Bill Text: CA SB715 | 2011-2012 | Regular Session | Enrolled
Bill Title: Annuity transactions.
Spectrum: Slight Partisan Bill (Democrat 5-3)
Status: (Vetoed) 2012-03-01 - Consideration of Governor's veto stricken from file. Veto sustained. [SB715 Detail]
Download: California-2011-SB715-Enrolled.html
BILL NUMBER: SB 715 ENROLLED
BILL TEXT
PASSED THE SENATE SEPTEMBER 7, 2011
PASSED THE ASSEMBLY AUGUST 31, 2011
AMENDED IN ASSEMBLY JUNE 28, 2011
AMENDED IN ASSEMBLY JUNE 14, 2011
AMENDED IN SENATE APRIL 25, 2011
AMENDED IN SENATE APRIL 4, 2011
INTRODUCED BY Senator Calderon
(Coauthors: Senators Anderson, Correa, Gaines, Lieu, 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, Calderon. 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 bill's provisions.
The bill would further provide that sales by a Financial Industry
Regulatory Authority (FINRA) broker-dealer that comply with the
suitability and supervision system requirements of FINRA shall be
deemed to satisfy the suitability and supervision system requirements
of this bill, as specified.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. The Legislature finds and declares all of the
following:
(a) The Legislature finds and declares that in 2010 the National
Association of Insurance Commissioners (NAIC) adopted a significantly
revised Suitability in Annuity Transactions Model Regulation.
(b) The Legislature also finds that the revised Suitability in
Annuity Transactions Model was adopted by the NAIC to set standards
and procedures for suitable annuity recommendations and to require
insurers to establish a system to supervise recommendations so that
the insurance needs and financial objectives of consumers are
appropriately addressed.
(c) The Legislature finds that the revised NAIC Suitability in
Annuity Transactions Model establishes a regulatory framework that
holds insurers responsible for ensuring that annuity transactions are
suitable, whether or not the insurer contracts with a third party to
supervise or monitor the recommendations made in the marketing and
sale of annuities.
(d) The Legislature also finds that the 2010 revisions to the NAIC
Suitability in Annuity Transactions Model require that producers be
trained on the provisions of annuities in general, and the specific
products they are selling.
(e) The Legislature finds that the adoption last year of the
federal Dodd-Frank Wall Street Reform and Consumer Protection Act
(Public Law 111-203) provides, under Title IX, Subtitle I, Section
989A, relating to senior investment protections, that a state's
adherence to at least the minimum requirements of the NAIC's
Suitability in Annuity Transactions Model is a required element for a
state or other eligible entities to participate in a program of
grants to support enhanced protections of seniors against misleading
marketing practices.
(f) Finally, the Legislature finds that adoption in this state of
at least the minimum requirements of the NAIC Suitability in Annuity
Transactions Model affects California's continued jurisdiction over
indexed securities under Title IX, Subtitle I, Section 989J of the
Dodd-Frank Act.
SEC. 2. 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. 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.
10509.911. (a) This article shall apply 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.
(b) Nothing in this act shall 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.
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 federal 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
California law that is individually solicited, whether the product is
classified as an individual or group annuity.
(b) "Commissioner" means the Insurance Commissioner.
(c) "Continuing education credit" or "CE credit" means one
continuing education credit hour as defined in Section 2188.2(i) of
Title 10 of the California Code of Regulations.
(d) "Continuing education provider" or "CE provider" means an
individual or entity that is certified to offer continuing education
courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of
the California Code of Regulations.
(e) "FINRA" means the Financial Industry Regulatory Authority or a
succeeding agency.
(f) "Insurance producer" means a person required to be licensed
under California law to sell, solicit, or negotiate insurance,
including annuities. An insurance producer is also referred to in
this article as a "producer."
(g) "Insurer" means a company required to be licensed or to hold a
certificate of authority, or both, under California law to provide
insurance products, including annuities.
(h) "Recommendation" means advice or guidance 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 guidance.
(i) "Replacement" has the same definition as in Section 10509.2,
except that for the purposes of this section, the term "surrendered,"
as used in Section 10509.2, shall include partial surrenders.
(j) "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.
(13) Whether or not the consumer has a reverse mortgage.
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 an insurer if no 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 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:
(A) Whether 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) Whether the consumer would benefit from product enhancements
and improvements.
(C) Whether the consumer has had another annuity exchange or
replacement and, in particular, an exchange or replacement within the
preceding 60 months.
(D) 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.
(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 and applicable California law.
(d) (1) Except as provided pursuant to paragraph (2), neither an
insurance producer, nor an insurer, shall have any obligation to a
consumer pursuant to subdivision (a) or (c) related to an 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 materially inaccurate 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 which are actually
known, or which after reasonable inquiry should be known, to the
insurer or the insurance producer 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 its 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). An
insurer is responsible for the compliance of its insurance producer
with the provisions of this article regardless of whether the insurer
contracts for performance of a function required under this
subdivision 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 ensure
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 or insurer 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) This subdivision applies to FINRA broker-dealer sales of
variable and fixed annuities.
(2) Sales by FINRA broker-dealers that comply with the suitability
and supervision system requirements set forth in FINRA Rule 2330, or
any successor rule, shall satisfy the suitability and supervision
system requirements of this article, provided that the suitability
criteria used also include both of the following:
(A) The consumer's income.
(B) The intended use of the annuity.
(3) Except as provided in paragraphs (1) and (2), all other
provisions of this article remain applicable to these broker-dealer
sales.
(4) Nothing in this subdivision shall limit the commissioner's
ability to enforce, including conducting investigations related to,
the provisions of this article.
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 is otherwise entitled to
engage in the sale of annuity products shall complete a one-time
eight-credit-hour annuity training course approved by the
commissioner and provided by a commissioner-approved education
provider, prior to commencing the transaction of annuities, pursuant
to subdivision (a) of Section 1749.8.
(B) In addition to the requirement set forth in subparagraph (A),
every producer who engages in this state in the sale of annuity
products shall satisfactorily complete four continuing education
credits prior to license renewal every two years, pursuant to
subdivision (b) of Section 1749.8.
(2) 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.
(G) Other topics required for training in selling annuities under
subdivision (c) of Section 1749.8.
(3) 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.
(4) A provider of an annuity training course intended to comply
with this section 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 Section 1749.8, in
subdivisions (d) and (e) of Section 1749.1, and in Sections 2188,
2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and
2188.9 of Title 10 of the California Code of Regulations.
(5) Annuity training courses may be conducted and completed by
classroom or self-study methods in accordance with Sections 2188.2
and 2188.3 of Title 10 of the California Code of Regulations.
(6) Providers of annuity training shall comply with the reporting
requirements and shall issue certificates of completion in accordance
with Section 2188.8 of Title 10 of the California Code of
Regulations.
(7) An insurer shall verify that an insurance producer has
completed the annuity training course required under this section
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, 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 managing general agent or an 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. For
purposes of Section 10509.9, this article shall be deemed to be part
of Article 8 (commencing with Section 10509), and the commissioner
may in a single enforcement action seek penalties for a first and a
second or subsequent violation.
(b) 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.
10509.917. (a) Insurers 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.
10509.918. The commissioner shall, from time to time as
conditions warrant, after notice and hearing, adopt reasonable rules
and regulations, and amendments and additions thereto, as are
necessary to administer this article. The commissioner may adopt
regulations not inconsistent with this article pursuant to Section
989J of the federal Dodd-Frank Wall Street Reform and Consumer
Protection Act (Public Law 111-203).
