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Retirement Planning > Retirement Investing > Annuity Investing

California Lawmakers OK Annuity Suitability Bill Based on NAIC Model

By Arthur D. Postal

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An annuity suitability standards bill, A.B. 689, has made it through the California Legislature and is waiting for the signature of Gov. Jerry Brown.

The bill passed in the state Senate by a 34-0 vote; it passed in the Assembly by a 79-0 vote in May and by a 76-0 vote last week.

Brown has until Sept. 9 to sign the bill, officials say.

California Insurance Commissioner Dave Jones says he is glad to see A.B. 689 pass after “several years of failed attempts” to get an annuity suitability bill enacted.

“California needs a comprehensive system that requires that insurers supervise and ultimately take responsibility for insurance producer annuity recommendations and sales in California,” Jones says in a statement.

A.B. 689 is California’s response to a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that encourages states to adopt annuity standards that are at least as rigorous as the suitability standards in the Suitability in Annuity Transactions Model that was approved by the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., in 2010 or else face the possibility that they might lose the right to regulate products such as indexed annuities.

Today, California requires annuity sellers to give consumers replacing annuities at least 30 days to get their money back, and it also prohibits annuity sellers from using materially inaccurate presentations to recommend that senior citizens buy unnecessary replacement annuities, according to an A.B. 689 analysis prepared by the Assembly staff.

But Michael Martinez, the legislative director at the California Department of Insurance, which gave A.B. 689 strong support, told the state Senate Appropriations Committee in a letter sent in July that the state now has no law that requires an insurer or an agent to determine whether an annuity is suitable for a client before recommending it.

No California law requires insurers or agents to ask a consumer for the information needed for a suitability analysis, such as information about a consumer’s financial objectives, existing assets or liquidity needs, Martinez said.

“The insurer or producer recommending the sale of an annuity must be responsible for collecting appropriate annuity suitability information from the consumer and receive proper training in evaluating that information to assess whether the sale of an annuity is in the best interest of the consumer prior to making the sale,” Martinez said.

The NAIC model requires producers to sell an annuity only if there are reasonable grounds for believing that the annuity is suitable for a consumer based on the financial and investment information disclosed by the consumer.

A.B. 689 would require insurance producers involved with selling, exchanging or replacing annuities recommended to a consumer to have annuity suitability training and to have reasonable grounds for believing the annuity transactions under consideration to be suitable for the consumer, according to the legislative counsel’s digest for the bill.

Both agents and insurers could face sanctions and penalties in connection with violations of the requirements.

A.B. 689 would exempt broker-dealers already regulated by the Financial Industry Regulatory Authority. FINRA-member broker-dealers that sell variable annuities and other variable products are already governed by FINRA suitability rules.

California A.B. 689: What’s in There?

The requirements listed in the bill would not apply to:

  • Annuities sold in connection with ordinary direct-response solicitations.
  • Structured settlements.
  • Formal prepaid funeral contracts.
  • Contracts used to fund federally regulated plans or arrangements, such as an employee benefit plan governed by the Employee Retirement Income Security Act.

Suitability information would include matters such as use of reverse mortgages along with age, annual income and liquidity needs.

A producer would need to have evidence that a consumer would receive a “tangible net benefit” from a transaction before proceeding.

An insurer and a producer would have no suitability obligation to a consumer if:

  • No recommendation were made.
  • The consumer provided materially inaccurate information.
  • A consumer refused to provide suitability information, and no transaction was recommended.
  • A consumer decided to enter into a transaction not based on a recommendation by the insurer or the producer.

The continuing education provisions would require a producer to get 8 hours of annuity training before starting to sell annuities and 4 hours of additional continuing education every 2 years. The courses could be self-study courses.

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