Regulation Best Interest - Annuities

NAIC Model Laws

NAIC Model Law Development Process

The National Association of Insurance Commissioners (NAIC) model law development process helps provide uniformity while balancing the needs of insurers operating in multiple jurisdictions with the unique nature of state judicial, legislative and regulatory frameworks. While the value of a state‑based regulatory system from a consumer protection perspective is the ability to tailor state laws and regulations to meet the needs of resident consumers, there is recognition that there are some areas where uniformity and consistency across state borders is beneficial to all. It is primarily through the states’ adoption of NAIC model laws and regulations that the legal framework for insurance regulation has been largely harmonized throughout all of the states.

The criterion for development of a model law or regulation involves a two‑pronged test. First, the subject matter of the model law or regulation must call for a minimum national standard or require uniformity among the states. The second part of the test is the NAIC members must be committed to dedicating significant regulator and NAIC staff resources to educating, communicating and supporting the adoption of the model law or regulation. When a committee, task force or working group decides to address an issue that does not meet the two‑prong test, it may develop a “guideline” instead. A guideline is simply an insurance regulatory best practice and can be used by the states as the basis for a law, regulation or bulletin.[1]

NAIC Annuities/Variable Contracts Model Regulation

A searchable index of the NAIC’s model laws, regulations, guidelines and other resources can be accessed on the NAIC website. For purposes of this course, we are concentrating on the latest developments in Suitability and Best Interest regulation. However, readers may find the following Model Laws informative and may wish to explore them as well on their own.

Model #235, Interest-Indexed Annuity Contracts Model Regulation – This model regulation establishes the initial filing requirements for interest-indexed annuity contracts. It also contains additional filing requirements, valuation requirements, and a Statement of Actuarial Opinion for Interest-Indexed Annuity Contracts. This regulation applies only to individual annuity contracts. This regulation currently addresses only the indexing of interest credits.

Model #240, Charitable Gift Annuities Model Act – This model act defines charitable gift annuities and contains requirements related to certificate of authority requirements, surplus and reserve standards, investments, examinations, annual reports and disclosure.

Model #241, Charitable Gift Annuities Exemption Model Act – This model act specifies that annuities that qualify as charitable gift annuities do not constitute engaging in the business of insurance.

Model #245, Annuity Disclosure Model Regulation – This model regulation provides standards for the disclosure of information about annuity contracts in order to protect consumers and foster consumer education.

Model #250, Variable Annuity Model Regulation – This model regulation specifies the qualifications required of insurers to offer, and agents to sell, variable annuities. It also stipulates the manner in which variable benefits are to be calculated and how separate account categories are to be maintained.

Model #255, Modified Guaranteed Annuity Regulation – This model regulation provides rules for modified guaranteed annuities. It establishes the qualifications of agents and insurers; the required contract form and provisions; and the manner in which separate account assets are to be maintained and reported.

Model #260, Variable Contract Model Law – This model law establishes guidelines for variable contracts. It includes requirements pertaining to contract statements and licensing, and clarifies the powers of the commissioner with respect to variable contracts.

Model #270, Variable Life Insurance Model Regulation – This model regulation establishes parameters for the issuance of variable life insurance. It outlines insurer qualifications, insurance policy requirements, reserve liabilities, separate accounts; information furnished to applicants, reports to policyholders, foreign companies and agent qualifications.

Model #278, Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the State of Life Insurance and Annuities – The purpose of this model regulation is to set forth standards to protect consumers from misleading and fraudulent marketing practices with respect to the use of senior‑specific certifications and professional designations in the solicitation, sale or purchase of, or advice made in connection with, a life insurance or annuity product.

AND…

Model #275, Suitability in Annuity Transactions Model Regulation – This model regulation sets 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.

Model #275, aka, “Suitability” model, has been updated to reflect a new Best Interest Standard. In 2019, the NAIC Annuity Suitability (A) Working Group completed the updates, which began in November 2017.

The “Best Interest Standard” refers to the ethical requirement that people who care for others will do so in good faith, placing their assessment of that person’s best interests above their own.

NAIC Suitability In Annuity Transactions Model Regulation

Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. Model #275 (Suitability model) sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. In revising the Suitability model, the NAIC intends to provide clear, enhanced standards for annuity sales so that consumers understand the products they are purchasing, are made aware of any potential conflicts, and are assured that those selling the products do not place their financial interests above consumers’ interests. Since the model’s original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA), which will be addressed later in this course material.

The following sections cover the current status of the NAIC Suitability in Annuity Transactions Model Regulation. This Model Regulation can be viewed as a template to be used in drafting the law to be passed at the state level. In several sections there are blanks where reference to state laws will be inserted and/or choice will be made by state legislators.

While all sections of this Model Regulation are important, Section 6 contains the duties of the insurer and producer under this regulation and should be reviewed carefully.

Annuity Suitability and Best Interest Standard

The revisions to Model #275 clarify that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumers’ interest in making a recommendation. The model now requires agents and carriers to act with “reasonable diligence, care and skill” in making recommendations. The revisions also include enhancements to the current model’s supervision system to assist in compliance.

The enhanced Model Regulation includes a new best interest standard of care that producers and insurers can meet if they satisfy four requirements:

1.    a Care Obligation;

2.    a Disclosure Obligation;

3.    a Material Conflict of Interest Obligation; and

4.    a Documentation Obligation.

Appendices A, B, and C have also been revised.

·         Appendix A. Insurance Agent (Producer) Disclosure For Annuities

·         Appendix B. Consumer Refusal to Provide Information

·         Appendix C. Consumer Decision to Purchase an Annuity Not Based on a Recommendation

The final rule takes effect on June 30, 2020. Following is the revised version, which was adopted on December 30, 2019, showing all revisions in the normal underline and strikethrough method.[2]

Purpose of the Suitability Model Act

Though the title “Purpose” of Section 1 remains the same, the big change here is to set forth a requirement for producers (the definition of which is amended under Section 5.L.) to act in the best interest of the consumer. The 2010 MDL 275 Purpose section address insurers only. Additionally, now insurers are required to establish and maintain a system to supervise recommendations. Finally, “appropriately” has been changed to “effectively.”

Section 1. Purpose. Subsection A. The purpose of this regulation is to require producers, as defined in this regulation, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish and maintain a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in a transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately effectively addressed.

Subsection A (above) states what the purpose of this regulation is; Subsection B states what it is not and expands on the current disclaimer (that a violation of the regulation should not create or imply a private cause of action) to add that a best interest standard should not be construed to treat producers as fiduciaries.

Section 1. Purpose. Subsection B. Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation or to subject a producer to civil liability under the best interest standard of care outlined in Section 6 of this regulation or under standards governing the conduct of a fiduciary or a fiduciary relationship.

Drafting Note:  The language of Subsection B comes from the NAIC Unfair Trade Practices Act. If a state has adopted different language, it should be substituted for Subsection B.

Drafting Note:  Section 989J of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd‑Frank Act”) specifically refers to this model regulation as the “Suitability in Annuity Transactions Model Regulation.” Section 989J of the Dodd‑Frank Act confirmed this exemption of certain annuities from the Securities Act of 1933 and confirmed state regulatory authority. This regulation is a successor regulation that exceeds the requirements of the 2010 model regulation.

Note that this drafting note was included to ensure that this model regulation would remain compliant under the safe harbor provisions included in Dodd‑Frank. For indexed annuities to remain free from securities regulation, the terms of Dodd‑Frank require states (or insurers on a nationwide basis) to adopt the NAIC.

Scope of the Suitability Model Act

Some of the changes here are cleanup, but untethering recommendation from “that results in the purchase…” expands the scope of the regulation to ALL recommendations, even where no purchase is made or consummated. Regulators understood this and wanted this regulation to apply to the activities involved in making a recommendation without regard to whether a purchase is made.

Section 2. Scope. This regulation shall apply to any sale or recommendation to purchase, exchange or replace of an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the purchase, exchange or replacement recommended.

Conferred Authority

No change to this section other than the drafting note.

Section 3. Authority. This regulation is issued under the authority of [insert reference to state enabling legislation].

Drafting Note:  States may wish to use the Unfair Trade Practices Act as enabling legislation or may pass a law with specific authority to adopt this regulation.

Exemptions to the Suitability Model Act

Changes to this section are clean up, separating as new Subsections C and D litigation/dispute resolution settlements or assumptions of liabilities and formal prepaid funeral contracts as unique exempted types of transactions, rather than lumping them under contracts generally related to the funding of pension and benefit plans.

Section 4. Exemptions. Unless otherwise specifically included, this regulation shall not apply to recommendations involving:

A. Direct response solicitations by insurers where there is no recommendation based on information collected from the consumer pursuant to this regulation;

B. Contracts used to fund:

(1) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);

(2) A plan described by sections 401(a), 401(k), 403(b), 408(k) or 408(p) of the Internal Revenue Code (IRC), as amended, if established or maintained by an employer;

(3) A government or church plan defined in section 414 of the IRC, 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 IRC;

(4) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;

C.(5) Settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or

D.(6) Formal prepaid funeral contracts.

Definitions Used in the Context of the Suitability Model Act

Subsection A contains no change in the definition of “annuity.” Subsection B contains a new definition, “cash compensation,” and Subsection C, “consumer profile information” replaces the old suitability information. (3) “Financial situation and needs” now adds the language, “including debts and other obligations.” Also, the “financial resources used to fund the annuity” is now split off as its own separate element. (5) “Insurance Needs” is a new element. (8) “Old” is modified to say as the “New.” (9) “Existing assets or financial products, including investment, annuity and life insurance holdings.” (12) (Old 11‑ Risk Tolerance) adds “including but not limited to, willingness to accept nonguaranteed elements in the annuity.” NOTE that the term “nonguaranteed elements” is itself newly defined here as Sec. 5.K. (H) “Intermediary” is a new definition. The only other time that the word/term “intermediary” is actually used in the amended regulation is under the definition of “cash compensation.” (I.1) “Material conflict of interest” is a new definition. Of note, (I.2) states that a material conflict of interest does not include cash compensation or non‑cash compensation. (J) “Non‑cash compensation” and (K) “Nonguaranteed elements” are new definitions. (L) The 2010 version included a definition for an “insurer and for an insurance producer”—and then throughout the regulation it repeatedly said, “an insurance producer, or insurer where no producer is involved…” This simplifies and cleans that up. “Entity” now encompasses an insurer—but could also mean a marketing organization or intermediary, if it is required to be licensed. (M.1) “…intended to result or does result…” circles back to the expanded application in Section 2. Scope, in applying the regulation to “any sale or recommendation of an annuity.” However, the new language in M.2. narrows the interpretive breadth of the foregoing by exempting from the definition of a recommendation general communications, customer service and administrative activities, and educational support and activities related to annuity sales. Section (N) contains no substantive change. (I) “Suitability information” has been redefined through “Consumer profile information” (C). (O) “SEC” is a new definition. The Drafting Note contains no changes.

Section 5. 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. “Cash compensation” means any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from the consumer.

C. “Consumer profile information” means information that is reasonably appropriate to determine whether a recommendation addresses the consumer’s financial situation, insurance needs and financial objectives, including, at a minimum, the following:

(1) Age;

(2) Annual income;

(3) Financial situation and needs, including debts and other obligations;

(4) Financial experience;

(5) Insurance needs;

(6) Financial objectives;

(7) Intended use of the annuity;

(8) Financial time horizon;

(9) Existing assets or financial products, including investment, annuity and insurance holdings;

(1) Liquidity needs;

(11) Liquid net worth;

(12) risk tolerance, including but not limited to, willingness to accept nonguaranteed elements in the annuity;

(13) Financial resources used to fund the annuity; and

(14) Tax status.

B.D. “Continuing education credit” or “CE credit” means one continuing education credit as defined in [insert reference in State law or regulations governing producer continuing education course approval].

C.E. “Continuing education provider” or “CE provider” means an individual or entity that is approved to offer continuing education courses pursuant to [insert reference in State law or regulations governing producer continuing education course approval].

D.F. “FINRA” means the Financial Industry Regulatory Authority or a succeeding agency.

E.G. “Insurer” means a company required to be licensed under the laws of this state to provide insurance products, including annuities.

F. “Insurance producer” means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities.

H. “Intermediary” means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurer’s annuities by producers.

I. (1) “Material conflict of interest” means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.

(2) “Material conflict of interest” does not include cash compensation or non-cash compensation.

J. “Non-cash compensation” means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support and retirement benefits.

K. “Nonguaranteed elements” means the premiums, credit interest rates (including any bonus), benefits, values, dividends, non-interest based credits, charges or elements of formulas used to determine any of these that are subject to company discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.

L. “Producer” means a person or entity required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities. For purposes of this regulation, “producer” includes an insurer where no producer is involved.

GM. (1) “Recommendation” means advice provided by an insurance a producer, or an insurer where no producer is involved, to an individual consumer that was intended to result or does result results in a purchase, an exchange or a replacement of an annuity in accordance with that advice.

(2) Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.

HN. “Replacement” means a transaction in which a new policy or contract annuity is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer if there is nowhether or not a producer is involved, that by reason of the transaction, an existing annuity or other insurance policy or contract has been or is to be any of the following:

(1) Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated;

(2) Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values;

(3) Amended so as to effect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid;

(4) Reissued with any reduction in cash value; or

(5) Used in a financed purchase.

I. “Suitability information” means information that is reasonably appropriate to determine the suitability of a recommendation, including 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; and

(12) Tax status.

O. “SEC” means the United States Securities and Exchange Commission.

Drafting Note:  The definition of “replacement” above is derived from the NAIC Life Insurance and Annuities Replacement Model Regulation. If a state has a different definition for “replacement,” the state should either insert the text of that definition in place of the definition above or modify the definition above to provide a cross‑reference to the definition of “replacement” that is in state law or regulation.

Duties of Insurers and Producers

The revision of Section 6 strikes the word “insurance” so that the title of Section 6 is now “Duties of Insurers and Producers.” [Section 6. Duties of Insurers and Insurance Producers].

Section 6.A limited the best interest obligation to “when making a recommendation of an annuity” (therefore, no ongoing duty); limited to the circumstances known at the time the recommendation is made (no retrospective look back, nor does it say “or should be known”); requires producers to not place financial interest ahead of the consumer’s interest (not “without regard to” producer’s financial interest); and sets forth that acting in the best interest is met if the producer has satisfied the four obligation “buckets,” as described below.

Section 6. Duties of Insurers and Producers. A. Best Interest Obligations. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest. A producer has acted in the best interest of the consumer if they have satisfied the following obligations regarding care, disclosure, conflict of interest and documentation:

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 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:

Care Obligation

Satisfying the Care Obligation requires the producer to exercise reasonable diligence, care and skill (does not require “exercising prudence”) while doing four specific things:

1.    Know the consumer’s financial situation, insurance needs and financial objectives;

2.    Understand the available recommendation options;

3.    Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information; and

4.    Communicate the basis or bases of the recommendation.

Also, the producer must:

ü  Make reasonable efforts to obtain the consumer profile information prior to the recommendation.

ü  Consider the types of products the producer is authorized and licensed to recommend or sell that address the consumer’s financial situation, insurance needs and financial objectives. Does NOT require producers to analyze or consider products outside the authority and scope of their license, nor consider other possible alternative products or strategies in the market at the time of the recommendation. Producers held to standards applicable to producers with similar authority and licensure.

Explicitly states that requirements under the Care Obligation do not create a fiduciary obligation or relationship and only create a regulator obligation.

Additionally, producers must:

ü  Consider relevant factors pertaining to the consumer, the product, and the insurer when making a particular recommendation, but such factors may vary in importance. Cannot consider any one factor in isolation, however.

ü  Have a reasonable basis to believe the consumer would benefit from certain features of the annuity. (This is in the 2010 version.)

(g) Requirements under the Care Obligation apply to the particular annuity as a whole, as well as the underlying subaccounts, riders and similar product enhancements. (No change from current version.) (h) Requirements here do not mean that the recommended annuity must be the one with lowest one‑time or multiple occurrence compensation structures. (i) Producers do not have ongoing monitoring obligations—unless such obligations are separately owed under agreement between the producer and consumer. (j) As it relates to an exchange or replacement of an annuity, this is generally the same as the current 2010 version; however, the changes of note are as follows:  First, (ii) adds the word “substantially” before “benefit” in terms of the replacing products comparison to the replaced product and that comparison must be considered in light of the “life of the product;” and, second, consideration of whether the consumer has had another annuity exchange or replacement is extended from its current look back of 36 months (3 years) to 60 months (5 years). (k) This new provision explicitly disclaims any requirement under the whole of the regulation for a producer to obtain any license other than an insurance license, including any securities license, in order to fulfill the obligations and duties set forth in the regulation. Caveat here for producers is to not give advice or provide services that are otherwise subject to securities law or engage in any other activity that would require other professional licenses.

(1)(a) Care Obligation. The producer, in making a recommendation shall exercise reasonable diligence, care and skill to:

(i) Know the consumer’s financial situation, insurance needs and financial objectives;

(ii) Understand the available recommendation options after making a reasonable inquiry into options available to the producer;

(iii) Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives over the life of the product, as evaluated in light of the consumer profile information; and

(iv) Communicate the basis or bases of the recommendation.

(b) The requirements under subparagraph (a) of this paragraph include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.

(c) The requirements under subparagraph (a) of this paragraph require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumer’s financial situation, insurance needs and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.

(d) The requirements under this subsection do not create a fiduciary obligation or relationship and only create a regulatory obligation as established in this regulation.

(e) The consumer profile information, characteristics of the insurer, and product costs, rates, benefits and features are those factors generally relevant in making a determination whether an annuity effectively addresses the consumer’s financial situation, insurance needs and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor may not be considered in isolation.

(f) The requirements under subparagraph (a) of this paragraph include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit or other insurance-related features.

(g) The requirements under subparagraph (a) of this paragraph apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar producer enhancements, if any.

(h) The requirements under subparagraph (a) of this paragraph do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be recommended.

(i) The requirements under subparagraph (a) of this paragraph do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising or financial planning agreement between the consumer and the producer.

(j) In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration whether:

(i) 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;

(ii) The replacing product would substantially benefit the consumer in comparison to the replaced product over the life of the product; and

(iii) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.

(k) Nothing in this regulation should be construed to require a producer to obtain any license other than a producer license with the appropriate line of authority to sell, solicit or negotiate insurance in this state, including but not limited to any securities license, in order to fulfill the duties and obligations contained in this regulation; provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.

Disclosure Obligation

The Disclosure Obligation contains the requirement for the producer to disclose certain information to the consumer prior to or at the time of the recommendation or sale, the substance of which is set forth in a new appendix to the regulation (Appendix A). This obligation generally requires a producer to disclose the scope/terms of the relationship with the consumer and the producer’s role in the transaction; what products the producer is licensed and authorized to sell; whether the producer is authorized to sell annuities from one or multiple insurers; a description of the types of cash compensation the producer will receive for the sale and the source of that cash compensation; a notice that the producer may receive non‑cash compensation and the source of the non‑cash compensation; and a notice that the consumer has the right to request additional information. If the consumer requests, the producer must disclose a reasonable estimate of the cash compensation to be received and whether the cash compensation is a one‑time or multiple occurrence amount (and if so, the frequency and amount of the occurrence). Amounts may be stated as a range of amounts or as a percentage. (c) This subparagraph was, generally, the “old” Section 6.A.(1), but this is slightly more restrictive in adding “prior to or at the time of…” and striking “reasonably” before informed. And, list of features of the annuity about which the producer must have a reasonable basis to believe that the consumer has been informed has been expanded to include such things as annual fees, potential charges for annuity options outside of riders, potential changes in nonguaranteed elements, and market risk.

(2) Disclosure Obligation.

(a) Prior to the recommendation or sale of an annuity, the producer shall prominently disclose to the consumer on a form substantially similar to Appendix A:

(i) A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction;

(ii) An affirmative statement on whether the producer is licensed and authorized to sell the following products:

(I) Fixed annuities;

(II) Fixed indexed annuities;

(III) Variable annuities;

(IV) Life insurance;

(V) Mutual funds;

(VI) Stocks and bonds; and

(VII) Certificates of deposit;

(iii) An affirmative statement describing the insurers the producer is authorized, contracted (or appointed), or otherwise able to sell insurance products for, using the following descriptions:

(I) One insurer;

(II) From two or more insurers; or

(III) From two or more insurers although primarily contracted with one insurer.

(iv) A description of the sources and types of cash compensation and non-cash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary or other producer or by fee as a result of a contract for advice or consulting services; and

(v) A notice of the consumer’s right to request additional information regarding cash compensation described in subparagraph (b) of this paragraph;

Drafting Note:  If a state approves forms, a state should add language to subparagraph (a) reflecting such approvals.

(b) Upon request of the consumer or the consumer’s designated representative, the producer shall disclose:

(i) A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages; and

(ii) Whether the cash compensation is a one-time or multiple occurrence amount, and if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages; and

(c1) Prior to or at the time of the recommendation or sale of an annuity, the producer shall have a reasonable basis to believe Thethe 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, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components and market risk.

Drafting Note: If a state has adopted the NAIC Annuity Disclosure Model Regulation, the state should insert an additional phrase in paragraph (1) subparagraph (c) above to explain that the requirements of this section are intended to supplement and not replace the disclosure requirements of the NAIC Annuity Disclosure Model Regulation.

(2) The consumer would benefit from certain features of the annuity, such as tax-deferred growth, annuitization or death or living benefit;

(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; and

(4) In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable including taking into consideration whether:

(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; and

(c) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 36 months.

Conflict of Interest Obligation

The Conflict of Interest Obligation requires a producer to (1) identify and (2) avoid or reasonably manage and disclose material conflicts of interest. Recall that material conflicts of interest are defined under Section 5.I. as a financial interest of the producer in the sale of an annuity that a reasonably person would expect to influence the impartiality of a recommendation but does not include cash or non‑cash compensation. No specific guidance is given here in regard to how a producer shall “reasonably manage” a material conflict of interest.

(3) Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.

Documentation Obligation

Under the Documentation Obligation, producers are required to:

·         Make a written record of their recommendation and the basis for it;

·         Obtain a consumer-signed statement (on a form substantially similar to the second new appendix (Appendix B):

o   Customer’s refusal to provide consumer profile information; and

o   Customer’s understanding of the ramifications for not doing so;

·         Obtain a consumer-signed statement (on a form substantially similar to the third new appendix (Appendix C):

o   An acknowledgment that the customer decided to buy an annuity that was not based on the producer’s recommendation.

(4) Documentation Obligation. A producer shall at the time of recommendation or sale:

(a) Make a written record of any recommendation and the basis for the recommendation subject to this regulation;

(b) Obtain a consumer signed statement on a form substantially similar to Appendix B documenting:

(i) A customer’s refusal to provide the consumer profile information, if any; and

(ii) A customer’s understanding of the ramifications of not providing his or her consumer profile information or providing insufficient consumer profile information; and

(c) Obtain a consumer signed statement on a form substantially similar to Appendix C acknowledging the annuity transaction is not recommended if a customer decides to enter into an annuity transaction that is not based on the producer’s recommendation.

Drafting Note: If a state approves forms, a state should add language to subparagraphs (b) and (c) of this paragraph reflecting such approvals.

B. Prior to the execution of a purchase or exchange of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumer’s suitability information.

C. Except as permitted under subsection 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.

Applicability of the New Best Interest Obligation

Subsection 5 describes to whom the best interest obligation applies. This new clause was suggested by the New York delegate to the Working Group and comes from NY Insurance Reg. 187, adopted in August 2019. However, there are a few critical differences:  NY Reg. 187 applies to any producer who has “materially participated;” here, a producer must have exercised material control or influence. Also, the qualifier “direct” is before the compensation that results from the sale of the annuities. And, the scope of activities that would not fall under the application is broader under the revised MDL 275, to include other back office product support and the general supervision of a producer. Subsection B contains no substantive difference.

(5) Application of the best interest obligation. Any requirement applicable to a producer under this subsection shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.

D.B. Transactions not based on a recommendation.

(1) Except as provided under paragraph (2) of this subsection, neither an insurance  a producer, nor an insurer, shall have any no obligation to a consumer under Subsection A(1) or C related to any annuity transaction if

(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 consumer profile information and the annuity transaction is not recommended; or

(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 at the time the annuity is issued.

Carrier/Insurer Supervision Requirements

In order to issue an annuity, insurers must have a reasonable basis to believe the annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives based on the consumer’s consumer profile information. (2) Generally in regard to the supervision system that is required, the language throughout is conformed to state “establish and maintain”—in the 2010 version, it sometimes stated “establish” and sometimes stated “maintain;” now “establish and maintain.” (d) Amends current requirement that the recommended annuity be “suitable” to the new best interest standard; i.e., that the “recommended annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives.” (e) Requires that the insurer’s “reasonable procedures” are sufficient to detect recommendation that are not in compliance with subsections A (the Best Interest Obligation, with the four “buckets” of Care, Disclosure, Material Conflicts of Interest, and Documentation), B (Transactions not based on a recommendation), D (Prohibited practices), and E (Safe Harbor). To accommodate industry concerns regarding the difficulty for insurers to know what producers may or may not have disclosed and communicated to a consumer, language added here allows insurers to use “producer and consumer” interviews, as well as “producer statements or attestations” in order to create the reasonable procedures that would be compliant with the regulation. Also, an insurer may confirm the consumer profile information as well as other required information after issuance or delivery of the annuity. (f) The appendices and the documentation required under Section 6.A (4)(a) to make a written record of any recommendation and the basis for the recommendation, as well as the producer interviews and attestations provide a structure for insurer assessment. (h) It is important to note the qualifiers here; First, as the drafting note states, this is directed at sales contests, etc. based on sales of “specific” annuities “within a limited period of time” and is not directed at general incentives for an insurer’s products. Incentives based on premium volume, for instance, would not be prohibited as long as it is not tied to the sale of a particular annuity within a limited time period. (Note:  There is no definition of what a “limited” time period would be.) Also important is that the reference to non‑cash compensation is not intended to prohibit a producer’s receipt of general employee or retirement benefits, nor the receipt of office support, including rent. (I) Qualifies that the annual report be written.

C. Supervision system.

(1) Except as permitted under subsection B, an insurer may not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives based on the consumer’s consumer profile information.

 (E) An insurance producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale:

(1) Make a record of any recommendation subject to section 6A of this regulation;

(2) Obtain a customer signed statement documenting a customer’s refusal to provide suitability information, if any; and

(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)(2) An insurer shall establish and maintain a supervision system that is reasonably designed to achieve the insurer’s and its insurance producers’ compliance with this regulation, including, but not limited to, the following:

(a) The insurer shall establish and maintain reasonable procedures to inform its insurance producers of the requirements of this regulation and shall incorporate the requirements of this regulation into relevant insurance producer training manuals;

(b) The insurer shall establish and maintain standards for insurance producer product training and shall establish and maintain reasonable procedures to require its insurance producers to comply with the requirements of section 7 of this regulation;

(c) The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers;

(d) The insurer shall establish and maintain procedures for the 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 recommended annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives. Such 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. Such 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 establish and maintain reasonable procedures to detect recommendations that are not suitablein compliance with subsections A, B, D and E. This may include, but is not limited to, confirmation of the consumer’s suitability consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations and programs of internal monitoring. Nothing in this subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures, or by confirming the suitability consumer profile information or other required information under this section after issuance or delivery of the annuity; and

(f) The insurer shall establish and maintain reasonable procedures to assess, prior to or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section;

(g) The insurer shall establish and maintain reasonable procedures to identify and address suspicious consumer refusals to provide consumer profile information;

(h) The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits or other employee benefits by employees as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time; and

Drafting Note: The intent of this subparagraph (h) is to prohibit sales contests, sales quotas, bonuses and non-cash compensation based on the sale of a particular product within a limited period of time, but not to prohibit general incentives regarding the sales of a company’s products with no emphasis on any particular product.

(f)(i) The insurer shall annually provide a written 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)(3)(a) Nothing in this subsection restricts an insurer from contracting for performance of a function (including maintenance of procedures) required under paragraph (1) this subsection. An insurer is responsible for taking appropriate corrective action and may be subject to sanctions and penalties pursuant to section 8 of this regulation regardless of whether the insurer contracts for performance of a function and regardless of the insurer’s compliance with subparagraph (b) of this paragraph.

(b) An insurer’s supervision system under paragraph (1) this subsection shall include supervision of contractual performance under this subsection. This includes, but is not limited to, the following:

(i) Monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed; and

(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.

Exemptions From Insurer’s Supervision System

The addition of (b) here is very important as it recognizes that an insurer cannot know and should not be expected to know what other product options a producer may have nor what the compensation is for those other options or how such compensation compares to the compensation for the insurer’s products; insurers should only be required to establish and maintain a system of supervision related to a producer’s recommendation of products—and the compensation related thereto‑for only those products offered by the insurer. Section D contains no substantive change.

(3)(4) An insurer is not required to include in its system of supervision an insurance

(a) A producer’s recommendations to consumers of products other than the annuities offered by the insurer; or

(b) Include consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.

GD. Prohibited Practices. Neither a producer nor an insurer shall An insurance producer shall not dissuade, or attempt to dissuade, a consumer from:

(1) Truthfully responding to an insurer’s request for confirmation of the suitabilityconsumer profile information;

(2) Filing a complaint; or

(3) Cooperating with the investigation of a complaint.

Safe Harbor

Section E broadens safe harbor beyond 2010 Model 275 compliance under FINRA suitability and supervision requirements to compliance made under standards that are comparable to the requirements under this regulation; and maintains the insurance commissioner’s ability to investigate and enforce this regulation, even where the financial professional is acting under comparable standards. However, if the recommendation and sale of an annuity is made by a financial professional under comparable standards outside of this regulation, the insurer is still obligated to comply with the insurer supervision system requirements under Section 6.C.(1)—requiring an insurer to have a reasonable basis to believe the annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives based on the consumer’s consumer profile information. (3) Sets forth what the insurer needs to do to comply where the recommendation and sales of an annuity is made by a financial professional as defined in (4) under the safe harbor provision:  insurers are required to monitor the relevant conduct of the financial professional and assist the entity responsible for supervising the financial professional seeking to rely on the safe harbor, providing information and reports that are reasonably appropriate to assist such entity in maintaining its supervision system.

HE. Safe Harbor.

(1) Recommendations and sales of annuities Sales made in compliance with comparable standards FINRA requirements pertaining to suitability and supervision of annuity transactions shall satisfy the requirements under this regulation. This subsection applies to FINRA broker-dealer all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls and procedures that satisfy a comparable standard even if such standard would not otherwise apply to the product or recommendation at issue if the suitability and supervision is similar to those applied to variable annuity sales. However, nothing in this subsection shall limit the insurance commissioner’s ability to investigate and enforce (including investigate) the provisions of this regulation.

Drafting Note: Noncompliance with comparable standards FINRA requirements means that the broker-dealer transaction recommendation or sale is subject to compliance with the suitability requirements of this regulation.

(2) Nothing in paragraph (1) shall limit the insurer’s obligation to comply with Section 6C(1) of this regulation, although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.

(2)(3) For paragraph (1) to apply, an insurer shall:

(a) Monitor the FINRA member broker-dealer relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professional’s broker-dealer or an investment adviser registered under federal [or state] securities laws using information collected in the normal course of an insurer’s business; and

(b) Provide to the FINRA member broker-dealer entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professional’s broker-dealer or investment adviser registered under federal [or state] securities laws, information and reports that are reasonably appropriate to assist the FINRA member broker-dealer such entity to maintain its supervision system.

Definition of a “Financial Professional” – A “financial professional” under the safe harbor provision is a producer who is regulated and is acting as:

·         A registered broker-dealer (B-D) or registered representative of a BD;

·         A registered investment adviser or IAR associated with the investment adviser; or

·         An ERISA or IRC plan fiduciary.

The drafting note clarifies that the financial professionals described under (4) must be explicitly acting in their capacity as such and in accordance and compliance with the relevant comparable standards that are applicable to those roles in order to be eligible for the safe harbor. If they are not, they are subject to this regulation.

(4) For purposes of this subsection, “financial professional” means a producer that is regulated and acting as:

(a) A broker-dealer registered under federal [or state] securities laws or a registered representative of a broker-dealer;

(b) An investment adviser registered under federal [or state] securities laws or an investment adviser representative associated with the federal [or state] registered investment adviser; or

(c) A plan fiduciary under Section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.

Drafting Note: The requirement that a producer be “regulated and acting” as a broker‑dealer, a registered representative of a broker-dealer, an investment adviser, an investment adviser representative or a plan fiduciary means that a producer who is not explicitly acting in compliance with the relevant comparable standards, as specified in paragraph (4) below, is not eligible for this safe harbor and is subject to compliance with the requirements of this regulation.

Definition of “Comparable Standards”

(a) For BDs and BD representatives, applicable SEC and FINRA rules pertaining to best interest obligations and supervision of annuity recommendations and sales (Reg. BI, for instance, and any amendments or successor regulations to Reg. BI). (b) For RIAs and IARs associated with the registered investment adviser, the fiduciary duties and requirements imposed under contract or under the Investment Advisers Act of 1940 (or applicable state securities law). (c) For plan fiduciaries, the duties, obligations, prohibitions and all other requirements attendant to ERISA or IRC rules and laws (and any amendments or successor statutes). The drafting note provides that each state may determine whether to extend the safe harbor to include state‑regulated financial professionals.

(5) For purposes of this subsection, “comparable standards” means:

(a) With respect to broker-dealers and registered representatives of broker‑dealers, applicable SEC and FINRA rules pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto;

(b) With respect to investment advisers registered under federal [or state] securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 [or applicable state securities law], including but not limited to, the Form ADV and interpretations; and

Drafting Note: State-registered investment advisers in this safe harbor are included in brackets so that each individual state that implements this model regulation may determine whether to include the state-regulated investment advisers. Given the varying treatment of annuities, particularly variable annuities, under state law, the varying structures of state securities and insurance departments, and the varying levels of cooperation between the two agencies, this is a decision best made in each individual state.

(c) With respect to plan fiduciaries or fiduciaries, means the duties, obligations, prohibitions and all other requirements attendant to such status under ERISA or the IRC and any amendments or successor statutes thereto.

Producer Training Requirements

Note:  The revision of Section 7 strikes the word “insurance” so that the title of Section 7 is now “Producer Training.” [Section 7. Insurance Producer Training]

Section 7.B.(3) is the big change to the training requirements—adding the appropriate “standard of conduct” to the list of things required to be included as part of the training course. This would imply that the new best interest standard and all its accompanying requirements would need to be part of the training. The question became:  what happens for those individuals who have already taken the one‑time four‑hour course? Do they need to retake it? Are they grandfathered in? The answer to that question came quite late in the process and was suggested by the joint trades. (6) Provides that producers who have already completed the annuity course required under the 2010 model regulation requirements need to complete either a new four‑credit training course or an additional one‑time one‑credit training course to provide training and education pertaining to the new standards and requirements of this amended regulation.

Section 7. Producer Training. A. An insurance A 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 A producer may rely on insurer-provided product-specific training standards and materials to comply with this subsection.

B. (1) (a) An insurance A producer who engages in the sale of annuity products shall complete a one-time four (4) credit training course approved by the department of insurance and provided by the department of insurance-approved education provider.

(b) Insurance pProducers who hold a life insurance line of authority on the effective date of this regulation and who desire to sell annuities shall complete the requirements of this subsection within six (6) months after the effective date of this regulation. Individuals who obtain a life insurance line of authority on or after the effective date of this regulation may not engage in the sale of annuities until the annuity training course required under this subsection has been completed.

(2) The minimum length of the training required under this subsection shall be sufficient to qualify for at least four (4) CE credits, but may be longer.

(3) The training required under this subsection shall include information on 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; and

(f) Appropriate standard of conduct, sales practices, replacement and disclosure requirements.

(4) Providers of courses intended to comply with this subsection 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.

(5) A provider of an annuity training course intended to comply with this subsection 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 [insert reference to State law or regulations governing producer continuing education course approval].

(6) A producer who has completed an annuity training course approved by the department of insurance prior to [insert effective date of amended regulation] shall, within six (6) months after [insert effective date of amended regulation], complete either:

(a) A new four (4) credit training course approved by the department of insurance after [insert effective date of amended regulation]; or

(b) An additional one-time one (1) credit training course approved by the department of insurance and provided by the department of insurance-approved education provider on appropriate sales practices, replacement and disclosure requirements under this amended regulation.

(6)(7) Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with [insert reference to State law or regulations governing producer continuing education course approval].

(7)(8) Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with [insert reference to State law or regulations governing to producer continuing education course approval].

(8)(9) The satisfaction of the training requirements of another State that are substantially similar to the provisions of this subsection shall be deemed to satisfy the training requirements of this subsection in this State.

(10) The satisfaction of the components of the training requirements of any course or courses with components substantially similar to the provisions of this subsection shall be deemed to satisfy the training requirements of this subsection in this state.

(9)(11) An insurer shall verify that an insurance a producer has completed the annuity training course required under this subsection before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this subsection 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.

Compliance Mitigation, Penalties, and Enforcement

Note:  The revision of Section 8 adds the word “Enforcement” so that the title of Section 8 is now “Compliance Mitigation; Penalties; Enforcement.” [Section 8. Compliance Mitigation; Penalties; Enforcement] This is not a substantive change:  Insurers are already responsible for the action of its producers and the actions of any outside entity it contracts with to satisfy its supervision obligations (see Sec. 6.C.(3)). Section C reinforces the argument and position that this is an insurance‑based regulation, not subject to securities‑based enforcement.

Section 8. Compliance Mitigation; Penalties; Enforcement. A. An insurer is responsible for compliance with this regulation. If a violation occurs, either because of the action or inaction of the insurer or its insurance producer, the commissioner may order:

(1) An insurer to take reasonably appropriate corrective action for any consumer harmed by a failure to comply with this regulation by the insurer’s, insurer, an entity contracted to perform the insurer’s supervisory duties or by its insurance producer’s, violation of this regulation the producer;

(2) A general 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 regulation; and

(3) Appropriate penalties and sanctions.

B. Any applicable penalty under [insert statutory citation] for a violation of this regulation may be reduced or eliminated [, according to a schedule adopted by the commissioner,] if corrective action for the consumer was taken promptly after a violation was not part of a pattern or practice.

Drafting Note: Subsection B above is intended to be consistent with the commissioner’s discretionary authority to determine the appropriate penalty for a violation of this regulation. The language of subsection B is not intended to require that a commissioner impose a penalty on an insurer for a single violation of this regulation if the commissioner has determined that such a penalty is not appropriate.

Drafting Note: A State that has authority to adopt a schedule of penalties may wish to include the words in brackets. In that case, “shall” should be substituted for “may” in the same sentence. States should consider inserting a reference to the NAIC Unfair Trade Practices Act or the State’s statute that authorizes the commissioner to impose penalties and fines.

C. The authority to enforce compliance with this regulation is vested exclusively with the commissioner.

Recordkeeping Requirements

Note:  The revision of Section 9 strikes the word “Optional” so that the title of Section 9 is now “Recordkeeping.” [Section 9. Optional Recordkeeping]. Section A removes “Optional” from the Recordkeeping requirement, which, it should be noted, was always optional in any case; it also adds “disclosures that a producer made to the consumer—including summaries of any oral disclosures”— as part of the records that must be maintained.

Section 9. Recordkeeping. A. Insurers, general agents, independent agencies and insurance producers shall maintain or be able to make available to the commissioner records of the information collected from the consumer, disclosures made to the consumer, including summaries of oral disclosures, and other information used in making the recommendations that were the basis for insurance transactions for [insert number] 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 a producer.

B. Records required to be maintained by this regulation may be maintained in paper, photographic, micro-process, magnetic, mechanical or electronic media or by any process that accurately reproduces the actual document.

Effective Date of the Model Act

Section 10 was changed to delete the suggested six month effective date set forth in the 2010 version. Sates sometime changed the timeframe in any case; this just allows states to set their own effective date.

Section 10. Effective Date. The amendments to this regulation shall take effect [six (6)X] months after the date the regulation is adopted or on [insert date], whichever is later.[3]

Appendix A – Insurance Agent Disclosure for Annuities

Note:  For ease of reading, the document has foregone the underlining required for new text, as this is all new. (See Sec. 6.A.(2))

APPENDIX A

INSURANCE AGENT (PRODUCER) DISCLOSURE FOR ANNUITIES
Do Not Sign Unless You Have Read and Understand the Information in this Form

Date: _________________________

INSURANCE AGENT (PRODUCER) INFORMATION (“Me,” “I,” “My”)

First Name: _____________________ Last Name: ________________________________

Business/Agency Name: __________________________ Website: ___________________

Business Mailing Address: ____________________________________________________

Business Telephone Number: _________________________________________________

Email Address: _____________________________________________________________

National Producer Number in [state]: ____________________________________________

CUSTOMER INFORMATION (“You,” “Your”)

First Name: _____________________ Last Name: ________________________________

What Types of Products Can I Sell You?

I am licensed to sell annuities to you in accordance with state law. If I recommend that You buy an annuity, it means I believe that it effectively meets Your financial situation, insurance needs, and financial objectives. Other financial products, such as life insurance or stocks, bonds and mutual funds, also may meet Your needs.

I offer the following products:

☐  Fixed or Fixed Indexed Annuities

☐  Variable Annuities

☐  Life Insurance

I need a separate license to provide advice about or to sell non-insurance financial products. I have checked below any non‑insurance financial products that I am licensed and authorized to provide advice about or to sell.

☐  Mutual Funds

☐  Stocks/Bonds

☐  Certificates of Deposits

Whose Annuities Can I Sell to You?

I am authorized to sell:

☐  Annuities from Only One (1) Insurer

☐  Annuities from Two or More Insurers although I primarily sell annuities from:   ____________________________________________________________________

☐  Annuities from Two or More Insurers

How I’m Paid for My Work:

It’s important for You to understand how I’m paid for my work. Depending on the particular annuity You purchase, I may be paid a commission or a fee. Commissions are generally paid to Me by the insurance company while fees are generally paid to Me by the consumer. If You have questions about how I’m paid, please ask Me.

Depending on the particular annuity You buy, I will or may be paid cash compensation as follows:

☐  Commission, which is usually paid by the insurance company or other sources. If other sources, describe: _________________________________________________________.

☐  Fees (such as a fixed amount, an hourly rate, or a percentage of your payment), which are usually paid directly by the customer.

☐  Other (Describe): _______________________________________________________

If you have questions about the above compensation I will be paid for this transaction, please ask me.

I may also receive other indirect compensation resulting from this transaction (sometimes called “non-cash” compensation), such as health or retirement benefits, office rent and support, or other incentives from the insurance company or other sources.

By signing below, you acknowledge that you have read and understand the information provided to you in this document.

_____________________________________
Customer Signature

_____________________________________
Date

_____________________________________
Agent (Producer) Signature

_____________________________________
Date

Table 1.1 – Appendix A, Insurance Agent (Producer) Disclosure for Annuities

Drafting Note: This disclosure may be adapted to fit the particular business model of the producer. As an example, if the producer only receives commission or only receives a fee from the consumer, the disclosure may be refined to fit that particular situation. This form is intended to provide an example of how to communicate producer compensation, but compliance with the regulation may also be achieved with more precise disclosure, including a written consulting, advising or financial planning agreement.

Appendix B – Customer Refusal to Provide Information

Note:  For ease of reading, the document has foregone the underlining required for new text, as this is all new. (See Sec. 6.A.(4)(b))

APPENDIX B

CONSUMER REFUSAL TO PROVIDE INFORMATION
Do Not Sign Unless You Have Read and Understand the Information in this Form

Why are you being given this form?

You’re buying a financial product – an annuity.

To recommend a product that effectively meets your needs, objectives and situation, the agent, broker, or company needs information about you, your financial situation, insurance needs and financial objectives.

If you sign this form, it means you have not given the agent, broker, or company some or all the information needed to decide if the annuity effectively meets your needs, objectives and situation. You may lose protections and under the Insurance Code of [this state] if you sign this form or provide inaccurate information.

Statement of Purchase:

☐  I REFUSE to provide this information at this time.

☐  I have chosen to provide LIMITED information at this time.

_____________________________________
Customer Signature

_____________________________________
Date

Table 1.2 – Appendix B, Consumer Refusal to Provide Information

Appendix C – Consumer Decision to Purchase an Annuity NOT Based on a Recommendation

Note:  For ease of reading, the document has foregone the underlining required for new text, as this is all new. (See Sec. 6.A.(4)(c))

APPENDIX C

Consumer Decision to Purchase an Annuity NOT Based on a Recommendation
Do Not Sign Unless You Have Read and Understand It.

Why are you being given this form? You are buying a financial product – an annuity.

To recommend a product that effectively meets your needs, objectives and situation, the agent, broker, or company has the responsibility to learn about you, your financial situation, insurance needs and financial objectives.

If you sign this form, it means you know that you’re buying an annuity that was not recommended.

Statement of Purchaser:

I understand that I am buying an annuity, but the agent, broker or company did not recommend that I buy it. If I buy it without a recommendation, I understand I may lose protections under the Insurance Code of [this state].

_____________________________________
Customer Signature

_____________________________________
Date

_____________________________________
Agent (Producer) Signature

_____________________________________
Date

Table 1.3  – Appendix C, Consumer Decision to Purchase an Annuity NOT Based on a Recommendation[4]

NAIC Recommendation Standards for Senior Consumers

(1)  Prior to recommending a transaction involving an annuity to a consumer, an insurer and an insurance producer shall make every effort to obtain relevant information from the senior consumer.

(2)  An insurer and an insurance producer shall make recommendations only of transactions that are appropriate to assist the senior consumer to meet the particular senior consumer’s insurance needs and financial objectives.

(3)  An insurer and an insurance producer shall not make a recommendation unless the insurer and the insurance producer comply with the standards, guidelines, procedures and data collection processes established by the insurer.