BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 715| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 SB 715 Page 2 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 SB 715 Page 3 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. SB 715 Page 4 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. SB 715 Page 5 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. SB 715 Page 6 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. SB 715 Page 7 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 SB 715 Page 8 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 SB 715 Page 9 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 **** END ****