BILL ANALYSIS                                                                                                                                                                                                    

                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair

          AB 689 (Blumenfield)Hearing Date: June 22, 2011 

          As Amended: May 27, 2011
          Fiscal:             Yes
          Urgency:       No

           SUMMARY    Would require adoption of more stringent procedures to 
          assess suitability of proposed annuity sales for customers, 
          including requiring insurers to establish a system to supervise 
          the suitability of annuity sale recommendations. In addition, 
          would establish mandatory standards, procedures and processes, 
          for insurers and producers, for assessing suitability and 
          monitoring annuity sales recommendations made to consumers so 
          that the insurance needs and financial objectives of consumers 
          at the time of the transaction are appropriately addressed.  
          Existing California law 

          |                                                                |
          |   1.   California law imposes various rules (described below)  |
          |     related to the sale of annuities to California buyers but  |
          |     does not contain standards related to the "Suitability" of |
          |     Annuity Sales to the personal situation of prospective     |
          |     buyers.                                                    |
          |                                                                |
          |   2.   Regulates Unfair Practices: Establishes a comprehensive |
          |     system for the regulation of unfair practices in the       |
          |     business of insurance sale which encompasses, among other  |
          |     matters, misrepresentation and the making false or         |
          |     misleading statements.  (See California Insurance Code     |
          |     (CIC) Section 790 et seq.);                                |
          |                                                                |
          |   3.   Imposes Special Duties toward Seniors: All insurers,    |
          |     brokers, agents, and others in the transacting of          |
          |     insurance owe a prospective insured 65 years of age or     |
          |     older  a duty of honesty, good faith, and fair dealing     |
          |     which is in addition to any other duty, whether express or |


                                           AB 689 (Blumenfield), Page 2

          |     implied, that may exist; the conduct of an insurer,        |
          |     broker, or agent, or other person during the offer and     |
          |     sale of a policy or certificate prior to the purchase is   |
          |     relevant to any action alleging a breach of the duty of    |
          |     good faith and fair dealing. (See CIC Section 785);        |
          |                                                                |
          |   4.   Imposes Rules on Annuity Sales for Medi-Cal Purposes:   |
          |     Provides an annuity shall not be sold to a senior if the   |
          |     senior's purpose is to affect Medi-Cal eligibility and the |
          |     seniors assets are equal to or less that the community     |
          |     spouse resource allowance or the senior would have         |
          |     otherwise qualified for Medi-Cal (See CIC Section 789.9);  |
          |                                                                |
          |                                                                |
          |   5.   Requires 8 Hour Mandatory Annuity Sales Training:       |
          |     Requires all life agents selling annuities shall complete  |
          |     8 hours of training prior to soliciting consumers to sell  |
          |     annuities. Specific training is required in:               |
          |        a.        Topics related to annuities;                  |
          |        b.        California law, regulations, and requirements |
          |          related to annuities;                                 |
          |        c.        Prohibited sales practices;                   |
          |        d.        The recognition of indicators that a          |
          |          prospective insured may lack the short-term memory or |
          |          judgment to knowingly purchase an insurance product;  |
          |        e.        Information on fraudulent and unfair trade    |
          |          practices                                             |
          |        f.        Subject matter determined by the commissioner |
          |          to be primarily intended to promote the sale or       |
          |          marketing of annuities shall not qualify for credit   |
          |          towards the training requirement. (See CIC Section    |
          |          1749.8);                                              |
          |                                                                |
          |   6.   Prohibits "Unnecessary Replacement" of a Life or        |
          |     Annuity Policy: Imposes duties upon insurers and agents    |
          |     with respect to the replacement of life and annuity        |
          |     policies and specifies that an "unnecessary replacement",  |
          |     which constitutes a violation of this existing law, means  |
          |     a sale of an annuity to replace an existing annuity that   |
          |     requires the insured to pay a surrender charge for the     |
          |     annuity being replaced without the new transaction         |
          |     conferring a substantial financial benefit over the life   |
          |     of the policy so that a reasonable person would believe    |
          |     that the purchase is unnecessary and provides related      |
          |     presumptions to guide this law's application.  (See CIC    |
          |     Section 10509.8);                                          |


                                           AB 689 (Blumenfield), Page 3

          |                                                                |
          |   7.   Establishes a Life and Annuity Consumer Protection Fund |
          |     in the Insurance Department: Establishes until January 1,  |
          |     2015 a Life and Annuity Consumer Protection Fund in the    |
          |     Department of Insurance funded by a $1 fee on all life and |
          |     annuity policies sold in California; The funds are used to |
          |     enhance the DOI's enforcement efforts in investigating and |
          |     prosecuting financial abuse by licensees, responding to    |
          |     consumer complaints and inquiries, educating consumers,    |
          |     regulating and overseeing life insurance and annuity       |
          |     marketing and sales activity and to support district       |
          |     attorneys with prosecution. (See CIC Section 10127.17);    |
          |                                                                |
          |   8.   Prohibits Misrepresentations: Provides that insurers,   |
          |     their officers and agents, and brokers and solicitors      |
          |     shall not issue, circulate or use any statement which is   |
          |     known, or which should have been known to be a             |
          |     misrepresentation of:                                      |
          |        a.        The terms of a policy issued by the insurer   |
          |          or which is being negotiated by the person making or  |
          |          permitting the misrepresentation;                     |
          |        b.        The benefits or privileges promised           |
          |          thereunder; or                                        |
          |        c.        The future dividends payable thereunder. (See |
          |          CIC Section 780)                                      |
          |                                                                |
          |   9.   Regulates any Reverse Mortgage Issuance with an Annuity |
          |     Tie-In: Specifies that a lender or another participant in  |
          |     issuance of a reverse mortgage shall not require the       |
          |     applicant  to purchase an annuity as a condition of        |
          |     obtaining a reverse mortgage loan, nor shall the lender or |
          |     other party:                                               |
          |        a.        Participate in any form with a party engaged  |
          |          in any other financial or insurance activity unless   |
          |          the lender maintains procedural safeguards to ensure  |
          |          that individuals participating in the origination of  |
          |          the mortgage shall have no involvement with, or       |
          |          incentive to provide the prospective borrower with,   |
          |          any other financial or insurance product; or          |
          |        b.        Refer the borrower to anyone for the purchase |
          |          of an annuity or other financial or insurance product |
          |          prior to the closing of the reverse mortgage or       |
          |          before the expiration of the right of the borrower to |
          |          rescind the reverse mortgage agreement.  (See         |
          |          California Civil Code Section  1923.2(i))             |
          |                                                                |


                                           AB 689 (Blumenfield), Page 4

          |   10.    Prohibits Financial Abuse: Provides penalties for     |
          |     "Financial Abuse" of an elder or dependent adult, which is |
          |     defined as occurring when a person or entity does any of   |
          |     the following:                                             |
          |        a.        Taking, obtaining, or retaining real or       |
          |          personal property of an elder or dependent adult for  |
          |          a wrongful use or with intent to defraud, or both;    |
          |        b.        Assisting in taking, obtaining or retaining   |
          |          real or personal property of an elder or dependent    |
          |          adult for a wrongful use or with intent to defraud,   |
          |          or both;                                              |
          |        c.        Taking, obtaining , or retaining, or          |
          |          assisting in taking, obtaining, or retaining real or  |
          |          personal property of an elder or dependent adult by   |
          |          undue influence;                                      |
          |        d.        Undue influence is defined as the use, by one |
          |          in whom a confidence is reposed by another, of such   |
          |          confidence for the purpose of taking an unfair        |
          |          advantage of another's weakness of mind and it is     |
          |          deemed to have been taken, obtained, or retained for  |
          |          a wrongful use if, among other things, the person or  |
          |          entity knew or should have known that their conduct   |
          |          is likely to be harmful to the elder or dependent     |
          |          adult. (See California Welfare and Institutions Code  |
          |          Section 15610.30)                                     |
          |                                                                |
          |Existing Federal Law                                            |
          |                                                                |
          |   1.   Under the 2010 Dodd-Frank Wall Street Reform and        |
          |     Consumer Protection Act, specifically Title IX, Subtitle   |
          |     I, Section 989a of the (relating to senior investment      |
          |     protections) a state's adoption of suitability             |
          |     requirements that meet or exceed National Association of   |
          |     Insurance Commissioners' Suitability in Annuity            |
          |     Transactions Model requirements is required for a state to |
          |     participate in a program of grants to support enhanced     |
          |     protections of seniors against misleading marketing        |
          |     practices.                                                 |
          |                                                                |
          |   2.   Additionally, under Dodd-Frank Title IX, Subtitle I,    |
          |     Section 989J of the Dodd-Frank Act California's adoption   |
          |     of at least the minimum requirements NAIC Suitability in   |
          |     Annuity Transactions Model is necessary for California's   |
          |     continued jurisdiction over indexed securities.            |
          |                                                                |
          |                                                                |


                                           AB 689 (Blumenfield), Page 5

           This bill

              1.   Would enact, with limited revisions, the National 
               Association of Insurance Commissioner's Suitability in 
               Annuity Sales Transactions Model to govern the duties of 
               insurers and producers when recommending the purchase or 
               exchange of an annuity and to impose a duty that the agent 
               and insurer have reasonable grounds for believing that the 
               recommendation is suitable for the consumer on the basis of 
               the facts disclosed by the consumer.

             2.   The Act additionally imposes a secondary suitability 
               review process upon life insurers who are prohibited under 
               SB 689 from issuing "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 
               and applicable California law" (Section 10509.914 (c) at 
               page 6, Lines 37-40)

             3.   The Act also imposes producer training and annuity 
               continuing education, carrier training programs, and 
               training verification requirements.

             4.   More specifically, SB 689:

                  a.        States legislative findings and declarations 
                    as follows:

                        i.             The Legislature recognizes that 
                         annuities are complex, long-term financial 
                         investment products designed to provide payments 
                         to the consumer at specified intervals, usually 
                         after retirement.

                        ii.            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. 

                        iii.           The Legislature further finds that 


                                           AB 689 (Blumenfield), Page 6

                         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 investment, 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.

                        iv.            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. 

                        v.             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. 

                        vi.            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.


                                           AB 689 (Blumenfield), Page 7

                   b.        Declares its purpose to be requiring 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. (Section 10509.910 at Page 3, lines 22 to 

                  c.        Is made applicable 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 and provides 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. (Section 10509.911 (a) and (b)  at Page 
                    3, lines 28 to 35)
                  d.        "Recommendation" is defined as "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." 
                    (Section 10509.912 (g) at Page 4, lines 35 to 39) 

                  e.        The Act excludes from its scope (Section 
                    10509.912 at Page 3, line 36 to Page 4, line 16):

                     i.          Transactions arising from direct response 
                      solicitations where there is no recommendation based 
                      on information collected from the consumer pursuant 
                      to this article, or:

                     ii.         Contracts used to fund any of the 

                         1.               An employee pension or welfare 
                           benefit plan s covered by the 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 


                                           AB 689 (Blumenfield), Page 8

                           the Internal Revenue Code, if established or 
                           maintained by an employer;
                         3.               A government or church plan 
                           defined in Section 414 of the Internal Revenue 
                           Code, 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 Internal 
                           Revenue Code. 
                         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 

                   f.        Establishes, at subdivisions (a) and (b) of 
                    Section 10509.914 the duty of insurers and insurance 
                    producers with respect to the making of annuity 
                    recommendations (Section 10509.914 (a) and (b) at Page 
                    5, line 34 to Page 6, line 36):  

                      i.          In recommending an annuity purchase or 
                      the exchange of an annuity that results in another 
                      insurance transaction or series of insurance 
                      transactions, the 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.

                     ii.         "Suitability information" is defined in 
                      subdivision (i) of Section 10509.913 as information 
                      that is reasonably appropriate to determine the 
                      suitability of a recommendation, including all of 
                      the following (Section 10509.913 (i) at Page 5, line 
                      16 to 5, line 33) : 

                         1.               Age;
                         2.               Annual income;


                                           AB 689 (Blumenfield), Page 9

                         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; and
                         13.              Whether or not the consumer has 
                           a reverse mortgage.

                  a.        In recommending the purchase or exchange of an 
                    annuity, the producer, or the insurer where no 
                    insurance producer is involved, is required to have a 
                    reasonable basis to believe all the following (Section 
                    10509.914 (a) at Page 5, line 34 to Page 6, line 31):

                     i.          The consumer has been reasonably informed 
                      of annuity features, such as the surrender period, 
                      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.
                     ii.         The consumer would receive a tangible net 
                      benefit from the transaction.
                     iii.        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.
                     iv.         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:

                         1.               Whether the consumer will incur 


                                           AB 689 (Blumenfield), Page 10

                           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 
                         2.               Whether the consumer would 
                           benefit from product enhancements and 
                         3.               Whether the consumer has had 
                           another annuity exchange or replacement and, in 
                           particular, an exchange or replacement within 
                           the preceding 60 months.

                  a.        Prior to a purchase, exchange or annuity 
                    replacement based on a recommendation, an insurance 
                    producer or an insurer where no insurance producer is 
                    involved are to make reasonable efforts to obtain the 
                    consumer's suitability information. (Section 10509.914 
                    (b) at Page 6, lines 32 to 36)

                  b.        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. (Section 10509.914 
                    (c) at Page 6, lines 37 to 40), except that neither a 
                    producer nor an insurer has any obligation to a 
                    consumer pursuant to Subdivisions (a) and (c) of 
                    Section 10509.914 if (Sec. 10509.915 (d)(1) at Page 7, 
                    lines 9 to 21):

                     i.          No recommendation is made;
                     ii.         A recommendation was made and was later 
                      found to have been  prepared based on  materially 
                      inaccurate  information provided by the consumer;
                     iii.        A consumer refuses to provide relevant 
                      suitability information and the annuity transaction 
                      is not recommended; or 
                     iv.         A consumer decides to enter into an 
                      annuity transaction that is not based on a 
                      recommendation of the insurer or the insurance 

                  a.        However, in the instances set forth in 
                    paragraph i through iv above, an insurer's issuance of 


                                           AB 689 (Blumenfield), Page 11

                    an annuity must "be reasonable under all the 
                    circumstances which are actually known, or which after 
                    reasonable inquiry should be known, to the insurer or 
                    insurance producer at the time the annuity is issued". 
                    (Section 10509.914 (d)(2) at Page 7, lines 22 to 25)

                  b.        Agents (or the responsible insurer 
                    representative where there is no agent) are required 
                    at the time of any sale to (Section 10509.914 (e) at 
                    Page 7, lines 26 to 36):

                     i.          Keep a record of any recommendations 
                     ii.         If a customer declines to provide 
                      suitability information, obtain a signed statement 
                      to that effect;
                     iii.        If a customer decides upon an annuity 
                      transaction not based on the insurance producer's or 
                      insurer's recommendation, obtain a signed customer 
                      statement acknowledging that the transaction is not 

                  a.        Insurers are required to establish a 
                    supervision system that is reasonably designed to 
                    achieve the insurer's and its producers' compliance 
                    with AB 689, which must include, but is not limited 
                    to, all the following (Section 10509.914 (f) at Page 
                    7, line 37 to Page 8, line 29) :

                     i.          Reasonable procedures to inform its 
                      insurance producers of this law's requirements, 
                      which are to be incorporated into relevant insurance 
                      producer training manuals;
                     ii.         Standards for insurance producer product 
                      training and reasonable procedures to require 
                      producers to comply with the SB 689 and current 
                      law's education and training rules.
                     iii.        Product-specific training and training 
                      materials that explain all material features of the 
                      insurer's annuity products to its insurance 
                     iv.         Procedures for review of each annuity 
                      sales recommendation, prior to issuance, to ensure 
                      that there is a reasonable basis to determine that a 
                      recommendation is suitable. 
                     v.          Procedures to detect recommendations that 


                                           AB 689 (Blumenfield), Page 12

                      are not suitable, which may include, but is not 
                      limited to, confirmation of consumer suitability 
                      information, systematic customer surveys, 
                      interviews, confirmation letters, and programs of 
                      internal monitoring. SB 689 authorizes the use of 
                      sampling procedures and post annuity delivery 

                      NOTE: With respect to subparagraphs i., ii., and iv. 
                      above, AB 689's most recent amendments include 
                      changes suggested by committee staff to delete 3 
                      occurrences of the words "and use" after the word 
                      "maintain" where it appears on page 8 at lines 1, 6 
                      and 12. Staff was concerned the California Insurance 
                      Code includes many requirements that various 
                      procedures and practices be "maintained".  The clear 
                      implication in all these under current law is that 
                      they are to be maintained  in order to be used  . 
                      Assemblyman Blumenfield has stricken the term "and 
                      use" so as to not cast doubt on the current 
                      statutory framework of the Insurance Code that 
                      maintain already implies "use"; the term should be 
                      thus construed in the context of AB 689 as well. 

                  a.        AB 689 requires that every insurer shall 
                    annually provide a report to 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. (Section 10509.914 (f)(1)(F) at 
                    Page 8, lines 30 to 35)

                  b.        AB 689's supervision rules permit an insurer 
                    to contract with a third party for these compliance 
                    reviews, but the insurer remains obligated to 
                    supervise the performance of any such third party 
                    suitability reviewer under paragraph (1) of 
                    Subdivision (f) of Section 10509.914. An insurer is 
                    not required to include in its system of supervision 
                    producer's recommendations of products other than 
                    annuities offered by the insurer. (Section 10509.914 
                    (f)(2) at Page 8, line 36 to Page 9, line 21)

                  c.        The Act prohibits insurance producers from 


                                           AB 689 (Blumenfield), Page 13

                    dissuading or attempting to dissuade, a consumer from 
                    (Section 10509.915 (g) at Page 9, lines 5 to 10): 

                     i.          Truthfully responding to an insurer's 
                      request for confirmation of suitability information; 

                     ii.         Filing a complaint; or
                     iii.        Cooperating with the investigation of a 

                  a.        Subdivision (h) (1) of Section 10509.914 is a 
                    provision which deviates from the NAIC Model by 
                    agreement with the California DOI and sets the rules 
                    concerning California supervision for FINRA 
                    broker-dealer sales of variable and fixed annuities. 
                    (Section 10509.914(h) at Page 9, line 28 to Page 10, 
                    line 5)

                    The provision specifies 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 the consumer's income the intended use of the 
                    annuity and except to this limited extent, all other 
                    provisions of this Article remain applicable to these 
                    broker-dealer sales and nothing in this provision 
                    shall limit the commissioner's ability to enforce, 
                    including conducting investigations related to, the 
                    provisions of this article.

                     i.          NOTE: An online commentary from the NAIC 
                      website on the rationale for a FINRA recognition in 
                      the model was prepared by the state regulators who 
                      chaired the 2010 NAIC Annuity Suitability Model 
                      revisions. It states as follows: 

                           "(It) 'is intended to prevent duplicative 
                           suitability standards being applied to sales of 
                           annuities through FINRA broker-dealers. Sales 
                           of insurance products which are securities 
                           under federal law, such as variable annuities, 
                           are required to meet FINRA suitability rules; 
                           and sales in compliance with FINRA rules would 
                           comply with the NAIC suitability regulation. 


                                           AB 689 (Blumenfield), Page 14

                           Broker-Dealers may subject fixed annuity sales 
                           to FINRA suitability and supervision rules; and 
                           sales made in compliance with such rules would 
                           also qualify as complying with the NAIC 
                           suitability regulation. However, since FINRA 
                           does not have authority to enforce its rules on 
                           the sale of fixed annuities, broker-dealers 
                           supervising fixed annuity sales may be subject 
                           to more intensive insurance examination than 
                           for sale of security insurance products. 
                           Representatives of a broker-dealer, who are not 
                           required by the broker-dealer to comply with 
                           the FINRA requirements on the sale of fixed 
                           annuities, will have to comply with the 
                           insurance suitability regulation adopted by the 
                           state. In any case, insurers are responsible 
                           for any unsuitable annuity transactions no 
                           matter what suitability regulation or rule is 
                           applied by a broker-dealer."

                  a.        AB 689 imposes continuing education and 
                    training requirements that are dovetailed with 
                    existing California law and DOI regulation and 
                    includes requirements for producers and insurers, 
                    including as to the latter a requirement to verify 
                    that training requirements of their producers have 
                    been met. (Section 10509.915 at Page 10, line 6 to 
                    Page 11, line 31)

                  b.        The Act states the insurer is responsible for 
                    compliance with this article and provides that 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 (Section 10509.916 at Page 
                    11, lines 32 to page 12, line 13):

                     i.          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;
                     ii.         A general insurance agency, independent 
                      agency, or the insurance producer to take reasonably 
                      appropriate corrective action for any consumer 
                      harmed by the insurance producer's violation of this 


                                           AB 689 (Blumenfield), Page 15

                      Article; and
                     iii.        Penalties and sanctions pursuant to 
                      Section 10509.9, which specifies:
                         1.               Agent penalties of from $1,000 
                           dollars for a first violation to from $5,000 to 
                           $50,000 dollars for multiple or willful 
                           violations; and
                         2.               Insurer penalties of from 
                           $10,000 for a first offense or $30,000 to 
                           $300,000 for subsequent violations which 
                           indicate a general business practice or a 
                           willful violation.

                  a.        Provides nothing in this Article shall affect 
                    any other obligation of an insurer for acts of its 
                    agents, or any other consumer remedy or cause of 
                    action otherwise provided by law. (Section 
                    10509.916(b) at Page 12, lines 11 to  13)

                  b.        Insurers and producers are required to 
                    maintain recommendation-related records and 
                    information for five (5) years after the insurance 
                    transaction is completed by the insurer. The insurer 
                    is permitted, but not required, to maintain this 
                    documentation on their producer's behalf. (Section 
                    10509.917 at Page 12 lines 14 to 25)

                  c.        Requires the Commissioner, from time to time 
                    as conditions warrant to 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).  (Section 
                    10509.918 at Page 12 lines 26 to 32)


          Purpose of the bill  : AB 689 is the Insurance Commissioner's 2010 
          "Suitability in Annuity Transactions bill.  According to the 
          Author, AB 689 requires insurers to establish a system to 
          supervise recommendations and to set forth standards and 
          procedures for recommendations to consumers for the sale of 


                                           AB 689 (Blumenfield), Page 16

          annuities to ensure that the financial and insurance needs and 
          objectives of the consumer purchasing the annuity are 
          appropriately addressed.  These protections include:

             a.   Specifying the duties of insurers and of insurance 
               producers in recommending the purchase of an annuity to a 
               consumer, outlining a process for assessing whether an 
               annuity is suitable for a consumer based on the consumer's 
               suitability information, and establishing a supervision 
               system to ensure compliance;
             b.   Requiring that the insurer and producer have a 
               reasonable basis to believe that the consumer will obtain a 
               net, tangible benefit from the purchase;
             c.   Requiring that all producers who intend to sell 
               annuities be adequately trained prior to selling an annuity 
               and that these producers satisfactorily complete continuing 
               education requirements pursuant to current state law;
             d.   Providing the Insurance Commissioner with the authority, 
               among other things, to order an insurer to take corrective 
               action when the Insurance Commissioner determines that a 
               violation of AB 689 has occurred; and, 
             e.   Specifying record-keeping requirements regarding annuity 
               transactions for insurers and producers.

          AB 689 builds on, and in some sections exceeds the requirements 
          set forth in the 2010 National Association of Insurance 
          Commissioners' (NAIC) Annuity Suitability Model Regulation, 
          which was created as a result of national-level discussions with 
          respect to annuity suitability requirements.  AB 689 also 
          conforms to current California law and provides additional 
          consumer safeguards. 

          1.   As introduced on, AB 689 closely paralleled the substance 
              of the 2010 NAIC Model.  Subsequent changes to AB 689 have 
              been of two types, primarily. They either:

                  a.        Served to more explicitly integrate the NAIC 
                    Model's provisions with existing California law, or 
                  b.        Modify some facet of the NAIC Model based upon 
                    preferences of the Department of Insurance and 
                    negotiations with interested parties.

          2.  As amended May 27th, AB 689's provisions are in all 
              substantive respects the same as SB 715 (Calderon et al).

          3.  An important innovation in the 2010 NAIC Act is it proposes 


                                           AB 689 (Blumenfield), Page 17

              requiring insurers to establish a system to supervise 
              annuity sale recommendations and sets forth standards and 
              procedures, for insurers and producers, for recommendations 
              made 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.
           4.  History and Evolution of NAIC Annuity Model Legislation:  
              Annuities, which are described below, are complex financial 
              tools whose traits, as they affect buyers, vary based upon 
              the kind of annuity involved. Due to this complexity, 
              regulators nationally have focused intently over the past 
              decade on developing tools to help ensure that as annuity 
              sales occur, producers and insurers are selling suitable 
          5.  This effort led in 2003 to a National Association of 
              Insurance Commissioners (NAIC) Senior Protection in Annuity 
              Transactions Model Regulation. By 2006, recognition of the 
              underlying complexity as a pitfall for buyers of all ages 
              led to NAIC adoption of a revised model applicable to all 
              consumers.  As summarized below in the Prior legislation 
              review, none of the earlier models led to suitability 
              adoption in California.

          6.  In recent years, the NAIC initiated a further review of its 
              Annuity Suitability Model, issuing a charge to its committee 
              of subject matter experts that it:

                     "Review and consider changes to the Suitability in 
                    Annuity Transactions Model Regulation to improve the 
                    regulation of annuity sales and to provide insurers 
                    uniform guidance in developing agent training, 
                    supervision and monitoring standards in order to 
                    better protect annuity consumers from unsuitable sales 
                    and abusive sales and marketing practices."

          7.  That most recent review led to the significantly revised 
              2010 version of the NAIC Annuity Suitability model. Under 
              the former model, for example, required consumer information 
              was limited to financial status, tax status and investment 
              objectives. In the 2010 model contained in AB 689, the 
              required "suitability information" appears at page 5, lines 
              8 through 24 and includes a dozen required factors. It also 
              expands training and procedure requirements for producers 


                                           AB 689 (Blumenfield), Page 18

              and a requirement on insurers to establish their own 
              processes and monitoring to protect against the sale of 
              unsuitable annuities.

           8.  What are Annuities?:  Annuities are specialized contracts 
              sold by an insurance company which are designed to provide 
              payments to the holder at specified intervals, usually after 
              retirement. The insurance company accepts payment from the 
              buyer and then, at a future time, a stream of payments to 
              the individual begins. They are often used to secure a 
              steady cash flow during retirement. Annuities can be 
              structured according to a wide array of details and factors, 
              such as the how long annuity payments can be guaranteed to 
              continue. Annuities can also be structured to provide either 
              fixed or variable payments. Variable annuities let an 
              annuitant receive greater payments if investments of the 
              annuity fund do well and smaller payments if its investments 
              do poorly. While this provides for a less stable cash flow 
              than a fixed annuity, it allows annuitants to reap a benefit 
              when returns are strong.

          While the variety of annuities give buyers great flexibility to 
              pick one that fits their situation, it also makes buyers 
              more dependent on the skill and training of their financial 
              advisor, hence the concern to strengthen suitability 
           9.  Background and Discussion Regarding the NAIC and its Model 
              Law Process:  The National Association of Insurance 
              Commissioners (NAIC) is the organization of insurance 
              regulators from the 50 states, the District of Columbia and 
              the five U.S. territories. State insurance regulators 
              created the NAIC in 1871 to address the need to coordinate 
              regulation of multistate insurers.
          10. The NAIC provides a forum for the development of uniform 
              policy when uniformity is appropriate. A state regulator's 
              primary responsibility is to protect the interests of 
              insurance consumers, and the NAIC helps regulators fulfill 
              that obligation. That assistance is related to the 
              regulators' shared objectives of financial solvency and 
              market conduct regulation. The first major step in that 
              process was the development of uniform financial reporting 
              by insurance companies. Since then, new legislative 
              concepts, new levels of expertise in data collection and 
              delivery have broadened the role of the NAIC as an 


                                           AB 689 (Blumenfield), Page 19

              internationally-recognized, insurance regulatory support 

           11. Summary of Arguments in Support:   

               a.     The California Department of Insurance, which is 
                 this bill's Sponsor, states "Currently there is no 
                 clearly stated requirement in California law that an 
                 insurance producer must make a reasonable determination 
                 that an annuity is suitable for a consumer prior to the 
                 consumer purchasing it, nor is there a law that requires 
                 an insurer to determine that an annuity is suitable for 
                 the purchasers before issuing it?. California needs a 
                 comprehensive system that requires that insurers 
                 supervise producer annuity recommendations and sales, in 
                 order to ensure that all consumers are adequately 
                 protected, including vulnerable seniors."

               b.     The American Association of Retired Persons states 
                 "AARP policy supports the adoption of strong suitability 
                 requirements for annuity products that build on the NAIC 
                 Model regulation and that apply regardless of age."
               c.     Senior Citizens Legal Services states "AB 689 sets 
                 standards and procedures for insurers and producers to 
                 follow when they are making their annuity recommendations 
                 to consumers. If passed, it will ameliorate the problem 
                 of unsuitable sales of annuities."

           12. Summary of Arguments in Opposition:  

                  a.        None as amended

           13. Amendments:   None

           14. Prior and Related Legislation: 

                  a.        Prior Failed Suitability Legislation:

                        i.             SB 620 (Scott) 2003/2004, While SB 
                         620 was passed, a ground-breaking portion of it 
                         which would have required insurers to establish a 
                         plan for ensuring suitable sales of insurance 
                         product to seniors was deleted.
                        ii.            SB 192 (Scott), 2005/2006, would 
                         have created suitability standards for the sale 
                         of annuities and imposed new duties on insurers 


                                           AB 689 (Blumenfield), Page 20

                         and agent-brokers relative to the sale of these 
                         products to seniors. It died in the Assembly 
                         Insurance Committee.
                        iii.           AB 267 (Calderon), 2007, would have 
                         required that agents or insurers, when making a 
                         recommendation to a senior for the purchase or 
                         exchange of an annuity, have reasonable grounds 
                         for believing that the recommendation is suitable 
                         for the senior. It died in the Assembly Insurance 
                        iv.            SB 573 (Scott), 2007, would have 
                         created suitability standards for the sale of 
                         annuities and imposed new duties on insurers and 
                         agent-brokers relative to the sale of these 
                         products to seniors. It died in the Assembly 
                         Insurance Committee.
                        v.             AB 989 (Block), 2009/2010, would 
                         have created a private right of action for anyone 
                         harmed under the senior insurance statutes in the 
                         CIC.  It died in the Assembly Insurance 
                        vi.            AB 2066 (Jones), 2010, proposed 1) 
                         various new suitability-type requirements to be 
                         submitted with an annuity application, 2) limits 
                         on agent compensation agreements in an effort to 
                         limit surrender charges, and 3) would have deemed 
                         certain annuity sales presumptively improper. It 
                         died in the Assembly Insurance Committee.

                  b.        Related Legislation

                        i.             SB 715 (Senators Calderon, Gaines, 
                         Anderson, Correa, Lieu, Lowenthal, Price & 
                         Wyland) is the Senate Insurance Committee's 2011 
                         Annuity Suitability bill. It is pending in the 
                         Assembly having received no votes during its 
                         Senate consideration.  SB 715 and AB 689 are 
                         substantially similar bills, the NAIC model first 
                         appearing in the February 18 version of SB 715 
                         and being added to AB 689 on March 31st.



                                           AB 689 (Blumenfield), Page 21

          California Department of Insurance (Sponsor)
          American Association of Retired Persons (AARP)
          American Council of Life Insurers (ACLI)
          Association of California Life and Health Insurance Companies 
          Carey Associates
          Congress of California Seniors
          Consumer Watchdog
          Pacific Life Insurance Company
          Professional Fiduciary Association of California
          SEIU Local 1000
          Senior Citizens Legal Services


          Consultant: Ken Cooley  (916) 651-4110