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									SENATE RULES COMMITTEE                                                  SB 715
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 651-1520       Fax: (916) 327-4478

                              THIRD READING

Bill No:     SB 715
Author:      Calderon (D), et al.
Amended:     4/25/11
Vote:        21

AYES: Calderon, Gaines, Anderson, Corbett, Lieu, Lowenthal, Price,


SUBJECT:       Annuity transactions

SOURCE:        Author

DIGEST: This bill requires adoption of more stringent procedures to
assess suitability of proposed annuity sales for customers, including
requiring insurers to establish a system to supervise the suitability of annuity
sale recommendations. In addition, this bill establishes mandatory
standards, procedures and processes, for insurers and producers, for
assessing suitability and monitoring annuity sales recommendations made to
consumers so that the insurance needs and financial objectives of consumers
at the time of the transaction are appropriately addressed.

ANALYSIS: California law imposes various rules related to the sale of
annuities to California buyers but does not contain standards related to the
“Suitability” of Annuity Sales to the personal situation of prospective

Existing federal law:
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1. Under the 2010 Dodd-Frank Wall Street Reform and Consumer
   Protection Act, specifically Title IX, Subtitle I, Section 989a of the
   (relating to senior investment protections) a state’s adoption of suitability
   requirements that meet or exceed National Association of Insurance
   Commissioners’ Suitability in Annuity Transactions Model requirements
   is required for a state to participate in a program of grants to support
   enhanced protections of seniors against misleading marketing practices.

2. Additionally, under Dodd-Frank Title IX, Subtitle I, Section 989J of the
   Dodd-Frank Act California’s adoption of at least the minimum
   requirements NAIC Suitability in Annuity Transactions Model is
   necessary for California’s continued jurisdiction over indexed securities.

This bill:

1.      Enacts, with limited revisions, the National Association of Insurance
        Commissioner’s Suitability in Annuity Sales Transactions Model to
        govern the duties of insurers and producers when recommending the
        purchase or exchange of an annuity and to impose a duty that the
        agent and insurer have reasonable grounds for believing that the
        recommendation is suitable for the consumer on the basis of the facts
        disclosed by the consumer.

2.      Imposes a secondary suitability review process upon life insurers who
        are prohibited under this bill from issuing “an annuity recommended
        to a consumer unless there is a reasonable basis to believe the annuity
        is suitable based on the consumer’s suitability information and
        applicable California law”

3.      Imposes producer training and annuity continuing education, carrier
        training programs, and training verification requirements.

4.      Specifically, this bill:

     A. States legislative findings and declarations as follows:

     B. Declares its purpose to be requiring 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

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   objectives of consumers at the time of the transaction are
   appropriately addressed.

C. Makes applicable to any recommendation to purchase, exchange, or
   replace an annuity made to a consumer that results in the purchase,
   exchange, or replacement that was recommended.

D. Defines “Recommendation” as “advice or other communication
   provided or made, by an insurance producer, or by an insurer, to an
   individual consumer that results in a purchase, exchange, or
   replacement of an annuity in accordance with that advice or

E. Excludes from its scope:

   1) Transactions arising from direct response solicitations where there
      is no recommendation based on information collected from the
      consumer pursuant to this article, or:

   2) Contracts used to fund any of the following:

       An employee pension or welfare benefit plan s covered by the
        Employee Retirement and Income Security Act (ERISA) (29
        U.S.C. Sec. 1001 et seq.);

       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;

       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.

       A nonqualified deferred compensation arrangement established
        or maintained by an employer or plan sponsor;

       Settlements of or assumptions of liabilities associated with
        personal injury litigation or any dispute or claim resolution
        process; or
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       Formal prepaid funeral contracts.

F. Establishes, at subdivisions (a) and (b) of Section 10509.915 the duty
   of insurers and insurance producers with respect to the making of
   annuity recommendations:

   1) Requires, in recommending an annuity purchase or the exchange of
      an annuity that results in another insurance transaction or series of
      insurance transactions, the producer and the insurer 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.

   2) Defines “Suitability information” in subdivision (j) of Section
      10509.914 as information that is reasonably appropriate to
      determine the suitability of a recommendation, including all of the

       Age;
       Annual income;
       Financial situation and needs, including the financial resources
        used for the funding of the annuity;
       Financial experience;
       Financial objectives;
       Intended use of the annuity;
       Financial time horizon;
       Existing assets, including investment and life insurance
       Liquidity needs;
       Liquid net worth;
       Risk tolerance;
       Tax status; and
       Whether or not the consumer has a reverse mortgage.

G. Requires, in recommending the purchase or exchange of an annuity,
   the producer, or the insurer where no insurance producer is involved,
   to have a reasonable basis to believe all the following:

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   1) The consumer has been reasonably informed of annuity features,
      such as the surrender period, surrender charge, potential tax
      penalty if the consumer sells, exchanges, surrenders, or annuitizes
      the annuity, mortality and expense fees, investment advisory fees,
      potential charges for and features of riders, limitations on interest
      returns, insurance and investment components, and market risk.

   2) The consumer would receive a tangible net benefit from the

   3) The particular annuity as a whole, the underlying subaccounts to
      which funds are allocated at the time of purchase or exchange of
      the annuity, and riders and similar product enhancements, if any,
      are suitable, and in the case of an exchange or replacement, the
      transaction as a whole is suitable, for the particular consumer,
      based on his or her suitability information.

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

       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.

       The consumer would benefit from product enhancements and

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

       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.

H. Requires, prior to a purchase, exchange or annuity replacement based
   on a recommendation, an insurance producer or an insurer where no
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   insurance producer is involved are to make reasonable efforts to
   obtain the consumer’s suitability information.

I. Prohibits an insurer from issuing an annuity recommended to a
   consumer unless there is a reasonable basis to believe the annuity is
   suitable based on the consumer’s suitability information and
   applicable California law, except that neither a producer nor an
   insurer has any obligation to a consumer pursuant to Subdivisions (a)
   and (c) of Section 10509.915 if:

   1) No recommendation is made;

   2) A recommendation was made and was later found to have been
      prepared based on materially inaccurate information provided by
      the consumer;

   3) A consumer refuses to provide relevant suitability information and
      the annuity transaction is not recommended; or

   4) A consumer decides to enter into an annuity transaction that is not
      based on a recommendation of the insurer or the insurance

J. Specifies, in the instances set forth in paragraph i through iv above, an
   insurer’s issuance of an annuity must “be reasonable under all the
   circumstances which are actually known, or which after reasonable
   inquiry should be known, to the insurer or insurance producer at the
   time the annuity is issued”.

K. Requires agents (or insurers if there is no agent) at the time of any sale

   1) Keep a record of any recommendations made;

   2) If a customer declines to provide suitability information, obtain a
      signed statement to that effect;

   3) If a customer decides upon an annuity transaction not based on the
      insurance producer’s or insurer’s recommendation, obtain a signed
      customer statement acknowledging that the transaction is not

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L. Requires insurers to establish a supervision system that is reasonably
   designed to achieve the insurer’s and its producers’ compliance with
   this bill, which must include, but is not limited to, all the following:

   1) Reasonable procedures to inform its insurance producers of this
      law’s requirements, which are to be incorporated into relevant
      insurance producer training manuals;

   2) Standards for insurance producer product training and reasonable
      procedures to require producers to comply with the this bill and
      current law’s education and training rules.

   3) Product-specific training and training materials that explain all
      material features of the insurer’s annuity products to its insurance

   4) Procedures for review of each annuity sales recommendation, prior
      to issuance, to ensure that there is a reasonable basis to determine
      that a recommendation is suitable.

   5) Procedures to detect recommendations that are not suitable, which
      may include, but is not limited to, confirmation of consumer
      suitability information, systematic customer surveys, interviews,
      confirmation letters, and programs of internal monitoring.

M. Requires that every insurer 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.

N. Permits an insurer to contract with a third party for these compliance
   reviews, but the insurer remains obligated to supervise the
   performance of any such third party suitability reviewer under
   paragraph (1) of Subdivision (f) of Section 10509.915. An insurer is
   not required to include in its system of supervision producer’s
   recommendations of products other than annuities offered by the

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O. Prohibits insurance producers from dissuading or attempting to
   dissuade, a consumer from:

   1) Truthfully responding to an insurer’s request for confirmation of
      suitability information;
   2) Filing a complaint; or
   3) Cooperating with the investigation of a complaint.

P. Provides subdivision (h) (1) of Section 10509.915 is a provision
   which deviates from the NAIC Model but was agreed to by the
   California DOI and sets the rules concerning California supervision
   for FINRA broker-dealer sales of variable and fixed annuities.

   The provision specifies 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 the consumer’s income the
   intended use of the annuity and except to this limited extent, all other
   provisions of this Article remain applicable to these broker-dealer
   sales and nothing in this provision shall limit the commissioner’s
   ability to enforce, including conducting investigations related to, the
   provisions of this article nor shall anything in this Act 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.

   NOTE: An online commentary from the NAIC website on the
   rationale for a FINRA recognition in the model was prepared by the
   state regulators who chaired the 2010 NAIC Annuity Suitability
   Model revisions. It states as follows:

   (It) “is intended to prevent duplicative suitability standards being
   applied to sales of annuities through FINRA broker-dealers. Sales of
   insurance products which are securities under federal law, such as
   variable annuities, are required to meet FINRA suitability rules; and
   sales in compliance with FINRA rules would comply with the NAIC
   suitability regulation. Broker-Dealers may subject fixed annuity sales
   to FINRA suitability and supervision rules; and sales made in
   compliance with such rules would also qualify as complying with the
   NAIC suitability regulation. However, since FINRA does not have

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   authority to enforce its rules on the sale of fixed annuities, broker-
   dealers supervising fixed annuity sales may be subject to more
   intensive insurance examination than for sale of security insurance
   products. Representatives of a broker-dealer, who are not required by
   the broker-dealer to comply with the FINRA requirements on the sale
   of fixed annuities, will have to comply with the insurance suitability
   regulation adopted by the state. In any case, insurers are responsible
   for any unsuitable annuity transactions no matter what suitability
   regulation or rule is applied by a broker-dealer.”

Q. Imposes continuing education and training requirements that are
   dovetailed with existing California law and DOI regulation and
   includes requirements for producers and insurers, including as to the
   latter a requirement to verify that training requirements of their
   producers have been met.

R. States the insurer is responsible for compliance with this article and
   provides that if a violation occurs, either because of the action or
   inaction of the insurer or its insurance producer, the commissioner
   may, in addition to any other available penalties, remedies, or
   administrative actions, order any or all of the following:

   1) An insurer to take reasonably appropriate corrective action for any
      consumer harmed by the insurer’s, or by its insurance producer’s,
      violation of this article;

   2) A 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; and

   3) Penalties and sanctions pursuant to Section 10509.9, which

       Agent penalties of from $1,000 dollars for a first violation to
        from $5,000 to $50,000 dollars for multiple or willful
        violations; and

       Insurer penalties of from $10,000 for a first offense or $30,000
        to $300,000 for subsequent violations which indicate a general
        business practice or a willful violation.
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   S. Provides 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.

   T. Requires insurers and producers to maintain recommendation-related
      records and information for five years after the insurance transaction
      is completed by the insurer. The insurer is permitted, but not
      required, to maintain this documentation on their producer’s behalf.


History and Evolution of NAIC Annuity Model Legislation: Annuities,
which are described below, are complex financial tools whose traits, as they
affect buyers, vary based upon the kind of annuity involved. Due to this
complexity, regulators nationally have focused intently over the past decade
on developing tools to help ensure that as annuity sales occur, producers and
insurers are selling suitable products.

This effort led in 2003 to a National Association of Insurance
Commissioners (NAIC) Senior Protection in Annuity Transactions Model
Regulation. By 2006, recognition of the underlying complexity as a pitfall
for buyers of all ages led to NAIC adoption of a revised model applicable to
all consumers. As summarized below in the Prior legislation review, none
of the earlier models led to suitability adoption in California.

In recent years, the NAIC initiated a further review of its Annuity Suitability
Model, issuing a charge to its committee of subject matter experts that it:

       “Review and consider changes to the Suitability in Annuity
      Transactions Model Regulation to improve the regulation of annuity
      sales and to provide insurers uniform guidance in developing agent
      training, supervision and monitoring standards in order to better
      protect annuity consumers from unsuitable sales and abusive sales and
      marketing practices.”

That most recent review led to the significantly revised 2010 version of the
NAIC Annuity Suitability model. Under the former model, for example,
required consumer information was limited to financial status, tax status and
investment objectives. In the 2010 model contained in this bill, the required
“suitability information” appears at page 5, lines 8 through 24 and includes a

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dozen required factors. It also expands training and procedure requirements
for producers and a requirement on insurers to establish their own processes
and monitoring to protect against the sale of unsuitable annuities.

What are Annuities? Annuities are specialized contracts sold by an
insurance company which are designed to provide payments to the holder at
specified intervals, usually after retirement. The insurance company accepts
payment from the buyer and then, at a future time, a stream of payments to
the individual begins. They are often used to secure a steady cash flow
during retirement. Annuities can be structured according to a wide array of
details and factors, such as the how long annuity payments can be
guaranteed to continue. Annuities can also be structured to provide either
fixed or variable payments. Variable annuities let an annuitant receive
greater payments if investments of the annuity fund do well and smaller
payments if its investments do poorly. While this provides for a less stable
cash flow than a fixed annuity, it allows annuitants to reap a benefit when
returns are strong.

While the variety of annuities give buyers great flexibility to pick one that
fits their situation, it also makes buyers more dependent on the skill and
training of their financial advisor, hence the concern to strengthen suitability

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 5/17/11)

Insurance Brokers and Agents of the West
Liberty Mutual Group
Pacific Life Insurance Company

ARGUMENTS IN SUPPORT: According to the author’s office,
California’s failure to have in place an annuity suitability law disadvantages
California annuity buyers and passage of annuity legislation this year will
correct that. It will ensure that every Californian will be better protected with
sales process safeguards that can help them despite the increased variety and
complexity of annuity offerings and their necessary reliance upon the advice
of others.

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JJA:nl 5/17/11 Senate Floor Analyses
                          **** END ****

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