Procedure Update Suitability of Annuity Transactions (NE L.B. 887)

Transcription

1 Procedure Update Suitability of Annuity Transactions (NE L.B. 887) Effective Date: The rules stated in this Update apply to solicitations occurring on and after January 1, The company must establish a system to supervise recommendations made by the company and insurance producers to consumers regarding annuity transactions so that consumer needs and financial objectives are addressed. These rules apply to any recommendation to purchase, exchange, or replace an annuity made to a consumer by a producer or the company (if no producer is involved) that results in the recommended purchase, exchange or replacement. o A replacement is a transaction where a new policy or contract is to be purchased, and it is known (or should be known) to the producer or the company (if no producer is involved), that an existing policy or contract has been or is to be: Lapsed, forfeited, surrendered, or partially surrendered, assigned to the replacing insurance company, or otherwise terminated; Converted to reduced paid up insurance, continued as extended term insurance, or reduced in value by the use of nonforfeiture benefits or other policy values; Amended to create either a reduction in benefits or in the term for which coverage would have remained in force or for which benefits would be paid; Reissued with any reduction in cash value; or Used in a financed purchase. The producer or the company (if no producer is involved) must have reasonable grounds to believe the annuity recommendation is suitable for the consumer based on the facts disclosed by the consumer before making a recommendation. The recommendation must be based on the facts disclosed by the consumer relating to his or her investments, other insurance products and the financial situation and needs of the consumer. This information must include suitability information. Page 1 of 6

2 o Suitable information is information that is reasonably appropriate to determine the suitability of a recommendation, including the following: Age; Annual income; Financial situation and need, 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 holdings; Liquidity needs; Liquid net worth; Risk tolerance; and Tax status. o The producer or the company (if a producer is not involved) must also have a reasonable basis to believe: The consumer has been reasonably informed of various features of the annuity, such as: The potential surrender period and surrender charge; Potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity; Mortality and expense fees; Investment advisory fees; Potential charges for and features of riders; Limitations on interest returns; Insurance and investment components; and Market risk. The consumer would benefit from certain features of the annuity, such as: Tax deferred growth; Annuitization; or Death or living benefit. The 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 Page 2 of 6

3 an exchange or replacement, the transaction as a whole is suitable for the particular consumer based on his or her suitability information. In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable, including the consideration as to whether the consumer: Will incur a surrender charge; Be subject to a new surrender period; Lose existing benefits (such as death, living or other contractual benefits); Would be subject to increased fees, investment advisory fees or charges for riders and similar product enhancements; Would benefit from product enhancements and improvements; and Has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 36 months. Before completing the purchase, exchange or replacement of an annuity resulting from a recommendation, the producer or the company (if no producer is involved) must make reasonable efforts to obtain the consumer s suitability information. Neither the producer nor the company has any obligation to a consumer stemming from an annuity transaction if: o No recommendation is made; o A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer; o The consumer refuses to provide relevant suitability information and the annuity transaction is not recommended; or o The consumer decides to enter into an annuity transaction that is not based on a recommendation of the company or the producer. If the company issues an annuity, it must be reasonable under all the circumstances actually known to the company at the time the annuity is issued. At the time of sale, the producer or the responsible company representative, must: o Make a record of any recommendation; o Obtain a customer s signed statement documenting his or her refusal to provide suitability information, if any; and Page 3 of 6

4 o Obtain a customer s signed statement acknowledging that an annuity transaction is not recommended if a customer decides to enter into an annuity transaction that is not based upon the producer's or the company's recommendation. The company must establish a supervision system that is reasonably designed to achieve the company's, and its producers', compliance with these procedures, including but not limited to: o Procedures to inform producers of these suitability requirements; o Incorporation of the requirements into relevant producer training manuals; o Standards for producer product training and reasonable procedures to ensure producer compliance; o Product specific training and training materials which explain all material features of its annuity products to its producers; o Procedures for reviewing each recommendation before issuing an annuity. These procedures must be designed to ensure that there is a reasonable basis to determine that a recommendation is suitable. The company may use a screening system to identify selected transactions for additional review. This may be accomplished electronically or through other means including, but not limited to, physical review. The system must require additional review of only those transactions identified for additional review by the selection criteria; o Reasonable procedures for detecting recommendations that are not suitable. These procedures may include, but are not limited to, confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring. The company may comply with this requirement by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity; and o An annual report to senior management (including to the senior manager responsible for audit functions) which includes a review (with appropriate testing) of the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended, if any. The company may contract with a third party to perform supervision functions, including maintenance of procedures. The supervision system must include supervision of contracted services including: o Monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed; and o Annually obtaining a certification from a senior manager who has responsibility Page 4 of 6

5 for the contracted function that the manager has a reasonable basis to represent (and does represent) that the function is properly performed. Note: If the company contracts with a third party to perform supervision functions, the company is still responsible for taking corrective action as needed and may be subject to sanctions and penalties regardless of whether the company contracts for the performance of a function and regardless of the company's compliance with the supervision requirements listed above. The company is not required to supervise a producer s recommendations for products other than the annuities offered by the company. An insurance producer may not dissuade, or attempt to dissuade, a consumer from: o Truthfully responding to the company's request for confirmation of suitability information; o Filing a complaint; or o Cooperating with the investigation of a complaint. Annuity sales made in compliance with the Financial Industry Regulatory Authority s (FINRA s) requirements regarding suitability and supervision of annuity transactions will satisfy requirements 1. With respect to those sales, the company must still, however: o Monitor the FINRA member broker dealer using information collected in the normal course of the company s business; and o Provide to the FINRA member broker dealer information and reports that are reasonably appropriate to assist the FINRA member broker dealer in maintaining its supervision system. A producer may not solicit the sale of an annuity unless the producer has adequate knowledge of the product to make recommendations and the producer is in compliance with the company s standards for product training. o A producer may rely on company provided product specific training standards and materials to comply with this requirement. Producers who sell annuities must complete a one time four hour credit training course, approved by the Department of Insurance and provided by a Department approved education provider. 1 This applies to FINRA broker dealer sales of both variable annuities and fixed annuities if the suitability and supervision is similar to those applied to variable annuity sales only. Page 5 of 6

6 o Producers who hold a life insurance line of authority on 1/1/2013 and who want to sell annuities must complete the education requirements by 7/1/2013. o Producers who obtain a life line of authority on or after 1/1/2013 cannot sell annuities until the training course is completed. o The producer training course must qualify for at least four CE credits but can be longer. o Annuities training must include the following: Types and classifications of annuities; Identification of the parties to an annuity; How fixed, variable and indexed contract provisions affect consumers; Income taxation of qualified and non qualified annuities; The primary uses of annuities; and Appropriate sales practices, replacement and disclosure requirements. o If the company provides annuity training courses, the company cannot include any marketing information or training on sales techniques, or provide specific information about the company s products. Additional topics can be offered in conjunction with (and in addition to) the required outline. o Providers of this required annuity training must register as a continuing education provider with the Department, comply with course provider reporting requirements, and issue certificates of completion as required by law. o The training can be completed by classroom or self study methods. o If a producer completes the annuity training requirements in another state with substantially similar training requirements as, the training requirement will be deemed satisfied for. o The company must verify that a producer has completed the required annuity training course before allowing the producer to sell annuity products for the company. This requirement can be satisfied by obtaining certificates of completion of the training course or obtaining reports provided by NAIC sponsored database systems, or vendors, or any reliable commercial database vendor that has a reporting arrangement with approved education providers. The company is responsible for compliance with all suitability requirements. o If a violation occurs because of the actions or inactions of the company or a producer, the Department may order appropriate corrective action. Any violation of these suitability requirements will be considered an unfair trade practice in the business of insurance under the state s Unfair Insurance Trade Practices Act. Page 6 of 6