82R9754 AJA-F

By: Eiland H.B. No. 2278

A BILL TO BE ENTITLED

AN ACT

relating to the suitability of certain annuity transactions.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 1115.001, Insurance Code, is amended to read as follows:

Sec. 1115.001. PURPOSE. The purpose of this chapter is to establish standards and procedures regarding recommendations made to a consumer that result in a transaction involving annuity products, and to require insurers to establish a system to supervise those recommendations, to ensure that the insurance needs and financial objectives of the consumer as of the time of the transaction are appropriately addressed.

SECTION 2. Section 1115.002, Insurance Code, is amended by adding Subdivision (5) to read as follows:

(5) "Suitability information" means information that is reasonably appropriate to determine the suitability of a recommendation, including the following:

(A) age;

(B) annual income;

(C) financial situation and needs, including the financial resources used for the funding of the annuity;

(D) financial experience;

(E) financial objectives;

(F) intended use of the annuity;

(G) financial time horizon;

(H) existing assets, including investment and life insurance holdings;

(I) liquidity needs;

(J) liquid net worth;

(K) risk tolerance; and

(L) tax status.

SECTION 3. Section 1115.003(a), Insurance Code, is amended to read as follows:

(a) This chapter applies to any recommendation to purchase, replace, or exchange an annuity that:

(1) is made to a consumer by an agent or insurer; and

(2) results in the recommended purchase, replacement, or exchange.

SECTION 4. Section 1115.051, Insurance Code, is amended to read as follows:

Sec. 1115.051. SUITABILITY OF ANNUITY PRODUCT REQUIRED. (a) Before the execution of a purchase or exchange of an annuity resulting from a recommendation, an agent, or the insurer if an agent is not involved, must make reasonable efforts to obtain[:

[(1)] information from the consumer concerning:

(1) [(A)] the consumer's financial situation and needs [status];

(2) [(B)] the consumer's investments [tax status]; and

(3) [(C)] the consumer's suitability information [investment objectives; and

[(2) other relevant information used or considered to be reasonable by the agent or that insurer in making recommendations to consumers].

(b) In a recommendation to a consumer regarding the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, an agent or the insurer, if an agent is not involved, has reasonable grounds for believing that:

(1) on the basis of [that the recommendation is suitable for that consumer based on the] facts disclosed by the consumer regarding the consumer's[:

[(1)] investments and other insurance products[;] and the consumer's [(2)] financial situation and needs, including the consumer's suitability information, the recommendation is suitable for the consumer;

(2) the consumer has been reasonably informed of the various features of the annuity, such as the potential surrender period and surrender charge, any 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;

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

(4) the particular annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the annuity, and any riders or similar product enhancements are suitable, and, in the case of an exchange or replacement, the transaction as a whole is suitable, for the particular consumer based on the consumer's suitability information; and

(5) in the case of an exchange or replacement of an annuity, the exchange or replacement is suitable, including taking into consideration whether the consumer:

(A) 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 or similar product enhancements;

(B) would benefit from product enhancements and improvements; and

(C) has had another annuity exchange or replacement, and in particular, an exchange or replacement in the preceding 36 months.

(c) Before the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, an agent, or an insurer if an agent is not involved, shall make reasonable efforts to obtain the consumer's suitability information.

(d) Except as permitted by Subsection (e), an insurer may not issue an annuity recommended to a consumer unless the insurer has a reasonable basis to believe the annuity is suitable based on the consumer's suitability information.

(e) [(c)] An agent, or an insurer if an agent is not involved, has no obligation to a consumer related to a recommendation if [the consumer]:

(1) the consumer refuses to provide relevant information requested by the agent or insurer and the annuity transaction is not recommended;

(2) the consumer received a recommendation that was made and was later found to have been prepared based on materially inaccurate information provided by the consumer; [fails to provide complete or accurate information on the request of the agent or insurer; or]

(3) the consumer decides to enter into a transaction that is not based on a recommendation of the agent or insurer; or

(4) a recommendation is not made.

(f) [(d)] An agent's or insurer's recommendation subject to Subsection (b) [(a)] must be reasonable under all the circumstances actually known to the agent or insurer at the time of the recommendation.

(g) An agent, or the responsible insurer if an agent is not involved, shall at the time of sale of an annuity:

(1) make a record of any recommendation made by the agent or insurer that is subject to this chapter;

(2) obtain a customer-signed statement documenting the customer's refusal, if any, to provide suitability information; and

(3) obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the agent's or insurer's recommendation.

(h) An agent may not dissuade, or attempt to dissuade, a consumer from:

(1) truthfully responding to an insurer's request for confirmation or suitability information;

(2) filing a complaint; or

(3) cooperating with the investigation of a complaint.

SECTION 5. Section 1115.052, Insurance Code, is amended to read as follows:

Sec. 1115.052. SUPERVISION [COMPLIANCE] SYSTEM. (a) Each insurer shall operate a system, that is reasonably designed to achieve the insurer's and the insurer's agents' compliance with this chapter, to supervise recommendations.

(b) [An insurer may comply with Subsection (a) by complying with Subsections (c)-(e) or by establishing and maintaining the insurer's own compliance system that complies with Subsection (c). Each agent and independent agency shall adopt an insurer's compliance system or shall establish and maintain such a system.

[(c)] A supervision [compliance] system established under Subsection (a) [(b)] must [include]:

(1) include reasonable procedures to inform the insurer's agents of the requirements of this chapter and incorporate the requirements of this chapter into relevant agent training manuals [maintenance of written procedures]; [and]

(2) establish standards for agent product training and maintain reasonable procedures to require the insurer's agents to comply with the requirements of Section 1115.056;

(3) provide product-specific training and training materials that explain all material features of the insurer's annuity products to the insurer's agents;

(4) maintain procedures to review each recommendation electronically, physically, or otherwise before the issuance of an annuity that:

(A) are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable; and

(B) may:

(i) include the application of a screening system to identify selected transactions for additional review; and

(ii) be designed to require additional review only of those transactions identified for additional review by the selection criteria;

(5) maintain reasonable procedures, such as confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters, and programs of internal monitoring, to detect recommendations that are not suitable, which may involve applying sampling procedures or confirming suitability information after the issuance or delivery of the annuity; and

(6) annually provide a report to the insurer's senior management, including to the senior manager responsible for audit functions, that details a review, with appropriate testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and any corrective action taken or recommended [periodic reviews of the insurer's or agent's records in a manner reasonably designed to assist in detecting and preventing violations of this chapter].

(c) This section does not prohibit an insurer from contracting for the performance of a function, including maintenance of procedures, required by Subsection (a). An insurer is responsible for taking appropriate corrective action and may be subject to sanctions and penalties under Section 1115.102 regardless of whether the insurer contracts for performance of a function and regardless of the insurer's compliance with Subsection (d).

(d) An insurer's supervision system under this section must include the supervision of contractual performance under this subsection that includes, at a minimum [(d) An agent or insurer may contract with a third party, including an agent or independent agency, to establish and maintain a compliance system with respect to agents under contract with or employed by the third party. The agent or insurer shall make reasonable inquiries sufficient to ensure that the third party is performing the functions required under Subsection (a), and shall take any action reasonable under the circumstances to enforce the contractual obligation to perform those functions. An agent or insurer may comply with the obligation to make reasonable inquiries by]:

(1) annually obtaining 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 contracted function is properly performed [of the third party that the third party is performing the required functions]; and

(2) monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed [periodically selecting third parties, based on reasonable selection criteria, for a review to determine whether the third parties are performing the required functions].

(e) [An agent or insurer shall adopt procedures for conducting a review under Subsection (d)(2) that are reasonable under the circumstances. An insurer that contracts with a third party under Subsection (d) and that complies with the requirements to supervise under Subsection (d) is deemed to have complied with the insurer's responsibilities under Subsection (b).

[(f)] An insurer[, agent, or independent agency] is not required by this section to[:

[(1) review, or provide for review of, all agent-solicited transactions; or

[(2)] include in the insurer's supervision [compliance] system an agent's recommendations to consumers of products other than the annuities offered by the insurer[, agent, or independent agency].

SECTION 6. Section 1115.054, Insurance Code, is amended by amending Subsection (a) and adding Subsection (c) to read as follows:

(a) Subject to Subsection (c), compliance [Compliance] with the conduct rules of the Financial Industry Regulatory Authority (FINRA) relating to suitability and supervision of annuity transactions, or the rules of another national organization recognized by the commissioner, satisfies the requirements of [under] this chapter for the recommendation of annuities registered under the Securities Act of 1933 (15 U.S.C. Section 77a et seq.) or rules or regulations adopted under that Act.

(c) Subsection (a) applies only if the insurer:

(1) monitors the FINRA member broker-dealer using information collected in the normal course of the insurer's business; and

(2) provides to the FINRA member broker-dealer information and reports that are reasonably appropriate to assist the broker-dealer to maintain the broker-dealer's supervision system.

SECTION 7. Section 1115.101, Insurance Code, is amended to read as follows:

Sec. 1115.101. MITIGATION. An insurer is responsible for compliance with this chapter. If a violation occurs because of the action or inaction of the insurer or the insurer's agent, the [The] commissioner may order:

(1) an insurer to take reasonable appropriate corrective action for any consumer harmed by the insurer or by the insurer's agent because of a violation of this chapter;

(2) an agent to take reasonably appropriate corrective action for any consumer harmed by the agent's violation of this chapter; and

(3) a managing general agent or independent agency that employs or contracts with an agent to sell, or solicit the sale of, annuities to consumers to take reasonably appropriate corrective action for any consumer harmed by the agent's violation of this chapter.

SECTION 8. Section 1115.053, Insurance Code, is repealed.

SECTION 9. Chapter 1115, Insurance Code, as amended by this Act, applies only to a recommendation to purchase, exchange, or replace an annuity contract made on or after January 1, 2012, and any transaction arising from that recommendation. A recommendation made before January 1, 2012, and a transaction arising from that recommendation are governed by the law in effect immediately before the effective date of this Act, and that law is continued in effect for that purpose.

SECTION 10. This Act takes effect September 1, 2011.