BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 715|
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THIRD READING
Bill No: SB 715
Author: Calderon (D), et al.
Amended: 4/25/11
Vote: 21
SENATE INSURANCE COMMITTEE : 8-0, 04/27/11
AYES: Calderon, Gaines, Anderson, Corbett, Lieu, Lowenthal,
Price, Wyland
NO VOTE RECORDED: Correa
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Annuity transactions
SOURCE : Author
DIGEST: This bill requires 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, this bill establishes
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.
ANALYSIS : California law imposes various rules related
to the sale of annuities to California buyers but does not
contain standards related to the "Suitability" of Annuity
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Sales to the personal situation of prospective buyers.
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.
This bill:
1. Enacts, 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. Imposes a secondary suitability review process upon
life insurers who are prohibited under this bill 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"
3. Imposes producer training and annuity continuing
education, carrier training programs, and training
verification requirements.
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4. Specifically, this bill:
A. States legislative findings and declarations as
follows:
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.
C. Makes 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.
D. Defines "Recommendation" as "advice or other
communication 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
communication."
E. Excludes from its scope:
1) Transactions arising from direct response
solicitations where there is no recommendation based
on information collected from the consumer pursuant
to this article, or:
2) Contracts used to fund any of the following:
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.);
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;
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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.
A nonqualified deferred compensation
arrangement established or maintained by an
employer or plan sponsor;
Settlements of or assumptions of
liabilities associated with personal injury
litigation or any dispute or claim resolution
process; or
Formal prepaid funeral contracts.
A. Establishes, at subdivisions (a) and (b) of Section
10509.915 the duty of insurers and insurance producers
with respect to the making of annuity recommendations:
1) Requires, in recommending an annuity purchase
or the exchange of an annuity that results in
another insurance transaction or series of insurance
transactions, the producer and the insurer 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.
2) Defines "Suitability information" in
subdivision (j) of Section 10509.914 as information
that is reasonably appropriate to determine the
suitability of a recommendation, including all of
the following:
Age;
Annual income;
Financial situation and needs, including
the financial resources used for the funding of
the annuity;
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Financial experience;
Financial objectives;
Intended use of the annuity;
Financial time horizon;
Existing assets, including investment and
life insurance holdings;
Liquidity needs;
Liquid net worth;
Risk tolerance;
Tax status; and
Whether or not the consumer has a reverse
mortgage.
A. Requires, in recommending the purchase or exchange
of an annuity, the producer, or the insurer where no
insurance producer is involved, to have a reasonable
basis to believe all the following:
1) 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.
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:
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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.
The consumer would benefit from product
enhancements and improvements.
The consumer has had another annuity
exchange or replacement and, in particular, an
exchange or replacement within the preceding 60
months.
The exchange or replacement of that
annuity would not be an "unnecessary replacement"
as that term is used in subdivision (b) of
Section 10509.8.
A. Requires, 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.
B. Prohibits an insurer 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, except that neither a
producer nor an insurer has any obligation to a
consumer pursuant to Subdivisions (a) and (c) of
Section 10509.915 if:
1) No recommendation is made;
2) A recommendation was made and was later found
to have been prepared based on materially
inaccurate information provided by the consumer;
3) A consumer refuses to provide relevant
suitability information and the annuity transaction
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is not recommended; or
4) A consumer decides to enter into an annuity
transaction that is not based on a recommendation of
the insurer or the insurance producer.
A. Specifies, in the instances set forth in paragraph
i through iv above, an insurer's issuance of 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".
B. Requires agents (or insurers if there is no agent)
at the time of any sale to:
1) Keep a record of any recommendations made;
2) If a customer declines to provide suitability
information, obtain a signed statement to that
effect;
3) 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
recommended.
A. Requires insurers to establish a supervision system
that is reasonably designed to achieve the insurer's
and its producers' compliance with this bill, which
must include, but is not limited to, all the
following:
1) Reasonable procedures to inform its insurance
producers of this law's requirements, which are to
be incorporated into relevant insurance producer
training manuals;
2) Standards for insurance producer product
training and reasonable procedures to require
producers to comply with the this bill and current
law's education and training rules.
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3) Product-specific training and training
materials that explain all material features of the
insurer's annuity products to its insurance
producers.
4) 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.
5) Procedures to detect recommendations that 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.
A. Requires that every insurer 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.
B. Permits 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 10509.915. An insurer is
not required to include in its system of supervision
producer's recommendations of products other than
annuities offered by the insurer.
C. Prohibits insurance producers from dissuading or
attempting to dissuade, a consumer from:
1) Truthfully responding to an insurer's request
for confirmation of suitability information;
2) Filing a complaint; or
3) Cooperating with the investigation of a
complaint.
A. Provides subdivision (h) (1) of Section 10509.915
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is a provision which deviates from the NAIC Model but
was agreed to by the California DOI and sets the rules
concerning California supervision for FINRA
broker-dealer sales of variable and fixed annuities.
The provision specifies sales by FINRA broker-dealers
that comply with the suitability and supervision
system requirements set forth in FINRA Rule 2111, 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 nor shall anything in this
Act 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.
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. 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
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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."
B. 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.
C. 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:
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; and
3) Penalties and sanctions pursuant to Section
10509.9, which specifies:
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
Insurer penalties of from $10,000 for a
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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.
B. Requires insurers and producers to maintain
recommendation-related records and information for
five 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.
Background
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
products.
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.
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,
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supervision and monitoring standards in order to
better protect annuity consumers from unsuitable sales
and abusive sales and marketing practices."
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 this
bill, 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 and a requirement on insurers to
establish their own processes and monitoring to protect
against the sale of unsuitable annuities.
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 requirements.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 5/17/11)
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Insurance Brokers and Agents of the West
Liberty Mutual Group
MetLife
Pacific Life Insurance Company
ARGUMENTS IN SUPPORT : According to the author's office,
California's failure to have in place an annuity
suitability law disadvantages California annuity buyers and
passage of annuity legislation this year will correct that.
It will ensure that every Californian will be better
protected with sales process safeguards that can help them
despite the increased variety and complexity of annuity
offerings and their necessary reliance upon the advice of
others.
JJA:nl 5/17/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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