Bill Text: CA SB715 | 2011-2012 | Regular Session | Amended
NOTE: There are more recent revisions of this legislation. Read Latest Draft
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-Amended.html
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-Amended.html
BILL NUMBER: SB 715 AMENDED
BILL TEXT
AMENDED IN SENATE APRIL 25, 2011
AMENDED IN SENATE APRIL 4, 2011
INTRODUCED BY Senator Calderon
(Coauthors: Senators Anderson, Correa, Gaines, 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, as amended, 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.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. 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 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
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 required
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.
10509.911. 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.
10509.912. (a) This article shall apply to
any recommendation to purchase, exchange, or replace an annuity made
to a consumer by an insurance producer, or an insurer where
no insurance producer is involved, 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.
10509.913. 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 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.
10509.914. For the purposes of this article, the following terms
have the following definitions:
(a) "Annuity" means an annuity that is an insurance product under
state 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 the laws of this state California law
to sell, solicit, or negotiate insurance, including annuities.
(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 provided
or other commu nication provided or made by an
insurance producer , or an insurer where no insurance
producer is involved, 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 .
(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.
10509.915. (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 the insurer where no insurance
producer is involved, and the insurer 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 benefit from certain features of
the annuity, such as tax-deferred growth, annuitization, or death or
living benefit. 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 whether any of the following are applicable
all of the following :
(A) 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) The consumer would benefit from product enhancements and
improvements.
(C) The consumer has had another annuity exchange or replacement
and, in particular, an exchange or replacement within the preceding
36 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 of paragraph (2), neither an
insurance producer, nor an insurer, shall have any obligation to a
consumer pursuant to subdivision (a) or (c) related to any 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 actually
known to the insurer 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
10509.916.
(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 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 10509.917 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 assure
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 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) Sales made in compliance with FINRA requirements
pertaining to suitability and supervision of annuity transactions
shall satisfy the requirements under this article. This subdivision
applies to FINRA broker-dealer sales of variable annuities and fixed
annuities if the suitability and supervision is similar to those
applied to variable annuity sales. However, nothing in this
subdivision shall limit the commissioner's ability to enforce,
including conducting investigations related to, the provisions of
this article.
(2) For paragraph (1) to apply, an insurer shall do both of the
following:
(A) Monitor the FINRA member broker-dealer using information
collected in the normal course of an insurer's business.
(B) Provide to the FINRA member broker-dealer information and
reports that are reasonably appropriate to assist the FINRA member
broker-dealer to maintain its supervision system.
(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 2111, 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 investigation related to,
the provisions of this article.
10509.916. (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 (1),
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.
(C) Insurance producers who hold a life insurance line of
authority on the effective date of this article and who desire to
sell annuities shall complete the requirements of this subdivision
within six months after the effective date of this article.
Individuals who obtain a life insurance line of authority on or after
the effective date of this article may not engage in the sale of
annuities until the annuity training course required under this
subdivision has been completed.
(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) The satisfaction of the training requirements of another state
that are substantially similar to the provisions of this subdivision
shall be deemed to satisfy the training requirements of this
subdivision in this state.
(8)
(7) An insurer shall verify that an insurance producer
has completed the annuity training course required under this
subdivision 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.
10509.917. (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 order any , 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.
(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) Any applicable penalty under Section 10509.9 for a violation
of this article may be reduced or eliminated if corrective action for
the consumer was taken promptly after a violation was discovered or
the violation was not part of a pattern or practice.
(c) 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.
10509.918. (a) Insurers, general agents, independent insurance
agencies, 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.
