1.1A bill for an act1.2relating to insurance; regulating annuity products; enacting and modifying 1.3a model regulation adopted by the National Association of Insurance 1.4Commissioners relating to suitability in annuity transactions;amending 1.5Minnesota Statutes 2010, sections 60K.46, subdivision 4; 60K.56, subdivision 5; 1.672A.20, subdivision 34; proposing coding for new law in Minnesota Statutes, 1.7chapter 72A.1.8BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:1.9    Section 1. Minnesota Statutes 2010, section 60K.46, subdivision 4, is amended to read:1.10    Subd. 4. Suitability of insurance. In recommending the purchase of any life, 1.11endowment, individual accident and sickness, long-term care, annuity, life-endowment, or 1.12Medicare supplement insurance to a customer, a producer must have reasonable grounds 1.13for believing that the recommendation is suitable for the customer and must make 1.14reasonable inquiries to determine suitability. The suitability of a recommended purchase 1.15of insurance will be determined by reference to the totality of the particular customer's 1.16circumstances, including, but not limited to, the customer's income, the customer's need 1.17for insurance, and the values, benefits, and costs of the customer's existing insurance 1.18program, if any, when compared to the values, benefits, and costs of the recommended 1.19policy or policies. This subdivision does not apply to limited lines insurance under section 1.2060K.38, subdivision 1
         , paragraph (c). Recommendations for the purchase of an annuity 1.21are subject to sections 72A.203 to 72A.2036 and not this subdivision.1.22    Sec. 2. Minnesota Statutes 2010, section 60K.56, subdivision 5, is amended to read:1.23    Subd. 5. Criteria for course accreditation. (a) The commissioner may accredit a 1.24course only to the extent it is designed to impart substantive and procedural knowledge of 2.1the insurance field. The burden of demonstrating that the course satisfies this requirement 2.2is on the individual or organization seeking accreditation. The commissioner is authorized 2.3to establish a procedure for renewal of course accreditation.2.4(b) The commissioner shall approve or disapprove professional designation 2.5examinations that are recommended for approval by the advisory task force. In order 2.6for an insurance producer to receive full continuing education credit for a professional 2.7designation examination, the producer must pass the examination. A producer may 2.8not receive credit for classroom instruction preparing for the professional designation 2.9examination and also receive continuing education credit for passing the professional 2.10designation examination.2.11(c) The commissioner shall approve continuing education courses offered by 2.12accredited institutions of higher education that are approved education providers under 2.13chapter 45 that impart substantive and procedural knowledge of the insurance field. 2.14Continuing education courses offered by accredited institutions of higher education 2.15that are approved education providers under chapter 45 shall not be considered 2.16company-sponsored courses unless attendance is restricted to producers of one or more 2.17companies or their affiliates.2.18    Sec. 3. Minnesota Statutes 2010, section 72A.20, subdivision 34, is amended to read:2.19    Subd. 34. Suitability of insurance for customer. In recommending or issuing life, 2.20endowment, individual accident and sickness, long-term care, annuity, life-endowment, or 2.21Medicare supplement insurance to a customer, an insurer, either directly or through its 2.22agent, must have reasonable grounds for believing that the recommendation is suitable for 2.23the customer.2.24In the case of group insurance marketed on a direct response basis without the use of 2.25direct agent contact, this subdivision is satisfied if the insurer has reasonable grounds to 2.26believe that the insurance offered is generally suitable for the group to whom the offer is 2.27made. Sections 72A.203 to 72A.2036, and not this subdivision, apply to recommending 2.28and issuing an annuity.2.29    Sec. 4. [72A.203] EXEMPTIONS.2.30Unless otherwise specifically included, sections 72A.203 to 72A.2036 do not apply 2.31to transactions involving:2.32(1) direct response solicitations where there is no recommendation based on 2.33information collected from the consumer pursuant to sections 72A.203 to 72A.2036; 2.34(2) contracts used to fund group plans under:3.1(i) an employee pension or welfare benefit plan that is covered by the Employee 3.2Retirement and Income Security Act of 1974 (ERISA) title 29, United States Code, 3.3sections 1001 to 1461;3.4(ii) a plan described by section 401(a), 401(k), 403(b), 408(k), or 408(p) of the 3.5Internal Revenue Code of 1986 (IRC); as amended, if established or maintained by an 3.6employer;3.7(iii) a government or church plan defined in section 414 of the Internal Revenue 3.8Code of 1986 as amended, a government or church welfare benefit plan, or a deferred 3.9compensation plan of a state or local government or tax exempt organization under section 3.10457 of the Internal Revenue Code of 1986, as amended; or3.11(iv) a nonqualified deferred compensation arrangement established or maintained by 3.12an employer or plan sponsor; and3.13(3) contracts used to fund, unless there is a recommendation to a consumer regarding 3.14an annuity in which case sections 72A.203 to 72A.2036 do apply with respect to the 3.15consumer annuity transaction:3.16(i) settlements of or assumptions of liabilities associated with personal injury 3.17litigation or a dispute or claim resolution process; or3.18(ii) formal prepaid funeral contracts.3.19    Sec. 5. [72A.2031] DEFINITIONS.3.20    Subdivision 1.Definitions.For purposes of sections 72A.203 to 72A.2036, the 3.21terms defined in this section have the meanings given them.3.22    Subd. 2.Annuity."Annuity" means an annuity that is an insurance product under 3.23state law that is individually solicited, whether the product is classified as an individual or 3.24group annuity.3.25    Subd. 3.Continuing education credit or CE credit."Continuing education credit" 3.26or "CE credit" means one continuing education credit earned pursuant to section 45.30, 3.27subdivision 4.3.28    Subd. 4.Continuing education provider or CE provider."Continuing education 3.29provider" or "CE provider" means an approved education provider under chapter 45.3.30    Subd. 5.FINRA."FINRA" means the Financial Industry Regulatory Authority 3.31or a succeeding agency.3.32    Subd. 6.Insurer."Insurer" means a company required to be licensed under the laws 3.33of this state to provide insurance products, including annuities.4.1    Subd. 7.Insurance producer."Insurance producer" means a person required to 4.2be licensed under the laws of this state to sell, solicit, or negotiate insurance, including 4.3annuities.4.4    Subd. 8.Replacement."Replacement" means a transaction in which a new policy or 4.5contract is to be purchased, and it is known or should be known to the proposing producer, 4.6or the proposing insurer, whether or not there is an insurance producer, that by reason of 4.7the transaction, an existing policy or contract has been or is to be any of the following:4.8(1) lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing 4.9insurer, or otherwise terminated;4.10(2) converted to reduced paid-up insurance; continued as extended term insurance, 4.11or otherwise reduced in value by the use of nonforfeiture benefits or other policy values;4.12(3) amended so as to effect either a reduction in benefits or in the term for which 4.13coverage would otherwise remain in force or for which benefits would be paid;4.14(4) reissued with any reduction in cash value; or4.15(5) used in a financed purchase.4.16    Subd. 9.Suitability information."Suitability information" means information that 4.17is reasonably appropriate to determine the suitability of a recommendation, including 4.18but not limited to the following:4.19(1) age;4.20(2) annual income and anticipated material changes in annual income;4.21(3) financial situation and needs, including the financial resources used for the 4.22funding of the annuity, and including anticipated material changes in financial situation 4.23and needs;4.24(4) financial experience;4.25(5) financial objectives;4.26(6) intended use of the annuity;4.27(7) financial time horizon;4.28(8) existing assets, including investment and life insurance holdings and anticipated 4.29material changes in existing assets;4.30(9) liquidity needs and anticipated material changes in liquidity needs;4.31(10) liquid net worth and anticipated material changes in liquid net worth;4.32(11) risk tolerance; 4.33(12) tax status; and4.34(13) whether or not the consumer has a reverse mortgage.4.35    Sec. 6. [72A.2032] DUTIES OF INSURERS AND INSURANCE PRODUCERS.5.1    Subdivision 1.Suitability standard.In recommending to a consumer the purchase 5.2of an annuity or the exchange of an annuity that results in another insurance transaction or 5.3series of insurance transactions, the insurance producer, or the insurer where no producer 5.4is involved, shall have reasonable grounds for believing, after a reasonable inquiry, that 5.5the recommendation is suitable for the consumer, under the totality of the circumstances 5.6based on the facts disclosed by the consumer as to the consumer's investments and other 5.7insurance products and as to the consumer's financial situation and needs, including the 5.8consumer's suitability information, and that there is a reasonable basis to believe all of 5.9the following:5.10(1) the consumer has been reasonably informed of various features of the annuity, 5.11such as the potential surrender period and surrender charge, potential tax penalty if the 5.12consumer sells, exchanges, surrenders, redeems, or annuitizes the annuity, mortality and 5.13expense fees, investment advisory fees, potential charges for and features of riders, 5.14limitations on interest returns, insurance and investment components, and market risk;5.15(2) the consumer would receive a tangible net benefit from the transaction;5.16(3) the particular annuity as a whole, the underlying subaccounts to which funds are 5.17allocated at the time of purchase or exchange of the annuity, and riders and similar product 5.18enhancements, if any, are suitable; and in the case of an exchange or replacement, the 5.19transaction as a whole is suitable taking into account, among other things, the age of the 5.20consumer; for the particular consumer based on the consumer's suitability information; and5.21(4) in the case of an exchange or replacement of an annuity, the exchange or 5.22replacement is suitable including taking into consideration all of the following:5.23(i) the consumer will incur a surrender charge; be subject to the commencement of a 5.24new surrender period; lose existing benefits, such as death, living, or other contractual 5.25benefits; or be subject to increased fees, investment advisory fees, or charges for riders 5.26and similar product enhancements;5.27(ii) the consumer would receive a tangible net benefit from the transaction, and 5.28in the case of a person 65 years of age or older, neither a producer nor an insurer shall 5.29recommend a replacement or exchange of an annuity that requires the insured to pay 5.30a surrender charge for the annuity being replaced or exchanged if the replacement or 5.31exchange does not confer a substantial financial benefit over the life of the annuity to the 5.32consumer so that a reasonable person would believe the purchase is unnecessary; and5.33(iii) the consumer has had another annuity exchange or replacement and, in 5.34particular, an exchange or replacement within the preceding 60 months.5.35    Subd. 2.Obtaining suitability information.Before the execution of a purchase, 5.36exchange, or replacement of an annuity resulting from a recommendation, an insurance 6.1producer, or an insurer where no producer is involved, shall make reasonable efforts to 6.2obtain the consumer's suitability information, and record this information on a form, 6.3inventory, or similar record.6.4    Subd. 3.Restriction on issuance of annuity.Except as permitted under subdivision 6.54, an insurer shall not issue an annuity recommended to a consumer unless there is a 6.6reasonable basis to believe the annuity is suitable based on the consumer's suitability 6.7information.6.8    Subd. 4.Exception.(a) Except as provided under paragraph (b), an insurance 6.9producer, or an insurer, does not have any obligation to a consumer under subdivision 1 6.10or 3 related to an annuity transaction if:6.11(1) no recommendation is made;6.12(2) a recommendation was made and was later found to have been prepared based on 6.13materially inaccurate information provided by the consumer; or6.14(3) a consumer refuses to provide relevant suitability information and the annuity 6.15transaction is not recommended.6.16(b) An insurer's issuance of an annuity subject to paragraph (a) shall be reasonable 6.17under all the circumstances actually known, or which after reasonable inquiry should be 6.18known to the insurer or the insurance producer, at the time the annuity is issued.6.19    Subd. 5.Documentation.An insurance producer or, where no insurance producer 6.20is involved, the responsible insurer representative, shall at the time of sale:6.21(1) make a record of any recommendation subject to subdivision 1;6.22(2) obtain a customer signed statement documenting a customer's refusal to provide 6.23suitability information, if any; and6.24(3) obtain a customer signed statement acknowledging that an annuity transaction 6.25is not recommended if a customer decides to enter into an annuity transaction that is not 6.26based on the insurance producer's or insurer's recommendation.6.27    Subd. 6.Supervision system.(a) An insurer shall establish a supervision system 6.28that is reasonably designed to achieve the insurer's and its insurance producers' compliance 6.29with sections 72A.203 to 72A.2036, including, but not limited to, all of the following:6.30(1) the insurer shall maintain reasonable procedures to inform its insurance 6.31producers of the requirements of sections 72A.203 to 72A.2036 and shall incorporate the 6.32requirements of sections 72A.203 to 72A.2036 into relevant insurance producer training 6.33programs and manuals;6.34(2) the insurer shall establish standards for insurance producer product training 6.35and shall maintain reasonable procedures to require its insurance producers to comply 6.36with the requirements of section 72A.2033;7.1(3) the insurer shall provide product-specific training and training materials which 7.2explain all material features of its annuity products to its insurance producers;7.3(4) the insurer shall maintain procedures for review of each recommendation 7.4before issuance of an annuity that are designed to ensure that there is a reasonable basis 7.5to determine that a recommendation is suitable. The review procedures shall apply a 7.6screening system for the purpose of identifying selected transactions for additional review 7.7and may be accomplished electronically or through other means including, but not limited 7.8to, physical review. The electronic or other system shall be designed to require additional 7.9or elevated review of those transactions identified for additional elevated review on the 7.10basis of the advanced age of the consumer, liquidity, and income;7.11(5) the insurer shall maintain reasonable procedures to detect recommendations 7.12that are not suitable. This may include, but is not limited to, confirmation of consumer 7.13suitability information, systematic customer surveys, interviews, confirmation letters, 7.14and programs of internal monitoring. Nothing in this clause prevents an insurer from 7.15complying with this clause by applying sampling procedures, or by confirming suitability 7.16information after issuance or delivery of the annuity; and7.17(6) the insurer shall annually provide a report to senior management, including to the 7.18senior manager responsible for audit functions, which details a review, with appropriate 7.19testing, reasonably designed to determine the effectiveness of the supervision system, the 7.20exceptions found, and corrective action taken or recommended, if any.7.21(b)(1) Nothing in this subdivision restricts an insurer from contracting for 7.22performance of a function, including maintenance of procedures, required under paragraph 7.23(a). An insurer is responsible for taking appropriate corrective action and may be subject 7.24to sanctions and penalties pursuant to section 72A.2034 regardless of whether the insurer 7.25contracts for performance of a function and regardless of the insurer's compliance with 7.26subdivision 2, and an insurer is responsible for the compliance of an insurance producer 7.27with the provisions of sections 72A.203 to 72A.2036 regardless of whether the insurer 7.28contracts for performance of a function required under this paragraph; and7.29(2) an insurer's supervision system under paragraph (a) must include supervision 7.30of contractual performance under this clause. This includes, but is not limited to, the 7.31following:7.32(i) monitoring and, as appropriate, conducting audits to assure that the contracted 7.33function is properly performed; and7.34(ii) annually obtaining a certification from a senior manager who has responsibility 7.35for the contracted function that the manager has a reasonable basis to represent, and does 7.36represent, that the function is properly performed.8.1(c) An insurer is not required to include in its system of supervision an insurance 8.2producer's recommendations to consumers of products other than the annuities offered 8.3by the insurer.8.4    Subd. 7.Undue influence.An insurance producer or insurer shall not dissuade, 8.5or attempt to dissuade, a consumer from:8.6(1) providing suitability information to the insurance producer or insurer and 8.7truthfully responding to an insurer's request for confirmation of suitability information;8.8(2) filing a complaint; or8.9(3) cooperating with the investigation of a complaint.8.10    Subd. 8.FINRA compliance.(a) Certain sales made by a broker-dealer in 8.11compliance with FINRA requirements pertaining to suitability and supervision of 8.12annuity transactions satisfy the requirements under sections 72A.203 to 72A.2036. This 8.13subdivision applies to FINRA broker-dealer sales of variable annuities and fixed annuities 8.14if the suitability and supervision is no less stringent than to those applied to variable 8.15annuity sales under FINRA requirements. However, nothing in this subdivision limits 8.16the commissioner of commerce's ability to enforce the provisions of sections 72A.203 8.17to 72A.2036 with respect to sales made in compliance with FINRA requirements and 8.18federal law. In addition, nothing in this subdivision limits the responsibilities of the 8.19insurer to monitor the broker-dealer as provided in this subdivision. The insurer remains 8.20responsible for the suitability of every transaction and must take reasonably appropriate 8.21corrective action for any consumer harmed by violation of law and is subject to the penalty 8.22provisions described in section 72A.2034, subdivision 1.8.23(b) For paragraph (a) to apply, an insurer shall:8.24(1) monitor the FINRA member broker-dealer using information collected in the 8.25normal course of an insurer's business; and8.26(2) provide to the FINRA member broker-dealer information and reports that 8.27are reasonably appropriate to assist the FINRA member broker-dealer to maintain its 8.28supervision system.8.29    Sec. 7. [72A.2033] INSURANCE PRODUCER TRAINING.8.30    Subdivision 1.Requirement.An insurance producer shall not solicit the sale of an 8.31annuity product unless the insurance producer has adequate knowledge of the product to 8.32recommend the annuity and the insurance producer is in compliance with the insurer's 8.33standards for product training. An insurance producer may rely on insurer-provided 8.34product-specific training standards and materials to comply with this subdivision.9.1    Subd. 2.Initial training.(a) An insurance producer who is otherwise entitled to 9.2engage in the sale of annuity products shall complete a onetime four-credit training course 9.3approved by the commissioner and provided by a continuing education provider approved 9.4by the commissioner prior to commencing the transaction of annuities.9.5Insurance producers who hold a life insurance line of authority on the effective 9.6date of sections 72A.203 to 72A.2036 and who desire to sell annuities shall complete 9.7the requirements of this subdivision no later than six months after January 1, 2013. 9.8Individuals who obtain a life insurance line of authority on or after January 1, 2013, may 9.9not engage in the sale of annuities until the annuity training course required under this 9.10subdivision has been completed. Producers licensed on or after January 1, 2013, have 9.11until June 30, 2013, to complete the course.9.12(b) The length of the training required under this subdivision must be four continuing 9.13education hours.9.14(c) The training required under this subdivision must include information on the 9.15following topics:9.16(1) the types of annuities and various classifications of annuities;9.17(2) identification of the parties to an annuity;9.18(3) how fixed, variable, and indexed annuity contract provisions affect consumers;9.19(4) the application of income taxation of qualified and nonqualified annuities;9.20(5) the primary uses of annuities; 9.21(6) appropriate and lawful sales practices, replacement, and disclosure requirements, 9.22and suitability information and whether an annuity is suitable for a consumer; and9.23(7) the recognition of indicators that a prospective insured may lack the short-term 9.24memory or judgment to knowingly purchase an insurance product.9.25(d) Providers of courses intended to comply with this subdivision shall cover all 9.26topics listed in the prescribed outline and shall not present any marketing information or 9.27provide training on sales techniques or provide specific information about a particular 9.28insurer's products.9.29(e) A provider of an annuity training course intended to comply with this subdivision 9.30must be an approved continuing education provider in this state and comply with the 9.31requirements applicable to insurance producer continuing education courses.9.32(f) Annuity training courses may be conducted and completed by classroom or 9.33self-study methods in accordance with chapter 45. In order to assist compliance with this 9.34section, all courses approved by the commissioner for the purposes of this section shall be 9.35given the course title "Annuity Suitability and Disclosure." Only courses satisfying the 9.36requirements of this section shall use this course title after the effective date of this section.10.1(g) Providers of annuity training shall comply with the course completion reporting 10.2requirements of chapter 45.10.3(h) The satisfaction of the training requirements of another state that are substantially 10.4similar to the provisions of this subdivision satisfies the training requirements of this 10.5subdivision in this state, but does not satisfy any of the continuing education requirements 10.6of chapter 60K unless the training requirements of the other state are satisfied through one 10.7or more continuing education courses approved by the commissioner.10.8(i) An insurer shall verify that an insurance producer has completed the annuity 10.9training course required under this subdivision before allowing the producer to sell an 10.10annuity product for that insurer. An insurer may satisfy its responsibility under this 10.11subdivision by obtaining certificates of completion of the training course or obtaining 10.12reports provided by commissioner-sponsored database systems or vendors or from 10.13a reasonably reliable commercial database vendor that has a reporting arrangement 10.14with approved insurance education providers. If such data collection and reporting 10.15arrangements are not in place, an insurer must maintain records verifying that the producer 10.16has completed the annuity training course required under this subdivision and make the 10.17records available to the commissioner upon request.10.18    Sec. 8. [72A.2034] PENALTIES.10.19    Subdivision 1.Imposition.(a) An insurer is responsible for compliance with 10.20sections 72A.203 to 72A.2036. If a violation occurs, either because of the action or 10.21inaction of the insurer or its insurance producer, the commissioner may, in addition to any 10.22available penalties, remedies, or administrative actions order:10.23(1) an insurer to take reasonably appropriate corrective, including but not limited 10.24to canceling a transaction action for any consumer harmed by the insurer's, or by its 10.25insurance producer's, violation of sections 72A.203 to 72A.2036;10.26(2) a general agency, independent agency, or the insurance producer to take 10.27reasonably appropriate corrective action for any consumer harmed by the insurance 10.28producer's violation of sections 72A.203 to 72A.2036; and10.29(3) appropriate penalties and sanctions.10.30(b) Nothing in sections 72A.203 to 72A.2036 shall affect any obligation of an 10.31insurer for the acts of its insurance producers, or any consumer remedy or any cause 10.32of action that is otherwise provided for under applicable federal or state law, including 10.33without limitation chapter 60K.11.1    Subd. 2.Aggravation or mitigation.Any applicable penalty for a violation of 11.2sections 72A.203 to 72A.2036 may be increased or decreased upon consideration of any 11.3aggravating or mitigating circumstances.11.4    Sec. 9. [72A.2035] RECORD KEEPING.11.5    Subdivision 1.Duration.Insurers and insurance producers shall maintain or be able 11.6to make available to the commissioner records of the information collected from the 11.7consumer and other information used in making the recommendations that were the basis 11.8for insurance transactions for ten years after the insurance transaction is completed by the 11.9insurer. An insurer is permitted, but shall not be required, to maintain documentation on 11.10behalf of an insurance producer.11.11    Subd. 2.Medium.Records required to be maintained by sections 72A.203 to 11.1272A.2036 may be maintained in paper, photographic, microprocess, magnetic, mechanical, 11.13or electronic media or by any process that accurately reproduces the actual document.11.14    Sec. 10. [72A.2036] RELATIONSHIP TO OTHER LAWS; ENFORCEMENT.11.15(a) Nothing in sections 72A.203 to 72A.2036 shall be interpreted to:11.16(1) change, alter, or modify any of the obligations, duties, or responsibilities of 11.17insurers or insurance producers, pursuant to any orders of the commissioner or consent 11.18decrees in effect as of January 1, 2013; or11.19(2) limit the commissioner's authority to make any investigation or take any action 11.20under chapter 45 or other applicable state law with respect to any insurer, insurance 11.21producer, broker-dealer, third-party contractor, or other entity engaged in any activity 11.22involving the sale of an annuity that is subject to sections 72A.203 to 72A.2036.11.23(b) In addition to any other penalties provided by the laws of this state, a violation of 11.24sections 72A.203 to 72A.2036 shall be considered a violation of section 72A.20.11.25    Sec. 11. EFFECTIVE DATE.11.26This act is effective January 1, 2013.