Advisors, insurance agents and insurance carriers may soon face more stringent compliance requirements and increased liability for making unsuitable recommendations, when selling annuities. The regulatory change will happen at the state level as a result of the National Conference of Insurance Legislators (NCOIL) executive committee voting unanimously on March 6 to adopt the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation(“Model Regulation”).
The Model Regulation affects annuity sales in three primary ways:
- Before recommending that a consumer purchase an annuity, producers will be required to make “reasonable efforts” to obtain the consumer’s “suitability information” and determine whether an annuity is suitable for the customer. “Suitability information” includes an analysis of the following consumer information:
- annual income
- financial situation
- financial experience
- financial objectives
- intended use of the annuity
- financial time horizon
- existing assets
- liquidity needs
- liquid net worth
- risk tolerance
- tax status
The Model Regulation will hold insurers responsible for prescribing suitable annuity transactions, regardless of whether the insurer contracts with the consumer.
2) Although producers will be responsible for complying with the suitability requirement, the ultimate onus of the requirement falls on the carriers. The Model Regulation will
hold insurers responsible for prescribing suitable annuity transactions, regardless of whether the insurer contracts with the consumer. This means carriers will be responsible for implementing additional producer training and reviewing all “recommended annuity transactions."
3) Because many producers are subject as broker-dealers to the authority of FINRA, the Model Regulation provides a safe harbor under which compliance with FINRA suitability rules will be deemed as compliance with the Model Regulation.
Violating the Model Regulation’s suitability requirements can result in insurers and producers being forced to take “reasonably appropriate corrective action” to provide a remedy for consumers who suffer harm as a result of unsuitable recommendations. Other sanctions and punitive penalties are allowed if appropriate under state insurance law.
NCOIL President George Keiser—a representative in the North Dakota legislature—said at the NCOIL 2011 Spring Meeting that the Model Regulation is intended to be “in line with state legislators’ efforts to promote transparency and accountability in the sale of life insurance products.”
Now that the NCOIL executive committee has adopted the Suitability in Annuity Transactions Model Regulation, the states will consider whether to adopt the Model Regulation. Although the states may choose not to adopt the Model Regulation, many undoubtedly will.
For additional coverage of this issue and similar ones, including in-depth analysis of partnership taxation,sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.
See also The Law Professor's blog at AdvisorFYI.