BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 715|
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                                      VETO


          Bill No:  SB 715
          Author:   Calderon (D), et al.
          Amended:  6/28/11
          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

           SENATE FLOOR  :  39-0, 05/23/11 (Consent)  
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, 
            Emmerson, Evans, Fuller, Gaines, Hancock, Hernandez, 
            Huff, Kehoe, La Malfa, Leno, Lieu, Liu, Lowenthal, 
            Negrete McLeod, Padilla, Pavley, Price, Rubio, Runner, 
            Simitian, Steinberg, Strickland, Vargas, Walters, Wolk, 
            Wright, Wyland, Yee
          NO VOTE RECORDED:  Harman

           ASSEMBLY FLOOR  :  78-0, 8/31/11 (Consent) - See last page 
            for vote

           SENATE FLOOR  :  39-0, 9/7/11
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, 
            Emmerson, Evans, Fuller, Gaines, Hancock, Harman, 
            Hernandez, Huff, Kehoe, La Malfa, Leno, Lieu, Liu, 
            Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio, 
            Runner, Simitian, Steinberg, Strickland, Vargas, Wolk, 
                                                           CONTINUED





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            Wright, Wyland, Yee
          NO VOTE RECORDED:  Walters


           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.  

           Assembly Amendments  require the Insurance Commissioner (IC) 
          to adopt reasonable rules and regulations as are necessary 
          to administer this bill, delete the authority of the IC to 
          reduce or eliminate any penalty or sanction pursuant to 
          Section 10509.9 of the Insurance Code for a violation of 
          this bill, add co-authors, and made numerous technical, 
          clarifying and conforming changes.

           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 
          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 







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            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.   Expresses that the purpose of this bill is to 
               require insurers 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. 

             2.   Specifies that it applies to any recommendation to 
               purchase, exchange or replace an annuity made to a 
               consumer. 

             3.   Provides that it does not apply to transactions 
               involving direct response solicitations where there is 
               no recommendation based on information collected from 
               the consumer, contracts that fund an employee pension 
               or welfare benefit plan covered by the federal 
               Employee Retirement and Income Security Act, a 401 
               Plan, a government or church plan as defined by 
               federal law, a deferred compensation plan of a state 
               or local government or tax exempt organization, a 
               nonqualified deferred compensation arrangement 
               maintained by an employer or plan sponsor, settlements 
               of disputes, or formal prepaid funeral contracts. 

             4.   Defines "annuity" as an annuity that is an 
               insurance product that is individually solicited, 
               whether the product is classified as an individual or 
               group annuity. 

             5.   Defines "insurance producer" as a person required 
               to be licensed to sell, solicit, or negotiate 
               insurance, including annuities. 








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             6.   Defines "suitability information" as information 
               that is reasonably appropriate to determine the 
               suitability of a recommendation, including: age, 
               annual income, financial situation and needs, 
               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. 

             7.   Requires the insurance producer and insurer to have 
               reasonable grounds for believing that a recommendation 
               made to a consumer to purchase or exchange an annuity 
               is suitable for the consumer. 

             8.   Requires the insurer and insurance producer to 
               reasonably believe the following: 

               A.     The consumer has been reasonably informed of 
                 various features of the annuity such as the 
                 potential surrender period, surrender charge, 
                 potential tax penalty if the consumer sells or 
                 surrenders the annuity, the fees, limitations on 
                 interest returns, and market risk; 

               B.     The consumer would receive a tangible net 
                 benefit from the transaction; 

               C.     The annuity and subaccounts are suitable for 
                 the particular consumer, based on his or her 
                 suitability information; 

               D.     In the case of an exchange or replacement of an 
                 annuity, the exchange or replacement is suitable 
                 when considering the following: whether the consumer 
                 would incur a surrender charge, a new surrender 
                 period, lose existing benefits such as death or 
                 other benefits, or become subject to increased fees; 
                 whether the consumer would benefit from product 
                 enhancements; and whether the consumer has exchanged 
                 or replaced another annuity within the preceding 60 
                 months, and the exchange or replacement of the 
                 annuity would not be an unnecessary replacement. 







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             1.   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 
               state law. 

             2.   Provides that an insurance producer and an insurer 
               shall not have an obligation to a consumer if the 
               following occur: no recommendation is made, a 
               recommendation was made and later found to have been 
               prepared based on materially inaccurate information 
               provided by the consumer, a consumer refuses to 
               provide relevant suitability information and the 
               annuity transaction is not recommended, or a consumer 
               decides to purchase or exchange an annuity that is not 
               based on a recommendation of the insurer or the 
               insurance producer. 

             3.   Requires insurers to establish a supervision system 
               that is reasonably designed to achieve compliance with 
               this bill, including: 

               A.     Information to insurance producers, 
                 incorporating information into insurance producer 
                 training manuals, providing training materials to 
                 insurance producers; 

               B.     Requires the insurer to 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; and 

               C.     Requires the insurer to maintain reasonable 
                 procedures to detect recommendations that are not 
                 suitable. 

             1.   Prohibits an insurance producer or insurer from 
               dissuading, or attempting to dissuade, a consumer from 
               truthfully responding to an insurer's request for 
               confirmation of suitability information, filing a 
               complaint, or cooperating with the investigation of a 
               complaint. 







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             2.   Provides that sales by broker-dealers authorized by 
               the Financial Industry Regulatory Authority (FINRA) 
               that comply with the suitability and supervision 
               system requirements in a FINRA rule shall satisfy the 
               suitability and supervision system requirements of 
               this bill, as long as the suitability criteria also 
               includes the consumer's income, and the intended use 
               of the annuity. 

             3.   Prohibits an insurance producer from soliciting the 
               sale of an annuity product unless the producer has 
               adequate knowledge of the product to recommend the 
               annuity. 

             4.   Requires insurer producers to complete a one-time 
               8-hour annuity training course approved by the IC, and 
               to satisfactorily complete four continuing education 
               credits prior to license renewal every two years. 

             5.   Specifies that insurers are responsible for 
               compliance with this bill. 

             6.   Authorizes the IC to take the following actions to 
               gain an insurer's compliance: 

               A.     Ordering an insurer to take reasonable 
                 corrective action for the consumer harmed by the 
                 insurer or its insurance producer; 

               B.     Ordering a managing general agent or an 
                 insurance producer to take reasonable corrective 
                 action for the consumer harmed. 

               C.     Placing an administrative penalty on 
                 individuals of $1,000 for the first violation and a 
                 penalty of $5,000 to $50,000 for each subsequent 
                 violation; 

               D.     Placing an administrative penalty on an insurer 
                 of $10,000 for the first violation and a penalty of 
                 $30,000 to $300,000 for a knowing violation or if 
                 committed with a frequency as to indicate a general 
                 business practice. 







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             1.   Requires the IC to adopt reasonable rules and 
               regulations as are necessary to administer this bill. 

           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, 
               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 







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          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  8/31/11)

          Association of California Life and Health Insurance 
          Companies
          Insurance Brokers and Agents of the West
          Liberty Mutual Group
          MetLife
          National Association of Insurance and Financial Advisors
          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 







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          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.


           GOVERNOR'S VETO MESSAGE:
           
               "I have just signed AB 689, a bill virtually identical 
               to the one before me.  Another won't be needed. 

               I am returning Senate Bill 715 without my signature."


           ASSEMBLY FLOOR  :  78-0, 8/31/11
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Brownley, Buchanan, Butler, Charles Calderon, Campos, 
            Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, 
            Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, 
            Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove, 
            Hagman, Halderman, Hall, Harkey, Hayashi, Roger 
            Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, 
            Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, 
            Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, 
            Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, 
            Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, 
            Wagner, Wieckowski, Williams, Yamada, John A. Pérez
          NO VOTE RECORDED:  Gorell, Mendoza


          JJA:nl  1/4/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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