BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 715|
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UNFINISHED BUSINESS
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 Le�n, 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
SUBJECT : Annuity transactions
SOURCE : Author
DIGEST : This bill requires adoption of more stringent
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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
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:
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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.
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.
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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.
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
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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.
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.
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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.
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,
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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
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
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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
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.
ASSEMBLY FLOOR : 78-0, 8/31/11
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall,
Bill Berryhill, Block, Blumenfield, Bonilla, Bradford,
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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
Hern�ndez, 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 P�rez, Portantino,
Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao,
Wagner, Wieckowski, Williams, Yamada, John A. P�rez
NO VOTE RECORDED: Gorell, Mendoza
JJA:nl 8/31/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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