HF 1134

as introduced - 87th Legislature (2011 - 2012) Posted on 03/14/2011 11:22am

A bill for an act
relating to insurance; regulating annuity products; enacting a model regulation
adopted by the National Association of Insurance Commissioners relating to
suitability in annuity transactions; amending Minnesota Statutes 2010, sections
60K.46, subdivision 4; 72A.20, subdivision 34; proposing coding for new law
in Minnesota Statutes, chapter 72A.

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

Section 1.

Minnesota Statutes 2010, section 60K.46, subdivision 4, is amended to read:

Subd. 4.

Suitability of insurance.

In recommending the purchase of any life,
endowment, individual accident and sickness, long-term care, deleted text begin annuity, deleted text end life-endowment, or
Medicare supplement insurance to a customer, a producer must have reasonable grounds
for believing that the recommendation is suitable for the customer and must make
reasonable inquiries to determine suitability. The suitability of a recommended purchase
of insurance will be determined by reference to the totality of the particular customer's
circumstances, including, but not limited to, the customer's income, the customer's need
for insurance, and the values, benefits, and costs of the customer's existing insurance
program, if any, when compared to the values, benefits, and costs of the recommended
policy or policies. This subdivision does not apply to limited lines insurance under section
60K.38, subdivision 1, paragraph (c). new text begin Recommendations for the purchase of an annuity
are subject to sections 72A.203 to 72A.2036 and not this subdivision.
new text end

Sec. 2.

Minnesota Statutes 2010, section 72A.20, subdivision 34, is amended to read:

Subd. 34.

Suitability of insurance for customer.

In recommending or issuing life,
endowment, individual accident and sickness, long-term care, deleted text begin annuity, deleted text end life-endowment, or
Medicare supplement insurance to a customer, an insurer, either directly or through its
agent, must have reasonable grounds for believing that the recommendation is suitable for
the customer.

In the case of group insurance marketed on a direct response basis without the use of
direct agent contact, this subdivision is satisfied if the insurer has reasonable grounds to
believe that the insurance offered is generally suitable for the group to whom the offer is
made. new text begin Sections 72A.203 to 72A.2036, and not this subdivision, apply to recommending
and issuing an annuity.
new text end

Sec. 3.

new text begin [72A.203] EXEMPTIONS.
new text end

new text begin Unless otherwise specifically included, sections 72A.203 to 72A.2036 do not apply
to transactions involving:
new text end

new text begin (1) direct response solicitations where there is no recommendation based on
information collected from the consumer pursuant to sections 72A.203 to 72A.2036; and
new text end

new text begin (2) contracts used to fund:
new text end

new text begin (i) an employee pension or welfare benefit plan that is covered by the Employee
Retirement and Income Security Act of 1974 (ERISA) title 29, United States Code,
sections 1001 to 1461;
new text end

new text begin (ii) a plan described by section 401(a), 401(k), 403(b), 408(k), or 408(p) of the
Internal Revenue Code of 1986 (IRC); as amended, if established or maintained by an
employer;
new text end

new text begin (iii) a government or church plan defined in section 414 of the Internal Revenue
Code of 1986 as amended, 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 Internal Revenue Code of 1986, as amended;
new text end

new text begin (iv) a nonqualified deferred compensation arrangement established or maintained
by an employer or plan sponsor;
new text end

new text begin (v) settlements of or assumptions of liabilities associated with personal injury
litigation or a dispute or claim resolution process; or
new text end

new text begin (vi) formal prepaid funeral contracts.
new text end

Sec. 4.

new text begin [72A.2031] DEFINITIONS.
new text end

new text begin Subdivision 1. new text end

new text begin Definitions. new text end

new text begin For purposes of sections 72A.203 to 72A.2036, the
terms defined in this section have the meanings given them.
new text end

new text begin Subd. 2. new text end

new text begin Annuity. new text end

new text begin "Annuity" means an annuity that is an insurance product under
state law that is individually solicited, whether the product is classified as an individual or
group annuity.
new text end

new text begin Subd. 3. new text end

new text begin Continuing education credit or CE credit. new text end

new text begin "Continuing education credit"
or "CE credit" means one continuing education credit earned pursuant to section 45.30,
subdivision 4.
new text end

new text begin Subd. 4. new text end

new text begin Continuing education provider or CE provider. new text end

new text begin "Continuing education
provider" or "CE provider" means an approved education provider under chapter 45.
new text end

new text begin Subd. 5. new text end

new text begin FINRA. new text end

new text begin "FINRA" means the Financial Industry Regulatory Authority
or a succeeding agency.
new text end

new text begin Subd. 6. new text end

new text begin Insurer. new text end

new text begin "Insurer" means a company required to be licensed under the laws
of this state to provide insurance products, including annuities.
new text end

new text begin Subd. 7. new text end

new text begin Insurance producer. new text end

new text begin "Insurance producer" means a person required to
be licensed under the laws of this state to sell, solicit, or negotiate insurance, including
annuities.
new text end

new text begin Subd. 8. new text end

new text begin Recommendation. new text end

new text begin "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.
new text end

new text begin Subd. 9. new text end

new text begin Replacement. new text end

new text begin "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:
new text end

new text begin (1) lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing
insurer or otherwise terminated;
new text end

new text begin (2) 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;
new text end

new text begin (3) 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;
new text end

new text begin (4) reissued with any reduction in cash value; or
new text end

new text begin (5) used in a financed purchase.
new text end

new text begin Subd. 10. new text end

new text begin Suitability information. new text end

new text begin "Suitability information" means information
that is reasonably appropriate to determine the suitability of a recommendation, including
the following:
new text end

new text begin (1) age;
new text end

new text begin (2) annual income;
new text end

new text begin (3) financial situation and needs, including the financial resources used for the
funding of the annuity;
new text end

new text begin (4) financial experience;
new text end

new text begin (5) financial objectives;
new text end

new text begin (6) intended use of the annuity;
new text end

new text begin (7) financial time horizon;
new text end

new text begin (8) existing assets, including investment and life insurance holdings;
new text end

new text begin (9) liquidity needs;
new text end

new text begin (10) liquid net worth;
new text end

new text begin (11) risk tolerance; and
new text end

new text begin (12) tax status.
new text end

Sec. 5.

new text begin [72A.2032] DUTIES OF INSURERS AND INSURANCE PRODUCERS.
new text end

new text begin Subdivision 1. new text end

new text begin Suitability standard. new text end

new text begin In recommending to a consumer the purchase
of an annuity or the exchange of an annuity that results in another 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 as to the
consumer's investments and other insurance products and as to the consumer's financial
situation and needs, including the consumer's suitability information, and that there is a
reasonable basis to believe all of the following:
new text end

new text begin (1) the consumer has been reasonably informed of 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;
new text end

new text begin (2) the consumer would benefit from certain features of the annuity, such as
tax-deferred growth, annuitization, or death or living benefit;
new text end

new text begin (3) 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 the consumer's
suitability information; and
new text end

new text begin (4) in the case of an exchange or replacement of an annuity, the exchange or
replacement is suitable including taking into consideration whether:
new text end

new text begin (i) 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;
new text end

new text begin (ii) the consumer would benefit from product enhancements and improvements; and
new text end

new text begin (iii) the consumer has had another annuity exchange or replacement and, in
particular, an exchange or replacement within the preceding 36 months.
new text end

new text begin Subd. 2. new text end

new text begin Obtaining suitability information. new text end

new text begin Before 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.
new text end

new text begin Subd. 3. new text end

new text begin Restriction on issuance of annuity. new text end

new text begin Except as permitted under subdivision
4, an insurer shall not issue an annuity recommended to a consumer unless there is a
reasonable basis to believe the annuity is suitable based on the consumer's suitability
information.
new text end

new text begin Subd. 4. new text end

new text begin Exception. new text end

new text begin (a) Except as provided under paragraph (b), an insurance
producer, or an insurer, does not have any obligation to a consumer under subdivision 1
or 3 related to an annuity transaction if:
new text end

new text begin (1) no recommendation is made;
new text end

new text begin (2) a recommendation was made and was later found to have been prepared based on
materially inaccurate information provided by the consumer;
new text end

new text begin (3) a consumer refuses to provide relevant suitability information and the annuity
transaction is not recommended; or
new text end

new text begin (4) a consumer decides to enter into an annuity transaction that is not based on a
recommendation of the insurer or the insurance producer.
new text end

new text begin (b) An insurer's issuance of an annuity subject to paragraph (a) shall be reasonable
under all the circumstances actually known to the insurer at the time the annuity is issued.
new text end

new text begin Subd. 5. new text end

new text begin Documentation. new text end

new text begin An insurance producer or, where no insurance producer
is involved, the responsible insurer representative, shall at the time of sale:
new text end

new text begin (1) make a record of any recommendation subject to subdivision 1;
new text end

new text begin (2) obtain a customer signed statement documenting a customer's refusal to provide
suitability information, if any; and
new text end

new text begin (3) 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.
new text end

new text begin Subd. 6. new text end

new text begin Supervision system. new text end

new text begin (a) An insurer shall establish a supervision system
that is reasonably designed to achieve the insurer's and its insurance producers' compliance
with sections 72A.203 to 72A.2036, including, but not limited to, the following:
new text end

new text begin (1) the insurer shall maintain reasonable procedures to inform its insurance
producers of the requirements of sections 72A.203 to 72A.2036 and shall incorporate the
requirements of sections 72A.203 to 72A.2036 into relevant insurance producer training
manuals;
new text end

new text begin (2) 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 72A.2033;
new text end

new text begin (3) the insurer shall provide product-specific training and training materials which
explain all material features of its annuity products to its insurance producers;
new text end

new text begin (4) the insurer shall maintain procedures for review of each recommendation
before issuance of an annuity that are designed to ensure that there is a reasonable basis
to determine that a recommendation is suitable. The review procedures may apply a
screening system for the purpose of identifying selected transactions for additional
review and may be accomplished electronically or through other means including, but
not limited to, physical review. Such an electronic or other system may be designed to
require additional review only of those transactions identified for additional review by
the selection criteria;
new text end

new text begin (5) the insurer shall maintain reasonable procedures 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 clause prevents an insurer from
complying with this clause by applying sampling procedures, or by confirming suitability
information after issuance or delivery of the annuity; and
new text end

new text begin (6) the insurer shall annually provide a report to senior management, including to 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.
new text end

new text begin (b)(1) Nothing in this subdivision restricts an insurer from contracting for
performance of a function, including maintenance of procedures, required under paragraph
(a). An insurer is responsible for taking appropriate corrective action and may be subject
to sanctions and penalties pursuant to section 72A.2034 regardless of whether the insurer
contracts for performance of a function and regardless of the insurer's compliance with
subdivision 2; and
new text end

new text begin (2) an insurer's supervision system under paragraph (a) must include supervision
of contractual performance under this clause. This includes, but is not limited to, the
following:
new text end

new text begin (i) monitoring and, as appropriate, conducting audits to assure that the contracted
function is properly performed; and
new text end

new text begin (ii) annually obtaining a 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 function is properly performed.
new text end

new text begin (c) 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.
new text end

new text begin Subd. 7. new text end

new text begin Undue influence. new text end

new text begin An insurance producer shall not dissuade, or attempt to
dissuade, a consumer from:
new text end

new text begin (1) truthfully responding to an insurer's request for confirmation of suitability
information;
new text end

new text begin (2) filing a complaint; or
new text end

new text begin (3) cooperating with the investigation of a complaint.
new text end

new text begin Subd. 8. new text end

new text begin Alternative compliance. new text end

new text begin (a) Sales made in compliance with FINRA
requirements pertaining to suitability and supervision of annuity transactions satisfy
the requirements under sections 72A.203 to 72A.2036. This subdivision applies to
FINRA broker-dealer sales of variable annuities and fixed annuities if the suitability and
supervision is similar to those applied to variable annuity sales. However, nothing in this
subdivision limits the commissioner of commerce's ability to enforce the provisions of
sections 72A.203 to 72A.2036.
new text end

new text begin (b) For paragraph (a) to apply, an insurer shall:
new text end

new text begin (1) monitor the FINRA member broker-dealer using information collected in the
normal course of an insurer's business; and
new text end

new text begin (2) provide to the FINRA member broker-dealer information and reports that
are reasonably appropriate to assist the FINRA member broker-dealer to maintain its
supervision system.
new text end

Sec. 6.

new text begin [72A.2033] INSURANCE PRODUCER TRAINING.
new text end

new text begin Subdivision 1. new text end

new text begin Requirement. new text end

new text begin 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 insurer-provided
product-specific training standards and materials to comply with this subdivision.
new text end

new text begin Subd. 2. new text end

new text begin Initial training. new text end

new text begin (a) An insurance producer who engages in the sale of
annuity products shall complete a one-time four-credit training course approved by
the Department of Commerce and provided by a Department of Commerce-approved
education provider.
new text end

new text begin Insurance producers who hold a life insurance line of authority on the effective date
of sections 72A.203 to 72A.2036 and who desire to sell annuities shall complete the
requirements of this subdivision within six months after the effective date of sections
72A.203 to 72A.2036. Individuals who obtain a life insurance line of authority on or after
the effective date of sections 72A.203 to 72A.2036 may not engage in the sale of annuities
until the annuity training course required under this subdivision has been completed.
new text end

new text begin (b) The minimum length of the training required under this subdivision must be
sufficient to qualify for at least four CE credits, but may be longer.
new text end

new text begin (c) The training required under this subdivision must include information on the
following topics:
new text end

new text begin (1) the types of annuities and various classifications of annuities;
new text end

new text begin (2) identification of the parties to an annuity;
new text end

new text begin (3) how fixed, variable, and indexed annuity contract provisions affect consumers;
new text end

new text begin (4) the application of income taxation of qualified and nonqualified annuities;
new text end

new text begin (5) the primary uses of annuities; and
new text end

new text begin (6) appropriate sales practices, replacement, and disclosure requirements.
new text end

new text begin (d) Providers of courses intended to comply with this subdivision 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.
new text end

new text begin (e) A provider of an annuity training course intended to comply with this subdivision
shall register as a CE provider in this state and comply with the requirements applicable to
insurance producer continuing education courses.
new text end

new text begin (f) Annuity training courses may be conducted and completed by classroom or
self-study methods in accordance with chapter 45.
new text end

new text begin (g) Providers of annuity training shall comply with the reporting requirements and
shall issue certificates of completion in accordance with chapter 45.
new text end

new text begin (h) The satisfaction of the training requirements of another state that are substantially
similar to the provisions of this subdivision satisfies the training requirements of this
subdivision in this state.
new text end

new text begin (i) An insurer shall verify that an insurance producer has completed the annuity
training course required under this subdivision before allowing the producer to sell an
annuity product for that insurer. An insurer may satisfy its responsibility under this
subdivision by obtaining certificates of completion of the training course or obtaining
reports provided by commissioner-sponsored database systems or vendors or from a
reasonably reliable commercial database vendor that has a reporting arrangement with
approved insurance education providers.
new text end

Sec. 7.

new text begin [72A.2034] PENALTIES.
new text end

new text begin Subdivision 1. new text end

new text begin Imposition. new text end

new text begin An insurer is responsible for compliance with sections
72A.203 to 72A.2036. If a violation occurs, either because of the action or inaction of the
insurer or its insurance producer, the commissioner of commerce may order:
new text end

new text begin (1) an insurer to take reasonably appropriate corrective action for any consumer
harmed by the insurer's, or by its insurance producer's, violation of sections 72A.203
to 72A.2036;
new text end

new text begin (2) 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 sections 72A.203 to 72A.2036; and
new text end

new text begin (3) appropriate penalties and sanctions.
new text end

new text begin Subd. 2. new text end

new text begin Reduction or elimination. new text end

new text begin Any applicable penalty for a violation of
sections 72A.203 to 72A.2036 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.
new text end

Sec. 8.

new text begin [72A.2035] RECORD KEEPING.
new text end

new text begin Subdivision 1. new text end

new text begin Duration. new text end

new text begin Insurers, general agents, independent agencies, and
insurance producers shall maintain or be able to make available to the commissioner
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 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.
new text end

new text begin Subd. 2. new text end

new text begin Medium. new text end

new text begin Records required to be maintained by sections 72A.203 to
72A.2036 may be maintained in paper, photographic, microprocess, magnetic, mechanical,
or electronic media or by any process that accurately reproduces the actual document.
new text end

Sec. 9.

new text begin [72A.2036] RELATIONSHIP TO OTHER LAW; ENFORCEMENT.
new text end

new text begin Enforcement of, and remedies under, sections 72A.203 to 72A.2036 are governed by
the same powers, procedures, and limitations that apply to section 72A.20; as if sections
72A.203 to 72A.2036 were codified within section 72A.20.
new text end

Sec. 10. new text begin EFFECTIVE DATE.
new text end

new text begin This act is effective January 1, 2012.
new text end