SF 877

2nd Engrossment - 87th Legislature (2011 - 2012) Posted on 04/05/2012 09:01am

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, unless there is a recommendation to a consumer regarding
an annuity in which case sections 72A.203 to 72A.2036 do apply with respect to the
consumer annuity transaction:
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 or guidance
provided or made 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 or guidance.
new text end

new text begin Subd. 9. new text end

new text begin Replacement. new text end

new text begin "Replacement" has the meaning given in section 61A.53,
subdivision 2.
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 current and
currently anticipated material 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, and including current and currently anticipated material changes
in financial situation and needs;
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;
new text end

new text begin (12) tax status; and
new text end

new text begin (13) whether or not the consumer has a reverse mortgage.
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 after a reasonable inquiry, that the
recommendation is suitable for the consumer, under the totality of circumstances based on
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, redeems, 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 receive a tangible net benefit from the transaction;
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, taking into account, among other things, the age of the
consumer; 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 all of the following:
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 receive a tangible net benefit from the transaction; and in
the case of a person over 65 years of age or older, neither a producer nor an insurer where
no producer is involved, shall recommend a replacement or exchange of an annuity that
requires the insured to pay a surrender charge for the annuity being replaced or exchanged
if the replacement or exchange does not confer a substantial financial benefit over the life
of the annuity to the consumer so that a reasonable person would believe the purchase
is unnecessary; 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 60 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 and record this information on a form,
inventory, or similar record.
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, or which after reasonable inquiry should be
known, to the insurer or the insurance producer 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, all of 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
programs and 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 an insurer is responsible for the compliance of an insurance producer
with the provisions of sections 72A.203 to 72A.2036 regardless of whether the insurer
contracts for performance of a function required under this paragraph; 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 or insurer where no producer is
involved shall not dissuade, or attempt to dissuade, a consumer from:
new text end

new text begin (1) providing suitability information to the insurance producer or insurer and
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 FINRA 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 no less stringent than to those applied to variable annuity sales under
FINRA requirements. However, nothing in this subdivision limits the commissioner of
commerce's ability to enforce the provisions of sections 72A.203 to 72A.2036 or limit the
commissioner of commerce's authority to act under chapter 45 to determine that required
supervisory and training systems are in place, and sales of annuity products are made in a
manner consistent with sections 72A.203 to 72A.2036 and federal law.
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 is otherwise entitled to
engage in the sale of annuity products shall complete a one-time four-credit training
course approved by the commissioner and provided by a continuing education provider
approved by the commissioner prior to commencing the transaction of annuities.
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 no later than six months after January 1, 2013.
Individuals who obtain a life insurance line of authority on or after January 1, 2013, may
not engage in the sale of annuities until the annuity training course required under this
subdivision has been completed. Producers licensed on or after January 1, 2013, have
until June 30, 2013, to complete the course.
new text end

new text begin (b) The length of the training required under this subdivision must be four continuing
education hours.
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;
new text end

new text begin (6) suitability information and whether an annuity is suitable for a consumer; and
new text end

new text begin (7) prohibited sales practices, the recognition of indicators that a prospective insured
may lack the short-term memory or judgment to knowingly purchase an insurance
product, and fraudulent and unfair trade practices as well as replacement and disclosure
requirements for sales of annuities under Minnesota law, including, but not limited to
sections 72A.203 to 72A.2036.
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.
new text end

new text begin (e) A provider of an annuity training course intended to comply with this subdivision
must be an approved continuing education 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. In order to assist compliance with this
section, all courses approved by the commissioner for the purposes of this section shall be
given the course title, "Annuity Suitability and Disclosure." Only courses satisfying the
requirements of this section shall use this course title after the effective date of this section.
new text end

new text begin (g) Providers of annuity training shall comply with the course completion reporting
requirements of 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, but does not satisfy any of the continuing education requirements
of chapter 60K unless the training requirements of the other state are satisfied through one
or more continuing education courses approved by the commissioner.
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. If such data collection and reporting
arrangements are not in place, an insurer must maintain records verifying that the producer
has completed the annuity training course required under this subdivision and make the
records available to the commissioner upon request.
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 (a) 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 may, in addition to any
available penalties, remedies, or administrative actions, order:
new text end

new text begin (1) an insurer to take reasonably appropriate corrective, including, but not limited
to canceling a transaction 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 (b) Nothing in sections 72A.203 to 72A.2036 shall affect any obligation of an
insurer for its acts of its insurance producers or consumer remedy or cause of action
that is otherwise provided for under applicable federal or state law, including without
limitation, chapter 60K.
new text end

new text begin Subd. 2. new text end

new text begin Aggravation or mitigation. new text end

new text begin Any applicable penalty for a violation of
sections 72A.203 to 72A.2036 may be increased or decreased upon consideration of any
aggravating or mitigating circumstances.
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 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 ten 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 LAWS; ENFORCEMENT.
new text end

new text begin (a) Nothing in sections 72A.203 to 72A.2036 shall be interpreted to:
new text end

new text begin (1) preclude, preempt, or otherwise interfere with the application of any other laws
of this state that may apply in any matter that is subject to sections 72A.203 to 72A.2036;
new text end

new text begin (2) change, alter, or modify any of the obligations, duties, or responsibilities of
insurers or insurance producers, pursuant to any orders of the commissioner or consent
decrees in effect as of January 1, 2013; or
new text end

new text begin (3) limit the commissioner's authority to make any investigation or take any action
under chapter 45 or other applicable state law with respect to any insurer, producer,
broker-dealer, third-party contractor, or other entity engaged in any activity involving the
sale of an annuity that is subject to sections 72A.203 to 72A.2036.
new text end

new text begin (b) In addition to any other penalties provided by the laws of this state, a violation of
sections 72A.203 to 72A.2036 shall be considered a violation of 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, 2013.
new text end