BILL NUMBER: SB 715	INTRODUCED
	BILL TEXT


INTRODUCED BY   Committee on Insurance (Senators Calderon (Chair),
Anderson, Corbett, Correa, Gaines, Lowenthal, Price, and Wyland)

                        FEBRUARY 18, 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


   SB 715, as introduced, Committee on 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 provisions of the act.
   Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  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.  (a) 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.
   (b) Nothing in this article shall be construed to create or imply
a private cause of action for a violation of this article.
   10509.911.  Notwithstanding any other provision of law, this
article shall apply to any recommendation to purchase, exchange, or
replace an annuity made to a consumer by an insurance producer, or an
insurer where no insurance producer is involved, that results in the
purchase, exchange, or replacement recommended.
   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 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, 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.
   (6) Formal prepaid funeral contracts.
   10509.913.  For the purposes of this article, the following terms
have the following definitions:
   (a) "Annuity" means an annuity that is an insurance product under
state law that is individually solicited, whether the product is
classified as an individual or group annuity.
   (b) "Continuing education credits" or "CE credits" means
continuing education credit from a continuing education course
approved by the commissioner.
   (c) "Continuing education provider" or "CE provider" means an
individual or entity that is approved by the commissioner to offer
continuing education courses.
   (d) "FINRA" means the Financial Industry Regulatory Authority or a
succeeding agency.
   (e) "Insurance producer" means a person required to be licensed
under the laws of this state to sell, solicit, or negotiate
insurance, including annuities.
   (f) "Insurer" means a company required to be licensed under the
laws of this state to provide insurance products, including
annuities.
   (g) "Recommendation" means advice provided by an insurance
producer, or an insurer where no insurance producer is involved, to
an individual consumer that results in a purchase, exchange, or
replacement of an annuity in accordance with that advice.
   (h) "Replacement" has the same definition as in Section 10509.2.
   (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.
   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 the insurer where no insurance 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 benefit from certain features of the
annuity, such as tax-deferred growth, annuitization, or death or
living benefit.
   (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 whether any of the following are applicable:
   (A) 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) The consumer would benefit from product enhancements and
improvements.
   (C) The consumer has had another annuity exchange or replacement
and, in particular, an exchange or replacement within the preceding
36 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 insurance producer is involved,
shall make reasonable efforts to obtain the consumer's suitability
information.
   (c) Except as permitted pursuant to 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.
   (d) (1) Except as provided pursuant of paragraph (2), neither an
insurance producer, nor an insurer, shall have any obligation to a
consumer pursuant to subdivision (a) or (c) related to any 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 inaccurate material 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 actually known to the
insurer 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)
of this section.
   (2) Obtain a customer signed statement documenting a customer's
refusal to provide suitability information, if any.
   (3) Obtain a customer signed statement acknowledging that an
annuity transaction is not recommended if a 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 that 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 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).
   (B) An insurer's supervision system under paragraph (1) shall
include supervision of contractual performance under this
subdivision. This includes, but is not limited to, both of the
following:
   (i) Monitoring and, as appropriate, conducting audits to assure
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 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) Sales made in compliance with FINRA requirements
pertaining to suitability and supervision of annuity transactions
shall satisfy the requirements under this article. This subdivision
applies to FINRA broker-dealer sales of variable annuities and fixed
annuities if the suitability and supervision is similar to those
applied to variable annuity sales. However, nothing in this
subdivision shall limit the commissioner's ability to enforce,
including conducting investigations related to, the provisions of
this article.
   (2) For paragraph (1) to apply, an insurer shall do both of the
following:
   (A) Monitor the FINRA member broker-dealer using information
collected in the normal course of an insurer's business.
   (B) Provide to the FINRA member broker-dealer information and
reports that are reasonably appropriate to assist the FINRA member
broker-dealer to maintain its supervision system.
   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) (A) An insurance producer who engages in the sale of
annuity products shall complete a one-time four credit-hour training
course approved by the commissioner and provided by a
commissioner-approved education provider.
   (B) Insurance producers who hold a life insurance line of
authority on the effective date of this article and who desire to
sell annuities shall complete the requirements of this subdivision
within six months after the effective date of this article.
Individuals who obtain a life insurance line of authority on or after
the effective date of this article may not engage in the sale of
annuities until the annuity training course required under this
subdivision has been completed.
   (2) The minimum length of the training required under this
subdivision shall be sufficient to qualify for at least four CE
credit-hours, but may be longer.
   (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) Appropriate sales practices, replacement, and disclosure
requirements.
   (4) Providers of courses intended to comply with this subdivision
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 subdivision 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 _____.
   (6) Annuity training courses may be conducted and completed by
classroom or self-study methods in accordance with _____.
   (7) Providers of annuity training shall comply with the reporting
requirements and shall issue certificates of completion in accordance
with ____.
   (8) The satisfaction of the training requirements of another state
that are substantially similar to the provisions of this subdivision
shall be deemed to satisfy the training requirements of this
subdivision in this state.
   (9) An insurer shall verify that an insurance producer has
completed the annuity training course required under this subdivision
before allowing the insurance producer to sell an annuity product
for that insurer. An insurer may satisfy its responsibility under
this subdivision 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 order any 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 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
article.
   (3) Penalties and sanctions pursuant to Section 10509.9.
   (b) Any applicable penalty under Section 10509.9 for a violation
of this article may be reduced or eliminated if corrective action for
the consumer was taken promptly after a violation was discovered or
the violation was not part of a pattern or practice.
   10509.917.  (a) Insurers, general agents, independent insurance
agencies, 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, microprocessing, magnetic,
mechanical, or electronic media or by any process that accurately
reproduces the actual document.