Requirement 8368 Sales Procedure Update - Suitability of Annuity Transactions (MN H.B. 791)
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1 Effective: June 1, 2013 Requirement 8368 Sales Procedure Update - Suitability of Annuity Transactions (MN H.B. 791) 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 transactions, the producer or the company (if no producer is involved) must have reasonable grounds to believe (after a reasonable inquiry) that the recommendation is, under the totality of the circumstances, suitable for the consumer. o This 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. Suitability information is information that is reasonably appropriate to determine the suitability of a recommendation, including, but not limited to, the following: age; annual income and any anticipated material changes in annual income; financial situation and needs, including the financial resources used for funding the annuity, and any anticipated material changes in the consumer s financial situation and needs; financial experience; financial objectives; intended use of the annuity; financial time horizon; existing assets, including investment and life insurance holdings, and any anticipated material changes in existing assets; liquidity needs, and any anticipated material changes in those needs; liquid net worth, and any anticipated material changes in liquid net worth; risk tolerance; tax status; and whether or not the consumer has a reverse mortgage. o The producer or the company (if a producer is not involved) must also have a reasonable basis to believe all of the following: The consumer has been reasonably informed of various features of the annuity, such as: the potential surrender period and surrender charge; Page 1 of 6
2 the potential tax penalty if the consumer sells, exchanges, surrenders, redeems, 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 receive a tangible net benefit from the transaction. For the particular consumer based on his or her suitability information: 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 an exchange or replacement, the transaction as a whole is suitable taking into account, among other things, the age of the consumer. In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable. This must include consideration of whether the consumer: will incur a surrender charge; be subject to the start of 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 receive a tangible net benefit from the transaction; in the case of a consumer who is 65 years of age or older, neither the producer nor the company may recommend a replacement or exchange of an annuity that requires the consumer to pay a surrender charge for the annuity if the replacement or exchange does not confer a substantial financial benefit over the life of the annuity to the consumer so that a reasonable person would believe the purchase is unnecessary; and has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months. o For purposes of this Update, 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 Page 2 of 6
3 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 otherwise remained in force, or for which benefits would be paid; reissued with any reduction in cash value; or used in a financed purchase. 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. o Suitability information must be recorded on a form, inventory, or similar record. o The producer must, on request, provide a copy of the information used in making the suitability determination to the consumer or his or her legal representative. The company may 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. Neither the producer nor the company has any obligation to a consumer stemming from an annuity transaction if: o A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer; or o The consumer refuses to provide relevant suitability information and the annuity transaction is not recommended. The company s issuance of an annuity under these circumstances must be reasonable under all circumstances actually known (or which after reasonable inquiry should be known) to the company or the producer at the time the annuity is issued. At the time of sale, the producer or the responsible company representative (where no producer is involved), must: Page 3 of 6
4 o Make a record of any recommendation; o Obtain a consumer s signed statement documenting his or her refusal to provide suitability information, if any; and o 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 upon the producer's or the company's recommendation. Neither the company nor an insurance producer may dissuade, or attempt to dissuade, a consumer from: o Providing suitability information to the producer or the company and 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. Sales of annuities by broker-dealers satisfy requirements as long as: o The sales comply with the Financial Industry Regulatory Authority s (FINRA s) requirements regarding suitability and supervision of annuity transactions; and o A registered principal reviews and approves the transaction based on review criteria that include consideration of the consumer s age, income, liquidity needs, and financial situation. A registered principal is a person associated with a FINRA member broker-dealer, who is actively engaged in the management of the brokerdealer s investment banking or securities business, including supervision, solicitation, conduct of business, or the training of persons associated with a FINRA member broker-dealer for any of these functions. With respect to broker-dealer sales, the company remains responsible for the suitability of every transaction, subject to penalties, and must still: o Monitor the FINRA member broker-dealer using information collected in the normal course of the company s business; 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; and o Take reasonably appropriate corrective action for any consumer harmed by violation of law. A producer may not solicit the sale of an annuity product unless the producer: o Has adequate knowledge of the product to recommend it; and o Is in compliance with the company s standards for product training. A producer may rely on company-provided product-specific training standards and materials to comply with this requirement. Page 4 of 6
5 Producers authorized to sell annuities must complete a one-time four-credit training course, approved by the Commissioner of the Department of Commerce ( Commissioner ) and provided by a Commissioner-approved continuing-education provider as follows: o Producers who hold a life insurance line of authority on 6/1/2013 and who want to continue to sell annuities must complete the training requirements by 7/1/2014. o Producers who obtain a life line of authority on or after 1/1/2014 cannot sell annuities until the training course is completed. o The producer-training course must qualify for four continuing education (CE) hours. o The producer training course must include the following topics: Types and classifications of annuities; Identification of the parties to an annuity; How fixed, variable and indexed annuity contract provisions affect consumers; Income taxation of qualified and non-qualified annuities; The primary uses of annuities; Appropriate and lawful sales practices, replacement, and disclosure requirements; Suitability information and whether an annuity is suitable for a consumer; and The recognition of indicators that a prospective insured may lack the short-term memory or judgment to knowingly purchase an insurance product. o Course providers must cover all topics listed in the prescribed outline and must not present any marketing information or provide training on sales techniques or specific information about a particular company s products. Course providers must: be approved continuing education providers in ; and comply with the requirements applicable to insurance producer continuing education courses. o Training courses may be conducted and completed by classroom or self-study methods. o All courses approved by the Commissioner for this purpose must be given the course title Annuity Suitability and Disclosure. Only the courses satisfying the requirements in this Update may use this title after June 1, o Course providers must comply with course completion reporting requirements under law. Page 5 of 6
6 o If a producer completes the annuity training requirements in another state with substantially similar training requirements as, this training requirement will be deemed satisfied for. Completion of the annuity training requirements in another state will not, however, satisfy continuing education requirements in unless the course taken is a continuing education course approved by the Commissioner. o The company must verify that a producer has completed the required annuitytraining course before allowing the producer to sell annuity products for the company. The company may satisfy this requirement by obtaining certificates of completion of the training course or obtaining reports provided by Commissioner-sponsored database systems, vendors, or any reasonably reliable commercial database vendor that has a reporting arrangement with approved insurance education providers. If these data collection and reporting arrangements are not in place, the company must maintain records verifying that the producer has completed the required annuity-training course and make the records available to the Commissioner upon request. 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 its producer, the Commissioner may order appropriate corrective action, penalties, remedies, or administrative actions. Corrective action may include cancelling an annuity transaction for a consumer harmed by the company s, or a producer s, violation of these rules. The company and its producers must maintain, or be able to make available to the Commissioner, records of the information collected from the consumer under these rules, and other information used in making recommendations for annuity transactions, for ten years after the transaction is completed by the company. o The company may, but is not required to, keep records on behalf of a producer. o The records may be kept: in paper, photographic, micro-process, magnetic, mechanical, or electronic media; or by any process that accurately reproduces the actual document. Page 6 of 6
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