appropriate corrective action
for any consumer harmed by the insurer's, or by its insurance
producer's, violation of this article.
(2) A managing general agent or an insurance producer to take
reasonably appropriate corrective action for any consumer harmed by
the insurance producer's violation of this article.
(3) Penalties and sanctions pursuant to Section 10509.9. For
purposes of Section 10509.9, this article shall be deemed to be part
of Article 8 (commencing with Section 10509), and the commissioner
may in a single enforcement action seek penalties for a first and a
second or subsequent violation.
(b) Nothing in this article shall affect any obligation of an
insurer for acts of its agents, or any consumer remedy or cause of
action that is otherwise provided for.
10509.917. (a) Insurers and insurance producers shall maintain or
be able to make available to the commissioner records of the
information collected from the consumer and other information used in
making the recommendations that were the basis for insurance
transactions for five years after the insurance transaction is
completed by the insurer. An insurer is permitted, but shall not be
required, to maintain documentation on behalf of an insurance
producer.
(b) Records required to be maintained by this article may be
maintained in paper, photographic, microprocess, magnetic,
mechanical, or electronic media, or by any process that accurately
reproduces the actual document.
10509.918. The commissioner shall, from time to time as
conditions warrant, after notice and hearing, adopt reasonable rules
and regulations, and amendments and additions thereto, as are
necessary to administer this article. The commissioner may adopt
regulations not inconsistent with this article pursuant to Section
989J of the federal Dodd-Frank Wall Street Reform and Consumer
Protection Act (Public Law 111-203).