480749 The Commissioner of the Department of Insurance, Securities and Banking proposes to establish a new chapter 84 of Title 26A which will require insurers to establish a system to supervise recommendations to consumers that result in ...

 

DEPARTMENT OF INSURANCE, SECURITIES, AND BANKING

 

NOTICE OF PROPOSED RULEMAKING

 

The Commissioner of the Department of Insurance, Securities, and Banking, pursuant to the authority set forth in section 125 of the Insurance Trade and Economic Development Amendment Act of 2000, effective April 3, 2001 (D.C. Law 13-265; D.C. Official Code § 31-2231.25 (2009 Repl.)), hereby gives notice of intent to establish a new chapter 84 of Subtitle A of Title 26, of the District of Columbia Municipal Regulations, in not less than thirty days from the date of the publication of this notice in the D.C. Register.  The new chapter 84 will require insurers to establish a system to supervise recommendations, including standards and procedures for recommendations to consumers that result in transactions involving annuity products, to ensure that the insurance needs and financial objectives of consumers are appropriately addressed.

 

Subtitle A, Insurance, of Title 26 of the District of Columbia Municipal Regulations is amended as follows:

 

A new chapter 84 is added to read as follows:

 

CHAPTER 84           SUITABILITY IN ANNUITY TRANSACTIONS

 

8400                PURPOSE

 

8400.1             The purpose of this chapter is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.

 

8400.2             Nothing herein shall be construed to create or imply a private cause of action for a violation of this chapter.

 

8401                SCOPE

 

8401.1             This chapter shall apply to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the recommended purchase, exchange or replacement transaction being executed.

 

8402                EXEMPTIONS

 

8402.1             Unless otherwise specifically included, this chapter shall not apply to transactions involving:

 

(a)        Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this chapter; or

 

(b)        Contracts used to fund:

 

(1)        An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);

 

(2)        A plan described by sections 401(a), 401(k), 403(b), 408(k) or 408(p) of the Internal Revenue Code (IRC), as amended, if established or maintained by an employer;

 

(3)        A government or church plan defined in section 414 of the IRC, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization under section 457 of the IRC;

 

(4)        A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;

 

(5)        Settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or

 

(6)        Formal prepaid funeral contracts.

 

8403                DUTIES OF INSURERS AND INSURANCE PRODUCERS

 

8403.1             In recommending the purchase or exchange of an annuity to a consumer that results in an insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer relative to his or her investments and other insurance products, and financial situation and needs, including the consumer’s suitability information, and that there is a reasonable basis to believe all of the following:

 

(a)        The consumer has been reasonably informed of the 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;

 

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

 

(c)        The particular 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) for the particular consumer based on his or her suitability information; and

 

(d)       In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable including taking into consideration whether:

 

(1)        The consumer 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 and similar product enhancements;

 

(2)        The consumer would benefit from product enhancements and improvements; and

 

(3)        The consumer has had another annuity exchange or replacement within the preceding 36 months.

 

8403.2             Prior to the execution of a purchase, exchange or replacement of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumer’s suitability information.

 

8403.3             Except as permitted under subsections 8403.4 and 8403.5, an insurer shall not issue an annuity recommendation to a consumer unless there is a reasonable basis to believe the annuity is suitable based on the consumer’s suitability information.

 

8403.4             Except as provided under subsection 8403.5 of this section, neither an insurance producer, nor an insurer, shall have any obligation to a consumer under section 8403.1 or 8403.3 related to any annuity transaction if:

 

(a)        No recommendation is made;

 

(b)        A recommendation was made and was later found to have been prepared based on inaccurate material information provided by the consumer;

 

(c)        A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended; or

 

(d)       A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the insurance producer.

 

8403.5             An insurer’s issuance of an annuity subject to subsection 8403.4 shall be reasonable under all the circumstances actually known to the insurer at the time the annuity is issued.

 

8403.6             An insurance producer, or where no insurance producer is involved, the insurer or its representative, shall at the time of sale:

 

(a)        Make a record of any recommendation subject to subsection 8403.1;

                       

(b)        Obtain a customer signed statement documenting a customer’s refusal to provide suitability information, if any; and

 

(c)        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 on the insurance producer’s or insurer’s recommendation.

 

8403.7             An insurer shall establish a system of supervision that is reasonably designed to comply with an insurer and its producer’s obligations under this chapter, including, but not limited to, the following:

 

(a)                The insurer shall maintain reasonable procedures to inform its insurance producers of the requirements of this chapter and shall incorporate the requirements of this chapter into the insurer’s producer policies and training manuals;

 

(b)               The insurer shall establish standards for insurance producer product training and shall maintain reasonable procedures to require its insurance producers to comply with the requirements of section 8404 of this chapter;

 

(c)                The insurer shall provide product-specific training and training materials which explain to its insurance producers all material features of its annuity products;

 

(d)               The insurer shall maintain procedures for review of each recommendation of an annuity that are designed to ensure that there are reasonable bases to determine that a recommendation is suitable.  Such review procedures may include a screening system for the purpose of identifying selected transactions for additional review, and may be accomplished electronically or through other means.  Such an electronic or other system may be designed to require additional review of those transactions deemed to have met certain selection criteria;

 

(e)                The insurer shall maintain reasonable procedure to detect recommendations that are not suitable.  This may include, but is not limited to, confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring.  Nothing in this paragraph prevents an insurer from complying with this subsection by applying sampling procedures or by confirming suitability information after the issuance or delivery of the annuity; and

 

(f)                The insurer shall annually provide a report to senior management, including the senior manager responsible for audit functions, which details a review, with appropriate testing reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended, if any.

 

8403.8             Nothing in this section shall restrict an insurer from contracting with third-parties to perform a function (including maintenance of procedures) required under subsection 8403.7.  An insurer is responsible for taking appropriate corrective action and may be subject to the sanctions and penalties in section 8306 of this chapter regardless of whether the insurer contracts for performance of a function or otherwise complies with paragraph (a) of this subsection.

 

(a)                An insurer’s system of supervision under subsection 8403.7 shall include the supervision of contractual performance under this section.  This includes, but is not limited to, the following:

 

(1)        Monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed; and

 

(2)        Annually obtaining a certification from a senior manager who has responsibility for the contracted function stating that the manager has a reasonable basis to represent, and does represent, that the function is being properly performed.

 

(b)        An insurer is not required to include in its system of supervision an insurance producer’s recommendations to consumers of products other than the annuities offered by the insurer.

 

8403.9             An insurance producer shall not dissuade, or attempt to dissuade, a consumer from:

 

(a)        Truthfully responding to an insurer’s request for confirmation of suitability information;

 

(b)        Filing a complaint; or

 

(c)        Cooperating with the investigation of a complaint.

 

8403.10           Sales made in compliance with FINRA requirements pertaining to suitability and supervision of annuity transactions shall satisfy the requirements under this chapter.  This subsection applies to FINRA broker-dealer sales of variable annuities and fixed annuities if the suitability and supervision procedures are similar to those applied to variable annuity sales.  However, nothing in this subsection shall limit the Commissioner’s ability to enforce the provisions of this chapter.

 

8403.11           For subsection 8403.10 of this section to apply, an insurer shall:

 

(a)        Monitor the FINRA member broker-dealer using information collected in the normal course of an insurer’s business; and

 

(b)        Provide to the FINRA member broker-dealer information and reports that are reasonably appropriate to assist in maintaining the FINRA member’s broker-dealer system of supervision.

 

8404                INSURANCE PRODUCER TRAINING

 

8404.1             An insurance producer shall not solicit the sale of an annuity product unless the insurance producer has adequate knowledge of the product to recommend the annuity and the insurance producer is in compliance with the insurer’s standards for product training.  An insurance producer may rely on the insurer-to provide product-specific training standards and materials to comply with this section.

 

8404.2             An insurance producer who engages in the sale of annuity products shall complete a one-time four (4) credit training course approved by the Department.

 

8404.3             Insurance producers who hold a life insurance line of authority on the effective date of this chapter and who desires to sell annuities shall complete the requirements of this section within six (6) months after the effective date of this chapter.  Individuals who obtain a life insurance line of authority on or after the effective date of this chapter may not engage in the sale of annuities until the annuity training course required under this subsection has been completed.

 

8404.4             The minimum length of the training required under this subsection shall be sufficient to qualify for at least four (4) CE credits, but may be longer.

 

8404.5             The training required under this section shall include information on the following topics:

 

(a)        The types of annuities and various classifications of annuities;

 

(b)        Identification of the parties to an annuity;

 

(c)        How fixed, variable and indexed annuity contract provisions affect consumers;

 

(d)       The application of income taxation of qualified and non-qualified annuities;

 

(e)        The primary uses of annuities; and

 

(f)        Appropriate sales practices, replacement and disclosure requirements.

           

8404.6             Providers of courses intended to comply with this section shall cover all topics listed in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurer’s products.  Additional topics may be offered in conjunction with and in addition to the required outline.

 

8404.7             A provider of an annuity training course intended to comply with this section shall register as a CE provider with the Department and comply with the applicable laws pertaining to insurance producer continuing education courses as set forth in 26 DCMR 100 et seq.

 

8404.8             Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with 26 DCMR 100 et seq.

 

8404.9             Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with 26 DCMR 100 et seq.

 

8404.10           The satisfactory compliance of another States’ training requirements that are substantially similar to the provisions of this section shall be deemed to have satisfied the training requirements of this section.

 

8404.11           An insurer shall verify that an insurance producer has completed the annuity training course required under this section before allowing the producer to sell an annuity product for that insurer.  An insurer may satisfy its responsibility under this section by obtaining certificates of completion of the training course or obtaining reports provided by database system sponsored and maintained by the Commissioner, or a vendor, or from a any other reasonably reliable commercial database vendor that has a reporting arrangement with the approved insurance education providers.

 

8405                COMPLIANCE MITIGATION; PENALTIES

 

8405.1             An insurer is responsible for compliance with this chapter.  If a violation occurs, either because of the action or inaction of the insurer, or its insurance producer, the commissioner may order:

 

(a)        An insurer to take reasonably appropriate corrective action for any consumer harmed by an insurer or insurance producer’s violation of this chapter;

 

(b)        A general agency, independent agency or the insurance producer to take reasonably appropriate corrective action for any consumer harmed by the insurance producer’s violation of this chapter; and

 

(c)        Any appropriate penalties and sanctions permitted under the Insurance Trade and Economic Development Amendment Act of 2009, effective April 3, 2001 (D.C. Law 1-265; D.C. Official Code § 31-2231.01 et seq. (2001)).

 

8405.2             Any applicable penalty for a violation of this chapter may be reduced or eliminated, if corrective action for the consumer was taken promptly after a violation was discovered or the violation was not part of a pattern or practice.

 

8406                RECORDKEEPING

 

8406.1             Insurers, general agents, independent agencies and insurance producers shall maintain and make available to the Commissioner upon request records of the information collected from the consumer and other information used in making the recommendations that were the basis for insurance transactions for three (3) years after the insurance transaction is completed by the insurer.  An insurer is permitted, but shall not be required, to maintain documentation on behalf of an insurance producer.

 

8406.2             Records required to be maintained by this chapter may be maintained in paper, photographic, microprocess, magnetic, mechanical or electronic media or by any process that accurately reproduces the actual document.

 

8407                EFFECTIVE DATE

 

8407.1             This chapter shall take effect six (6) months after the date the rules become effective.

 

8499                DEFINITIONS

 

8499                For the purposes of this chapter, the term:

 

Annuity means an annuity that is an insurance product under District of Columbia law and individually solicited, whether the product is classified as an individual or group annuity.

 

Commissioner means the Commissioner of the District of Columbia Department of Insurance, Securities and Banking.

           

Continuing education credit or CE credit means one continuing education credit as provided for in 26 DCMR 100 et seq.

 

Continuing education provider or CE provider means an individual or entity that is approved to offer continuing education courses pursuant to 26 DCMR 100 et seq.

 

Department means the District of Columbia Department of Insurance, Securities and Banking.

 

FINRA means the Financial Industry Regulatory Authority.

 

Insurer means a company required to be licensed under the laws of the District of Columbia to provide insurance products, including annuities.

 

Insurance producer means a person required to be licensed under the laws of the District of Columbia to sell, solicit or negotiate insurance, including annuities.

 

Recommendation means advice provided by an insurance producer, or an insurer where no producer is involved, to an individual consumer that results in a purchase, exchange or replacement of an annuity in accordance with that advice.

 

Replacement means a transaction in which a new policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer if there is no producer, that by reason of the transaction, an existing policy or contract has been or is to be:

 

(A)       Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated;

 

(B)       Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values;

 

(C)       Amended so as to effect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid;

 

(D)       Reissued with any reduction in cash value; or

 

(E)       Used in a financed purchase.

 

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

 

 

Persons desiring to comment on these proposed rules should submit comments in writing to Gennet Purcell, Commissioner, Department of Insurance, Securities, and Banking, 810 First Street, N.E., Suite 701, Washington, D.C. 20002.  Comments must be received not later than thirty (30) days after the date of publication of this notice in the D.C. Register.  Copies of the proposed rules may be obtained from the Department at the address above.