SB 263: Insurance: annuities and life insurance policies.
- Session Year: 2023-2024
- House: Senate
- Latest Version Date: 2024-02-29
Current Status:
Passed
(2024-02-29: Chaptered by Secretary of State. Chapter 2, Statutes of 2024.)
Introduced
In Committee
First Chamber
In Committee
Second Chamber
Enacted
What does this bill do?
Starting January 1, 2025, the bill requires insurance producers (agents) and insurance companies to follow a "best interest" standard when recommending annuities—agents must put consumers' financial interests first, collect a consumer profile, disclose fees and compensation, document recommendations, and address conflicts of interest. It also requires annuity training for agents, mandates insurers set up supervision and review systems, requires life insurers to give an annuity buyers guide, and lets the insurance regulator order corrective actions or penalties for violations.
The summary is provided by generative AI which can make mistakes. For original language, please view the details in the table below.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would limit application of these provisions to (1) a recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended and (2) a sale of an annuity made before January 1, 2025, that is not based on a recommendation.
This bill would, with respect to the sales or recommendations of annuities made on or after January 1, 2025, require producers to act in the best interest of the consumer when making a recommendation of an annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities, which would apply to any sale of or recommendation made to a consumer to purchase, exchange, or replace an annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities are in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity. The bill would authorize the commissioner to require certain actions by, and impose sanctions and penalties on, insurers and their agents for a violation of these provisions.
Existing law requires an insurance producer who is otherwise entitled to engage in the sale of annuity products to complete an annuity training course approved by the Insurance Commissioner prior to commencing the transaction of annuities.
This bill would apply this training requirement to producers who hold a life insurance line of authority, as specified, and who desire to sell annuities.
This bill would require a life agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete specified hours of life insurance training courses before soliciting consumers to sell these life insurance policies. The bill would require any life agent, who engages in the sale of variable life insurance policies, to complete specified hours of training before renewing their license. The bill would apply these training provisions to licenses that are issued or renewed on or after January 1, 2025.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would limit application of these provisions to (1) a recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended and (2) a sale of an annuity made before January 1, 2025, that is not based on a recommendation.
This bill would, with respect to the sales or recommendations of annuities made on or after January 1, 2025, require producers to act in the best interest of the consumer when making a recommendation of an annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities, which would apply to any sale of or recommendation made to a consumer to purchase, exchange, or replace an annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities are in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity. The bill would authorize the commissioner to require certain actions by, and impose sanctions and penalties on, insurers and their agents for a violation of these provisions.
Existing law requires an insurance producer who is otherwise entitled to engage in the sale of annuity products to complete an annuity training course approved by the Insurance Commissioner prior to commencing the transaction of annuities.
This bill would apply this training requirement to producers who hold a life insurance line of authority, as specified, and who desire to sell annuities.
This bill would require a life agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete specified hours of life insurance training courses before soliciting consumers to sell these life insurance policies. The bill would require any life agent, who engages in the sale of variable life insurance policies, to complete specified hours of training before renewing their license. The bill would apply these training provisions to licenses that are issued or renewed on or after January 1, 2025.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would limit application of these provisions to (1) a recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended and (2) a sale of an annuity made before January 1, 2025, that is not based on a recommendation.
This bill would revise and recast those provisions beginning January 1, 2025, would, with respect to the sales or recommendations of annuities issued made on or after January 1, 2025. The bill would 2025, require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities, which would apply to any sale of or recommendation made to a consumer to purchase, exchange, or replace an annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities are in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity. The bill would authorize the commissioner to require certain actions by, and impose sanctions and penalties on, insurers and their agents for a violation of these provisions.
Existing law requires an insurance producer who is otherwise entitled to engage in the sale of annuity products to complete an annuity training course approved by the Insurance Commissioner prior to commencing the transaction of annuities.
This bill would apply this training requirement to producers who hold a life insurance line of authority, as specified, and who desire to sell annuities.
This bill would require a life agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete specified hours of life insurance training courses before soliciting consumers to sell these life insurance policies. The bill would require any life agent, who engages in the sale of variable life insurance policies, to complete specified hours of training before renewing their license. The bill would apply these training provisions to licenses that are issued or renewed on or after January 1, 2025. The bill would require an insurance producer to complete an annuity training course approved by the Insurance Commissioner before transacting annuities on or after January 1, 2025.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would revise and recast those provisions beginning January 1, 2025. 2025, with respect to annuities issued on or after January 1, 2025. The bill would require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities, which would apply to any sale of or recommendation made to a consumer to purchase, convert, replace, or modify exchange, or replace an annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities are only in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity.
This bill would require a life agent agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete specified hours of life insurance training courses before soliciting consumers to sell these life insurance policies or policies. The bill would require any life agent, who engages in the sale of variable life insurance policies, to complete specified hours of training before renewing their license. The bill would apply these training provisions to licenses that are issued or renewed on or after January 1, 2025. The bill would require an insurance producer to complete an annuity training course approved by the Insurance Commissioner before transacting annuities on or after January 1, 2025.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would revise and recast those provisions beginning January 1, 2025. The bill would require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities, which would apply to any recommendation made to a consumer to purchase, convert, replace, or modify an annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities are only in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity.
This bill would require a life agent who engages in the sale of life insurance policies on or after January 1, 2025, to complete specified hours of life insurance training courses before soliciting consumers to sell life insurance policies or renewing their license. The bill would require an insurance producer to complete an annuity training course approved by the Insurance Commissioner before transacting annuities. annuities on or after January 1, 2025.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would revise and recast those provisions, making them also applicable to life insurance policies. provisions beginning January 1, 2025. The bill would require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity or life insurance policy. annuity. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities or life insurance policies, annuities, which would apply to any recommendation made to a consumer to purchase, convert, replace, or modify an annuity or life insurance policy. annuity. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities and life insurance policies are only in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified forms and information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity.
This bill would require a life agent or insurance producer who engages in the sale of life insurance policies to complete specified hours of life insurance training courses before soliciting or transacting consumers to sell life insurance policies or renewing their license. The bill would require an insurance producer to complete an annuity training course approved by the Insurance Commissioner before transacting annuities.
Existing law generally regulates classes of insurance, including life insurance and annuities. Existing law requires insurers to establish a system to supervise recommendations and set standards and procedures for recommendations for annuity products, which applies to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. Existing law requires an insurance producer recommending the purchase or exchange of an annuity to have reasonable grounds for believing that the recommendation is suitable for the consumer, as specified.
This bill would revise and recast those provisions, making them also applicable to life insurance policies. The bill would require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity or life insurance policy. The bill would require an insurer to establish, maintain, and utilize a system to supervise recommendations for annuities or life insurance policies, which would apply to any recommendation made to a consumer to purchase, convert, replace, or modify an annuity or life insurance policy. The bill would set forth various duties of an insurer and producer to ensure that recommended annuities and life insurance policies are only in the consumers best interest, and would specify obligations that ensure a producer has acted in the best interest of a consumer, including the provision of specified forms and information to the consumer. The bill would require a life insurer to provide a buyers guide to all consumers who purchase an annuity.
This bill would require a life agent or insurance producer who engages in the sale of life insurance policies to complete specified hours of life insurance training courses before soliciting or transacting life insurance policies or renewing their license.
Existing law requires, when 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 an insurer if no producer is involved, to have reasonable grounds for believing that the recommendation is suitable for the consumer based on the facts disclosed by the consumer as to their investments, financial situation, and needs, and that there is a reasonable basis to believe, among other things, the consumer would receive a tangible net benefit from the transaction.This bill would make technical, nonsubstantive changes to this provision.Existing law requires, when 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 an insurer if no producer is involved, to have reasonable grounds for believing that the recommendation is suitable for the consumer based on the facts disclosed by the consumer as to their investments, financial situation, and needs, and that there is a reasonable basis to believe, among other things, the consumer would receive a tangible net benefit from the transaction.
This bill would make technical, nonsubstantive changes to this provision.
(a)A life agent licensed on or after January 1, 2024, who sells life insurance policies other than term life with no cash value shall satisfactorily complete four hours of training before soliciting individual consumers to sell nonterm life insurance policies.
(b)A life agent who sells variable life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour annuity training required by Section 1749.8 does not satisfy the training required by this section. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to the types of life insurance policies described in subdivisions (a) and (b) and California law, regulations, and requirements related to those life insurance policies, prohibited sales practices, and unfair trade practices. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. Any course or seminar that is disapproved under the provisions of this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner.
(d)This section shall become operative January 1, 2025, and applies to licenses that are issued or renewed on or after January 1, 2025.
SEC. 2.The heading of Article 9 (commencing with Section 10509.910) of Chapter 5 of Part 2 of Division 2 of the Insurance Code is amended to read:9.Suitability Requirements for Annuity Transactions before January 1, 2025SEC. 3.Section 10509.914 of the Insurance Code is amended to read:10509.914.(a)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 producer, or an insurer if 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 their investments and other insurance products and as to their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, a producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither a producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(e)A producer or, where no producer is involved, the responsible insurer representative, shall, at the time of sale, do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish standards for producer product training and shall maintain reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision a producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
SEC. 4.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(4)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 insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, in subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, and 2188.9 of Title 10 of the California Code of Regulations.
(6)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
SEC. 5.Section 10509.919 is added to the Insurance Code, to read:10509.919.This article shall apply to both of the following:
(a)A recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended.
(b)A sale of an annuity made before January 1, 2025, that is not based on a recommendation.
SEC. 6.Article 9.5 (commencing with Section 10509.9200) is added to Chapter 5 of Part 2 of Division 2 of the Insurance Code, to read:9.5.Suitability Requirements for Annuity Transactions on or after January 1, 202510509.9200.The purpose of this article is to require producers, as defined in Section 10509.9203, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.9204 or under standards governing the conduct of a fiduciary relationship.
10509.9201.(a)This article shall apply to any sale of, or recommendation made to a consumer to purchase, exchange, or replace, as defined in paragraph (14) of subdivision (a) of Section 10509.9203, an annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
10509.9202.Unless otherwise specifically included, this article shall not apply to transactions involving any of the following:
(a)Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this article.
(b)Contracts used to fund any of the following:
(1)An employee pension or welfare benefit plan that is covered by the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.).
(2)A plan described by Section 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.
(6)Formal prepaid funeral contracts.
10509.9203.(a)For purposes of this article:
(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.
(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer.
(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets or financial products, including investments, annuity, and insurance holdings.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, including, but not limited to, the willingness to accept nonguaranteed elements in the annuity.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.
(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.
(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.
(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.
(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.
(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:
(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 a reduction 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.
(E)Used in a financed purchase.
(15)SEC means the United States Securities and Exchange Commission.
10509.9204.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:
(a)Best Interest Obligations. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.
(C)The requirements under subparagraphs (A) and (B) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(D)The requirements under subparagraphs (A) and (B) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(E)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(F)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(G)The requirements under subparagraphs (A) and (B) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.
(H)The requirements under subparagraphs (A) and (B) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.
(I)The requirements under subparagraphs (A) and (B) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.
(J)The requirements under subparagraphs (A) and (B) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(K)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(i)Whether 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 or similar product enhancements.
(ii)Whether the replacing product would not confer a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is unnecessary.
(iii)Whether the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(L)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(2)Disclosure Obligation.
(A)Before or at the time of recommendation, or before or at the time of sale if no recommendation is made, of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation. If NAIC updates or adopts a new version of the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation after January 1, 2024, the commissioner shall adopt, and producers shall use, a substantially similar version of the new or amended Insurance Agent (Producer) Disclosure for Annuities form.
(i)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(ii)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(I)Fixed annuities.
(II)Fixed indexed annuities.
(III)Variable annuities.
(IV)Life insurance.
(V)Other life and annuity products, as specified.
(VI)Mutual funds.
(VII)Stocks and bonds.
(VIII)Certificates of deposit.
(iii)(I)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(ia)From one insurer.
(ib)From two or more insurers.
(ic)From two or more insurers, although primarily contracted with one insurer.
(II)For purposes of this clause, insurers with common ownership and control shall be counted as one insurer.
(iv)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(v)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer as described in subparagraph (B).
(B)Upon request of the consumer or the consumers designated representative, the producer shall disclose both of the following:
(i)A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages.
(ii)Whether the cash compensation is a one-time or multiple occurrence amount, and if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages.
(C)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(3)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(4)Documentation Obligation. A producer shall, at the time of recommendation or sale, do all of the following:
(A)Provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(B)Obtain a customer-signed statement documenting both of the following:
(i)The customers refusal to provide the consumer profile information, if any.
(ii)The customers understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information.
(C)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(5)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(b)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(c)Supervision System.
(1)Except as permitted under subdivision (b), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.9205.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a), (b), (d), and (e). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.
(H)The insurer shall establish, maintain, and utilize reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.9206 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.
(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.
(4)An insurer is not required to include in its system of supervision either of the following:
(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(d)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(e)Safe Harbor.
(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements of this section. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article, regardless of whether the financial professional is operating under a comparable standard or in accordance with subdivisions (a) to (d), inclusive, of this section.
(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (c), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
10509.9205.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority prior to January 1, 2025, and who desire to sell annuities shall complete the requirements of this subdivision by July 1, 2025. Individuals who obtain a life insurance line of authority on or after January 1, 2025, shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8 and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, and 2188.9 of Title 10 of the California Code of Regulations.
(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
10509.9206.(a)An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harm caused by a violation of this article by the insurer, by its producer, or by its intermediary or by an entity that is contracted to perform the insurers supervisory duties.
(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
10509.9207.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
10509.9208.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
10509.9209.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
10509.9210.This article shall apply only to sales or recommendations of annuities made on or after January 1, 2025.
(a)A life agent licensed on or after January 1, 2024, who sells life insurance policies other than term life with no cash value shall satisfactorily complete four hours of training before soliciting individual consumers to sell nonterm life insurance policies.
(b)A life agent who sells variable life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour annuity training required by Section 1749.8 does not satisfy the training required by this section. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to the types of life insurance policies described in subdivisions (a) and (b) and California law, regulations, and requirements related to those life insurance policies, prohibited sales practices, and unfair trade practices. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. Any course or seminar that is disapproved under the provisions of this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner.
(d)This section shall become operative January 1, 2025, and applies to licenses that are issued or renewed on or after January 1, 2025.
SEC. 2.The heading of Article 9 (commencing with Section 10509.910) of Chapter 5 of Part 2 of Division 2 of the Insurance Code is amended to read:9.Suitability Requirements for Annuity Transactions before January 1, 2025SEC. 3.Section 10509.914 of the Insurance Code is amended to read:10509.914.(a)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 producer, or an insurer if 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 their investments and other insurance products and as to their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, a producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither a producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(e)A producer or, where no producer is involved, the responsible insurer representative, shall, at the time of sale, do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish standards for producer product training and shall maintain reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision a producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
SEC. 4.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(4)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 insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, in subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, and 2188.9 of Title 10 of the California Code of Regulations.
(6)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
SEC. 5.Section 10509.919 is added to the Insurance Code, to read:10509.919.This article shall apply to both of the following:
(a)A recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended.
(b)A sale of an annuity made before January 1, 2025, that is not based on a recommendation.
SEC. 6.Article 9.5 (commencing with Section 10509.9200) is added to Chapter 5 of Part 2 of Division 2 of the Insurance Code, to read:9.5.Suitability Requirements for Annuity Transactions on or after January 1, 202510509.9200.The purpose of this article is to require producers, as defined in Section 10509.9203, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.9204 or under standards governing the conduct of a fiduciary relationship.
10509.9201.(a)This article shall apply to any sale of, or recommendation made to a consumer to purchase, exchange, or replace, as defined in paragraph (14) of subdivision (a) of Section 10509.9203, an annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
10509.9202.Unless otherwise specifically included, this article shall not apply to transactions involving any of the following:
(a)Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this article.
(b)Contracts used to fund any of the following:
(1)An employee pension or welfare benefit plan that is covered by the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.).
(2)A plan described by Section 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.
(6)Formal prepaid funeral contracts.
10509.9203.(a)For purposes of this article:
(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.
(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer.
(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets or financial products, including investments, annuity, and insurance holdings.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, including, but not limited to, the willingness to accept nonguaranteed elements in the annuity.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.
(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.
(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.
(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.
(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.
(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:
(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 a reduction 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.
(E)Used in a financed purchase.
(15)SEC means the United States Securities and Exchange Commission.
10509.9204.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:
(a)Best Interest Obligations. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.
(C)The requirements under subparagraphs (A) and (B) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(D)The requirements under subparagraphs (A) and (B) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(E)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(F)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(G)The requirements under subparagraphs (A) and (B) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.
(H)The requirements under subparagraphs (A) and (B) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.
(I)The requirements under subparagraphs (A) and (B) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.
(J)The requirements under subparagraphs (A) and (B) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(K)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(i)Whether 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 or similar product enhancements.
(ii)Whether the replacing product would not confer a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is unnecessary.
(iii)Whether the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(L)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(2)Disclosure Obligation.
(A)Before or at the time of recommendation, or before or at the time of sale if no recommendation is made, of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation. If NAIC updates or adopts a new version of the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation after January 1, 2024, the commissioner shall adopt, and producers shall use, a substantially similar version of the new or amended Insurance Agent (Producer) Disclosure for Annuities form.
(i)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(ii)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(I)Fixed annuities.
(II)Fixed indexed annuities.
(III)Variable annuities.
(IV)Life insurance.
(V)Other life and annuity products, as specified.
(VI)Mutual funds.
(VII)Stocks and bonds.
(VIII)Certificates of deposit.
(iii)(I)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(ia)From one insurer.
(ib)From two or more insurers.
(ic)From two or more insurers, although primarily contracted with one insurer.
(II)For purposes of this clause, insurers with common ownership and control shall be counted as one insurer.
(iv)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(v)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer as described in subparagraph (B).
(B)Upon request of the consumer or the consumers designated representative, the producer shall disclose both of the following:
(i)A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages.
(ii)Whether the cash compensation is a one-time or multiple occurrence amount, and if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages.
(C)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(3)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(4)Documentation Obligation. A producer shall, at the time of recommendation or sale, do all of the following:
(A)Provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(B)Obtain a customer-signed statement documenting both of the following:
(i)The customers refusal to provide the consumer profile information, if any.
(ii)The customers understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information.
(C)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(5)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(b)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(c)Supervision System.
(1)Except as permitted under subdivision (b), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.9205.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a), (b), (d), and (e). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.
(H)The insurer shall establish, maintain, and utilize reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.9206 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.
(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.
(4)An insurer is not required to include in its system of supervision either of the following:
(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(d)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(e)Safe Harbor.
(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements of this section. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article, regardless of whether the financial professional is operating under a comparable standard or in accordance with subdivisions (a) to (d), inclusive, of this section.
(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (c), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
10509.9205.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority prior to January 1, 2025, and who desire to sell annuities shall complete the requirements of this subdivision by July 1, 2025. Individuals who obtain a life insurance line of authority on or after January 1, 2025, shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8 and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, and 2188.9 of Title 10 of the California Code of Regulations.
(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
10509.9206.(a)An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harm caused by a violation of this article by the insurer, by its producer, or by its intermediary or by an entity that is contracted to perform the insurers supervisory duties.
(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
10509.9207.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
10509.9208.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
10509.9209.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
10509.9210.This article shall apply only to sales or recommendations of annuities made on or after January 1, 2025.
(a)A life agent licensed on or after January 1, 2024, who sells life insurance policies other than term life with no cash value shall satisfactorily complete four hours of training before soliciting individual consumers to sell nonterm life insurance policies.
(b)A life agent who sells variable life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour annuity training required by Section 1749.8 does not satisfy the training required by this section. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to the types of life insurance policies described in subdivisions (a) and (b) and California law, regulations, and requirements related to those life insurance policies, prohibited sales practices, and unfair trade practices. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. Any course or seminar that is disapproved under the provisions of this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner.
(d)The training requirements set forth in this section shall not apply to nonresident agents representing an insurer that is a direct response provider.(e)For purposes of this section, direct response provider means an insurer that meets each of the following criteria:(1)The insurer does not initiate telephone contact with insureds or prospective insureds.(2)Agents of the insurer speak with insureds and prospective insureds only by telephone, and at the request of the insureds or prospective insureds.(3)Agents of the insurer are assigned to speak with insureds or prospective insureds on a random basis, when contacted.(4)Agents of the insurer are salaried and do not receive commissions for sales or referrals.(f)(d)This section shall become operative January 1, 2025, and applies to licenses that are issued or renewed on or after January 1, 2025.
SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.(a)The purpose of this article 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.(b)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.SEC. 3.Section 10509.910 is added to the Insurance Code, to read:10509.910.(a)The purpose of this article is to require producers, as defined in Section 10509.913, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.914 or under standards governing the conduct of a fiduciary relationship.(b)This section shall become operative January 1, 2025.SEC. 4.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended.(b)Nothing in this act shall be interpreted to preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.SEC. 5.Section 10509.911 is added to the Insurance Code, to read:10509.911.(a)This article shall apply to any sale of, or recommendation made to a consumer to purchase, exchange, or replace, as defined in paragraph (14) of subdivision (a) of Section 10509.913, an annuity.(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.(c)This section shall become operative January 1, 2025.SEC. 6.Section 10509.913 of the Insurance Code is amended to read:10509.913.(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.(b)Commissioner means the Insurance Commissioner.(c)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.(d)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.(e)Insurance producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer.(f)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.(g)Recommendation means advice or guidance provided or made by an insurance producer or by an insurer to an individual consumer that results in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.(h)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, regardless of whether or not there is a producer, that by reason of the transaction, an existing policy or contract has been or is to be any of the following:(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.(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.(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.(4)Reissued with any reduction in cash value.(5)Used in a financed purchase.(i)Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including all of the following:(1)Age.(2)Annual income.(3)Financial situation and needs, including the financial resources used for the funding of the annuity.(4)Financial experience.(5)Financial objectives.(6)Intended use of the annuity.(7)Financial time horizon.(8)Existing assets, including investment and life insurance holdings.(9)Liquidity needs.(10)Liquid net worth.(11)Risk tolerance.(12)Tax status.(13)Whether or not the consumer has a reverse mortgage.(14)Whether or not the consumer intends to apply for means-tested government benefits, including, but not limited to, Medi-Cal or the veterans aid and attendance benefit.(j)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.SEC. 7.Section 10509.913 is added to the Insurance Code, to read:10509.913.(a)For purposes of this article:(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer. Cash compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:(A)Age.(B)Annual income.(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.(D)Financial experience.(E)Insurance needs.(F)Financial objectives.(G)Intended use of the annuity, including any riders attached thereto.(H)Financial time horizon, including the duration of existing liabilities and obligations.(I)Existing assets or financial products, including investments, annuity, and insurance holdings.(J)Liquidity needs.(K)Liquid net worth.(L)Risk tolerance, including, but not limited to, the willingness to accept nonguaranteed elements in the annuity.(M)Tax status.(N)Whether or not the consumer has a reverse mortgage.(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:(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 a reduction 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.(E)Used in a financed purchase.(15)SEC means the United States Securities and Exchange Commission.(b)This section shall become operative January 1, 2025.SEC. 2.The heading of Article 9 (commencing with Section 10509.910) of Chapter 5 of Part 2 of Division 2 of the Insurance Code is amended to read:9.Suitability Requirements for Annuity Transactions before January 1, 2025SEC. 8.SEC. 3.Section 10509.914 of the Insurance Code is amended to read:10509.914.(a)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 producer, or an insurer if 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 their investments and other insurance products and as to their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, a producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither a producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(e)A producer or, where no producer is involved, the responsible insurer representative, shall shall, at the time of sale sale, do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish standards for producer product training and shall maintain reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision a producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(i)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.SEC. 9.Section 10509.914 is added to the Insurance Code, to read:10509.914.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:(a)Best Interest Obligation. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:(1)Care Obligation.(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.(C)The requirements under subparagraph (A) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.(D)The requirements under subparagraph (A) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.(E)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.(F)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.(G)The requirements under subparagraph (A) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.(H)The requirements under subparagraph (A) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.(I)The requirements under subparagraph (A) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.(J)The requirements under subparagraph (A) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.(K)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:(i)Whether 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 or similar product enhancements.(ii)Whether the replacing product would not confer a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is not unnecessary.(iii)Whether the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.(L)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.(b)Disclosure Obligation.(1)Before or at the time of recommendation or sale of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation. If NAIC updates or adopts a new version of the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation after January 1, 2024, the commissioner shall adopt, and producers shall use, a substantially similar version of the new or amended Insurance Agent (Producer) Disclosure for Annuities form.(A)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.(B)An affirmative statement on whether the producer is licensed and authorized to sell the following products:(i)Fixed annuities.(ii)Fixed indexed annuities.(iii)Variable annuities.(iv)Life insurance.(v)Other life and annuity products, as specified.(vi)Mutual funds.(vii)Stocks and bonds.(viii)Certificates of deposit.(C)(i)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:(I)From one insurer.(II)From two or more insurers.(III)From two or more insurers, although primarily contracted with one insurer.(ii)For purposes of this subparagraph, insurers with common ownership and control shall be counted as one insurer.(D)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.(E)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer.(2)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.(c)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.(d)Documentation Obligation. A producer shall, at the time of recommendation or sale, do all of the following:(1)Provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.(2)Obtain a customer-signed statement documenting both of the following:(A)The customers refusal to provide the consumer profile information, if any.(B)The customers understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information.(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.(e)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.(f)Transactions not based on a recommendation.(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:(A)No recommendation is made.(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.(g)Supervision System.(1)Except as permitted under subdivision (f), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.915.(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a) to (f), inclusive, (h), and (i). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.(H)The insurer shall establish, maintain, and utilize reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.917 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.(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.(4)An insurer is not required to include in its system of supervision either of the following:(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.(h)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.(2)Filing a complaint.(3)Cooperating with the investigation of a complaint.(i)Safe Harbor.(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements under this article. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article, regardless of whether the financial professional is operating under a comparable standard or in accordance with subdivisions (a) to (h), inclusive, of this section.(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (g), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.(3)For paragraph (1) to apply, an insurer shall do both of the following:(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.(5)For purposes of this subdivision, comparable standards means:(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.(6)Notwithstanding anything herein to the contrary, the training requirements of Section 10509.915 remain applicable to recommendations and sales of annuities covered by this subdivision.(j)This section shall become operative January 1, 2025.SEC. 10.SEC. 4.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(4)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 insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, in subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(6)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.SEC. 11.Section 10509.915 is added to the Insurance Code, to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.(3)Producers who hold a life insurance line of authority on the effective date of the act that added this paragraph and who desire to sell annuities shall complete the requirements of this subdivision within six months after the effective date of the act that added this paragraph. Individuals who obtain a life insurance line of authority on or after the effective date of the act that added this paragraph shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.(E)The primary uses of annuities.(F)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, all as provided under California law, including, but not limited to, this article.(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8 and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.(h)This section shall become operative January 1, 2025.SEC. 12.Section 10509.916 is added to the Insurance Code, to read:10509.916.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.(c)This section shall become operative January 1, 2025.SEC. 13.Section 10509.916 of the Insurance Code is amended and renumbered to read:10509.917.(a) An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:(1)An insurer to take reasonably appropriate corrective action for any consumer harm caused by a violation of this article by the insurer, by its producer, or by its intermediary or by an entity that is contracted to perform the insurers supervisory duties.(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.SEC. 14.Section 10509.917 of the Insurance Code is amended and renumbered to read:10509.918.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.SEC. 15.Section 10509.918 of the Insurance Code is amended and renumbered to read:10509.919.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).SEC. 16.Section 10509.920 is added to the Insurance Code, to read:10509.920.The act that added this section shall apply only to annuities issued on or after January 1, 2025.SEC. 5.Section 10509.919 is added to the Insurance Code, to read:10509.919.This article shall apply to both of the following:
(a)A recommendation of an annuity made before January 1, 2025, that results in the purchase, exchange, or replacement that was recommended.
(b)A sale of an annuity made before January 1, 2025, that is not based on a recommendation.
SEC. 6.Article 9.5 (commencing with Section 10509.9200) is added to Chapter 5 of Part 2 of Division 2 of the Insurance Code, to read:9.5.Suitability Requirements for Annuity Transactions on or after January 1, 202510509.9200.The purpose of this article is to require producers, as defined in Section 10509.9203, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.9204 or under standards governing the conduct of a fiduciary relationship.
10509.9201.(a)This article shall apply to any sale of, or recommendation made to a consumer to purchase, exchange, or replace, as defined in paragraph (14) of subdivision (a) of Section 10509.9203, an annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
10509.9202.Unless otherwise specifically included, this article shall not apply to transactions involving any of the following:
(a)Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this article.
(b)Contracts used to fund any of the following:
(1)An employee pension or welfare benefit plan that is covered by the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.).
(2)A plan described by Section 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.
(6)Formal prepaid funeral contracts.
10509.9203.(a)For purposes of this article:
(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.
(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer.
(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets or financial products, including investments, annuity, and insurance holdings.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, including, but not limited to, the willingness to accept nonguaranteed elements in the annuity.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.
(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.
(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.
(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.
(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.
(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:
(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 a reduction 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.
(E)Used in a financed purchase.
(15)SEC means the United States Securities and Exchange Commission.
10509.9204.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:
(a)Best Interest Obligations. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.
(C)The requirements under subparagraphs (A) and (B) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(D)The requirements under subparagraphs (A) and (B) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(E)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(F)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(G)The requirements under subparagraphs (A) and (B) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.
(H)The requirements under subparagraphs (A) and (B) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.
(I)The requirements under subparagraphs (A) and (B) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.
(J)The requirements under subparagraphs (A) and (B) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(K)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(i)Whether 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 or similar product enhancements.
(ii)Whether the replacing product would not confer a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is unnecessary.
(iii)Whether the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(L)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(2)Disclosure Obligation.
(A)Before or at the time of recommendation, or before or at the time of sale if no recommendation is made, of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation. If NAIC updates or adopts a new version of the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation after January 1, 2024, the commissioner shall adopt, and producers shall use, a substantially similar version of the new or amended Insurance Agent (Producer) Disclosure for Annuities form.
(i)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(ii)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(I)Fixed annuities.
(II)Fixed indexed annuities.
(III)Variable annuities.
(IV)Life insurance.
(V)Other life and annuity products, as specified.
(VI)Mutual funds.
(VII)Stocks and bonds.
(VIII)Certificates of deposit.
(iii)(I)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(ia)From one insurer.
(ib)From two or more insurers.
(ic)From two or more insurers, although primarily contracted with one insurer.
(II)For purposes of this clause, insurers with common ownership and control shall be counted as one insurer.
(iv)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(v)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer as described in subparagraph (B).
(B)Upon request of the consumer or the consumers designated representative, the producer shall disclose both of the following:
(i)A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages.
(ii)Whether the cash compensation is a one-time or multiple occurrence amount, and if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages.
(C)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(3)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(4)Documentation Obligation. A producer shall, at the time of recommendation or sale, do all of the following:
(A)Provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(B)Obtain a customer-signed statement documenting both of the following:
(i)The customers refusal to provide the consumer profile information, if any.
(ii)The customers understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information.
(C)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(5)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(b)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(c)Supervision System.
(1)Except as permitted under subdivision (b), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.9205.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a), (b), (d), and (e). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.
(H)The insurer shall establish, maintain, and utilize reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.9206 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.
(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.
(4)An insurer is not required to include in its system of supervision either of the following:
(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(d)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(e)Safe Harbor.
(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements of this section. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article, regardless of whether the financial professional is operating under a comparable standard or in accordance with subdivisions (a) to (d), inclusive, of this section.
(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (c), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
10509.9205.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority prior to January 1, 2025, and who desire to sell annuities shall complete the requirements of this subdivision by July 1, 2025. Individuals who obtain a life insurance line of authority on or after January 1, 2025, shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8 and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.50, 2188.6, 2188.7, 2188.8, and 2188.9 of Title 10 of the California Code of Regulations.
(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
10509.9206.(a)An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harm caused by a violation of this article by the insurer, by its producer, or by its intermediary or by an entity that is contracted to perform the insurers supervisory duties.
(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
10509.9207.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
10509.9208.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
10509.9209.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
10509.9210.This article shall apply only to sales or recommendations of annuities made on or after January 1, 2025.
(a)A life agent licensed on or after January 1, 2024, who sells life insurance policies other than term life with no cash value shall satisfactorily complete four hours of training before soliciting individual consumers to sell nonterm life insurance policies. This training is in addition to, and is not a part of, the annuity training required by subdivision (a) of Section 1749.8.
(b)A life agent who sells variable life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour life insurance policy annuity training required by subdivision (a) Section 1749.8 does not satisfy the two-hour life insurance policy training required by this subdivision. section. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to the types of life insurance policies, policies described in subdivisions (a) and (b) and California law, regulations, and requirements related to those life insurance policies, 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. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. A Any course or seminar that is disapproved under the provisions of this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner.
(d)The training requirements set forth in this section shall not apply to nonresident agents representing an insurer that is a direct response provider.
(e)For the purposes of this section, direct response provider means an insurer that meets each of the following criteria:
(1)The insurer does not initiate telephone contact with insureds or prospective insureds.
(2)Agents of the insurer speak with insureds and prospective insureds only by telephone, and at the request of the insureds or prospective insureds.
(3)Agents of the insurer are assigned to speak with insureds or prospective insureds on a random basis, when contacted.
(4)Agents of the insurer are salaried and do not receive commissions for sales or referrals.
(f)This section shall become operative January 1, 2025. 2025, and applies to licenses that are issued or renewed on or after January 1, 2025.
SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.(a)The purpose of this article 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.
(b)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 3.Section 10509.910 is added to the Insurance Code, to read:10509.910.(a)The purpose of this article is to require producers, as defined in Section 10509.913, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.914 or under standards governing the conduct of a fiduciary relationship.
(b)This section shall become operative January 1, 2025.
SEC. 4.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended.
(b)Nothing in this act shall be interpreted to preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 5.Section 10509.911 is added to the Insurance Code, to read:10509.911.(a)This article shall apply to any sale of, or recommendation made to a consumer to purchase, exchange, convert, or replace, or modify an annuity, or to elect a contractual provision of an in-force as defined in paragraph (14) of subdivision (a) of Section 10509.913, an annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
(c)This section shall become operative January 1, 2025.
SEC. 6.Section 10509.913 of the Insurance Code is amended to read:10509.913.(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.
(b)Commissioner means the Insurance Commissioner.
(c)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(d)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(e)Insurance producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer.
(f)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(g)Recommendation means advice or guidance provided or made by an insurance producer or by an insurer to an individual consumer that results in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(h)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, regardless of whether or not there is a producer, that by reason of the transaction, an existing policy or contract has been or is to be any of the following:
(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.
(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.
(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.
(4)Reissued with any reduction in cash value.
(5)Used in a financed purchase.
(i)Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including all of the following:
(1)Age.
(2)Annual income.
(3)Financial situation and needs, including the financial resources used for the funding of the annuity.
(4)Financial experience.
(5)Financial objectives.
(6)Intended use of the annuity.
(7)Financial time horizon.
(8)Existing assets, including investment and life insurance holdings.
(9)Liquidity needs.
(10)Liquid net worth.
(11)Risk tolerance.
(12)Tax status.
(13)Whether or not the consumer has a reverse mortgage.
(14)Whether or not the consumer intends to apply for means-tested government benefits, including, but not limited to, Medi-Cal or the veterans aid and attendance benefit.
(j)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 7.Section 10509.913 is added to the Insurance Code, to read:10509.913.(a)For purposes of this article:
(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.
(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer. Cash compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.
(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets or financial products, including investments, annuity, and insurance holdings.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, including, but not limited to, the willingness to accept nonguaranteed elements in the annuity.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.
(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.
(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.
(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.
(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.
(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:
(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 a reduction 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.
(E)Used in a financed purchase.
(15)SEC means the United States Securities and Exchange Commission.
(b)This section shall become operative January 1, 2025.
SEC. 8.Section 10509.914 of the Insurance Code is amended to read:10509.914.(a)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 producer, or an insurer if 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 their investments and other insurance products and as to their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, a producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither a producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(e)A producer or, where no producer is involved, the responsible insurer representative, shall at the time of sale do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish standards for producer product training and shall maintain reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision a producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(i)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 9.Section 10509.914 is added to the Insurance Code, to read:10509.914.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:
(a)Best Interest Obligation. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a prudent person acting in a like capacity and reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.
(2)(C)The requirements under paragraph (1) subparagraph (A) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(3)(D)The requirements under paragraph (1) subparagraph (A) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(4)(E)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(5)(F)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(6)(G)The requirements under paragraph (1) subparagraph (A) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.
(7)(H)The requirements under paragraph (1) subparagraph (A) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.
(8)(I)The requirements under paragraph (1) subparagraph (A) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.
(9)(J)The requirements under paragraph (1) subparagraph (A) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(10)(K)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(A)The
(i)Whether 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 or similar product enhancements.
(B)The
(ii)Whether the replacing product would provide not confer a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is not unnecessary.
(C)The
(iii)Whether the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(11)(L)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(b)Disclosure Obligation.
(1)Before or at the time of recommendation or sale of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation. If NAIC updates or adopts a new version of the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation after January 1, 2024, the commissioner shall adopt, and producers shall use, a substantially similar version of the new or amended Insurance Agent (Producer) Disclosure for Annuities form.
(A)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(B)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(i)Fixed annuities.
(ii)Fixed indexed annuities.
(iii)Variable annuities.
(iv)Life insurance.
(v)Other life and annuity products, as specified.
(vi)Mutual funds.
(vii)Stocks and bonds.
(viii)Certificates of deposit.
(C)(i)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(i)(I)From one insurer.
(ii)(II)From two or more insurers.
(iii)(III)From two or more insurers, although primarily contracted with one insurer.
(ii)For purposes of this subparagraph, insurers with common ownership and control shall be counted as one insurer.
(D)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(E)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer.
(F)A notice of the consumers right to request additional information regarding cash compensation described in this subdivision.(2)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(c)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(d)Documentation Obligation. A producer shall, at the time of recommendation or sale, provide sale, do all of the following:
(1)Provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(2)Obtain a customer-signed statement documenting both of the following:
(A)The customers refusal to provide the consumer profile information, if any.
(B)The customers understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(e)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(f)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the producer at the time the annuity is issued.
(3)A producer, or the responsible insurer representative if no producer is involved, shall at the time of sale do both of the following:(A)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.(B)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.(g)Supervision System.
(1)Except as permitted under subdivision (b), (f), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a), (b), (d), and (e). (a) to (f), inclusive, (h), and (i). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.
(H)The insurer shall establish and maintain establish, maintain, and utilize reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.917 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.
(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.
(4)An insurer is not required to include in its system of supervision either of the following:
(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(h)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(i)Safe Harbor.
(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements under this article. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article. article, regardless of whether the financial professional is operating under a comparable standard or in accordance with subdivisions (a) to (h), inclusive, of this section.
(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (g), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
(6)Notwithstanding anything herein to the contrary, the training requirements of Section 10509.915 remain applicable to recommendations and sales of annuities covered by this subdivision.
(j)This section shall become operative January 1, 2025.
SEC. 10.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(4)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 insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, in subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(6)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 11.Section 10509.915 is added to the Insurance Code, to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority on the effective date of the act that added this paragraph and who desire to sell annuities shall complete the requirements of this subdivision within six months after the effective date of the act that added this paragraph. Individuals who obtain a life insurance line of authority on or after the effective date of the act that added this paragraph shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, Section 1749.81, 1749.8 and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
(h)This section shall become operative January 1, 2025.
SEC. 12.Section 10509.916 is added to the Insurance Code, to read:10509.916.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
(c)This section shall become operative January 1, 2025.
SEC. 13.Section 10509.916 of the Insurance Code is amended and renumbered to read:10509.917.(a) An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harmed harm caused by the insurers, or a violation of this article by the insurer, by its producers, violation of this article. producer, or by its intermediary or by an entity that is contracted to perform the insurers supervisory duties.
(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
SEC. 14.Section 10509.917 of the Insurance Code is amended and renumbered to read:10509.918.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
SEC. 15.Section 10509.918 of the Insurance Code is amended and renumbered to read:10509.919.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
SEC. 16.Section 10509.920 is added to the Insurance Code, to read:10509.920.The act that added this section shall apply only to annuities issued on or after January 1, 2025.
(a)A life agent who sells life insurance policies shall satisfactorily complete four hours of training before soliciting individual consumers to sell life insurance policies. This training is in addition to, and is not a part of, the annuity training required by subdivision (a) of Section 1749.8.
(b)A life agent who sells life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour life insurance policy training required by subdivision (a) does not satisfy the two-hour life insurance policy training required by this subdivision. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to life insurance policies, California law, regulations, and requirements related to life insurance policies, 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. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. A course or seminar that is disapproved under this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner.
(d)The training requirements set forth in this section shall not apply to nonresident agents representing an insurer that is a direct response provider.
(e)For the purposes of this section, direct response provider means an insurer that meets each of the following criteria:
(1)The insurer does not initiate telephone contact with insureds or prospective insureds.
(2)Agents of the insurer speak with insureds and prospective insureds only by telephone, and at the request of the insureds or prospective insureds.
(3)Agents of the insurer are assigned to speak with insureds or prospective insureds on a random basis, when contacted.
(4)Agents of the insurer are salaried and do not receive commissions for sales or referrals.
(f)This section shall become operative January 1, 2025.
SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.The purpose of this article is to require producers, as defined in Section 10509.913, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.914 or under standards governing the conduct of a fiduciary relationship.SEC. 3.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation made to a consumer to purchase, exchange, convert, replace, or modify an annuity, or to elect a contractual provision of an in-force annuity.(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.SEC. 4.Section 10509.913 of the Insurance Code is amended to read:10509.913.For purposes of this article:(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.(b)(1)Compensation means anything of value, if paid as commission or otherwise and if paid as cash or by some other means, received by a producer in connection with the recommendation or sale of an annuity or life insurance policy from an insurer, intermediary, or directly from the consumer.(2)Compensation includes money, credits, loans, interest on premium, forgiveness of principal or interest, any discounts, concessions, fees, service fees, commissions, sales charges, overrides, cash benefits, trips, prizes, or gifts. Compensation also includes any health insurance, office rent, office support, and retirement benefits.(3)Compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.(c)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:(1)Age.(2)Annual income.(3)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.(4)Financial experience.(5)Insurance needs.(6)Financial objectives.(7)Intended use of the annuity, including any riders attached thereto.(8)Financial time horizon, including the duration of existing liabilities and obligations.(9)Existing assets or financial products, including investments, annuity, and insurance holdings.(10)Liquidity needs.(11)Liquid net worth.(12)Risk tolerance, including, but not limited to, nonguaranteed elements in the annuity.(13)Tax status.(14)Whether or not the consumer has a reverse mortgage.(15)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.(16)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.(d)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.(e)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.(f)FINRA means the Financial Industry Regulatory Authority or a successor agency.(g)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.(h)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.(i)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.(j)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates including any temporary bonus interest rate, dividends, noninterest based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.(k)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer. Producer includes an insurer when no producer is involved.(l)(1)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.(2)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.(m)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.(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.(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.(4)Reissued with any reduction in cash value.(5)Used in a financed purchase.(n)SEC means the United States Securities and Exchange Commission.SEC. 5.Section 10509.914 of the Insurance Code is repealed.SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.(a)The purpose of this article 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.
(b)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 3.Section 10509.910 is added to the Insurance Code, to read:10509.910.(a)The purpose of this article is to require producers, as defined in Section 10509.913, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.914 or under standards governing the conduct of a fiduciary relationship.
(b)This section shall become operative January 1, 2025.
SEC. 4.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation to purchase, exchange, or replace an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended.
(b)Nothing in this act shall be interpreted to preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 5.Section 10509.911 is added to the Insurance Code, to read:10509.911.(a)This article shall apply to any recommendation made to a consumer to purchase, exchange, convert, replace, or modify an annuity, or to elect a contractual provision of an in-force annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity that is subject to this article.
(c)This section shall become operative January 1, 2025.
SEC. 6.Section 10509.913 of the Insurance Code is amended to read:10509.913.(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.
(b)Commissioner means the Insurance Commissioner.
(c)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(d)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(e)Insurance producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer.
(f)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(g)Recommendation means advice or guidance provided or made by an insurance producer or by an insurer to an individual consumer that results in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(h)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, regardless of whether or not there is a producer, that by reason of the transaction, an existing policy or contract has been or is to be any of the following:
(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.
(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.
(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.
(4)Reissued with any reduction in cash value.
(5)Used in a financed purchase.
(i)Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including all of the following:
(1)Age.
(2)Annual income.
(3)Financial situation and needs, including the financial resources used for the funding of the annuity.
(4)Financial experience.
(5)Financial objectives.
(6)Intended use of the annuity.
(7)Financial time horizon.
(8)Existing assets, including investment and life insurance holdings.
(9)Liquidity needs.
(10)Liquid net worth.
(11)Risk tolerance.
(12)Tax status.
(13)Whether or not the consumer has a reverse mortgage.
(14)Whether or not the consumer intends to apply for means-tested government benefits, including, but not limited to, Medi-Cal or the veterans aid and attendance benefit.
(j)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 7.Section 10509.913 is added to the Insurance Code, to read:10509.913.(a)For purposes of this article:
(1)Annuity means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.
(2)Cash compensation means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer. Cash compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.
(3)Consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets or financial products, including investments, annuity, and insurance holdings.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, including, but not limited to, nonguaranteed elements in the annuity.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer.
(4)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(5)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(6)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(7)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities.
(8)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities by producers.
(9)Material conflict of interest means a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or noncash compensation.
(10)Noncash compensation means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support, and retirement benefits.
(11)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity, such as credited interest rates, including any temporary bonus interest rate, dividends, noninterest-based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(12)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. Producer includes an insurer when no producer is involved.
(13)(A)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(B)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(14)Replacement means a transaction in which a new annuity policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, whether or not a producer is involved, that by reason of the transaction, an existing annuity or insurance policy has been or is to be any of the following:
(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 a reduction 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.
(E)Used in a financed purchase.
(15)SEC means the United States Securities and Exchange Commission.
(b)This section shall become operative January 1, 2025.
SEC. 8.Section 10509.914 of the Insurance Code is amended to read:10509.914.(a)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 an insurer if 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 his or her their investments and other insurance products and as to his or her their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 his or her their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, an insurance a producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither an insurance a producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the insurance producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.
(e)An insurance A producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the insurance producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its insurance producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its insurance producers of the requirements of this article and shall incorporate the requirements of this article into relevant insurance producer 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 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision an insurance a producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)An insurance A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(i)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 6.SEC. 9.Section 10509.914 is added to the Insurance Code, to read:10509.914.Insurers and producers have the following duties to ensure that annuities that are recommended are in the consumers best interest:
(a)Best Interest Obligation. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with those matters would use under the circumstances then prevailing.
(2)The requirements under paragraph (1) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(3)The requirements under paragraph (1) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(4)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(5)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(6)The requirements under paragraph (1) include having a reasonable basis to believe the consumer would benefit from the annuity. certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.
(7)The requirements under paragraph (1) apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.
(8)The requirements under paragraph (1) do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be in the best interest of the consumer.
(9)The requirements under paragraph (1) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(10)In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(A)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 or similar product enhancements.
(B)The replacing product would provide a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is not unnecessary.
(C)The consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(11)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(b)Disclosure Obligation.
(1)Before or at the time of recommendation or sale of an annuity, the producer shall prominently disclose to the consumer orally and in writing all of the following: all of the following information to the consumer on a form substantially similar to the Insurance Agent (Producer) Disclosure for Annuities form in Appendix A of the 2020 National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation.
(A)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(B)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(i)Fixed annuities.
(ii)Fixed indexed annuities.
(iii)Variable annuities.
(iv)Life insurance.
(v)Other life and annuity products, as specified.
(v)(vi)Mutual funds.
(vi)(vii)Stocks and bonds.
(vii)(viii)Certificates of deposit.
(C)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(i)From one insurer.
(ii)From two or more insurers.
(iii)From two or more insurers, although primarily contracted with one insurer.
(D)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(E)A reasonable estimate of the amount of cash compensation to be received by the producer and whether the compensation is a one-time or multiple-occurrence amount.(E)A prominent notice of the consumers right to request additional information regarding cash compensation to be received by the producer.
(F)A notice of the consumers right to request additional information regarding cash compensation described in this subdivision.
(2)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(c)Conflict of Interest Obligation. A producer shall identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(d)Documentation Obligation. A producer shall, at the time of recommendation or sale, provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(e)Application of the Best Interest Obligation. Any requirement applicable to a producer under this section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(f)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.
(3)An insurance A producer, or the responsible insurer representative if no insurance producer is involved, shall at the time of sale do all both of the following:
(A)Make a record of any recommendation subject to subdivision (a).(B)(A)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(C)(B)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(g)Supervision System.
(1)Except as permitted under subdivision (b), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its producers compliance with this article, including, but not limited to, the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its producers of the requirements of this article and shall incorporate the requirements of this article into relevant producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for producer product training, and shall maintain and utilize reasonable procedures to require its producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuance of an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with subdivisions (a), (b), (d), and (e). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address suspicious consumer refusals to provide complete consumer profile information.
(H)The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.917 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to assure that the contracted function is properly performed.
(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.
(4)An insurer is not required to include in its system of supervision either of the following:
(A)A producers recommendations to consumers of products other than the annuities offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(h)Prohibited Practices. A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(i)Safe Harbor.
(1)Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements under this article. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(2)Paragraph (1) does not limit the insurers obligation to comply with paragraph (1) of subdivision (g), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(B)An investment adviser registered under federal or California laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
(j)This section shall become operative January 1, 2025.
SEC. 7.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)An insurance producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the insurance producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.(3)Producers who hold a life insurance line of authority on the effective date of the act that added this paragraph and who desire to sell annuities shall complete the requirements of this subdivision within six months after the effective date of the act that added this paragraph. Individuals who obtain a life insurance line of authority on or after the effective date of the act that added this paragraph shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.(E)The primary uses of annuities.(F)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, all as provided under California law, including, but not limited to, this article.(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in Section 1749.8, Section 1749.81, and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.(g)An insurer shall verify that an insurance producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.SEC. 10.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)An insurance A 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 insurers standards for product training. An insurance A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)An insurance A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(4)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 insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in Section 1749.8, in subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(6)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)An insurer shall verify that an insurance a producer has completed the annuity training required under this section before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
(c)This section shall remain in effect only until January 1, 2025, and as of that date is repealed.
SEC. 11.Section 10509.915 is added to the Insurance Code, to read:10509.915.(a)A producer shall not solicit the sale of an annuity product unless the producer has adequate knowledge of the product to recommend the annuity and the producer is in compliance with the insurers standards for product training. A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority on the effective date of the act that added this paragraph and who desire to sell annuities shall complete the requirements of this subdivision within six months after the effective date of the act that added this paragraph. Individuals who obtain a life insurance line of authority on or after the effective date of the act that added this paragraph shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(4)The training required under this subdivision shall include information on all of 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 nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(d)A provider of an annuity training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to producer continuing education courses as set forth in Section 1749.8, Section 1749.81, and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(e)Annuity training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(f)Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(g)An insurer shall verify that a producer has completed the annuity training required under this section before allowing the producer to sell an annuity for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
(h)This section shall become operative January 1, 2025.
SEC. 8.SEC. 12.Section 10509.916 is added to the Insurance Code, to read:10509.916.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
(c)This section shall become operative January 1, 2025.
SEC. 9.SEC. 13.Section 10509.916 of the Insurance Code is amended and renumbered to read:10509.917.(a) An insurer is responsible for compliance with this article. If a violation occurs, either because of the action or inaction of the insurer or its producer, the commissioner may, in addition to any other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harmed by the insurers, or by its producers, violation of this article.
(2)A general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
SEC. 10.SEC. 14.Section 10509.917 of the Insurance Code is amended and renumbered to read:10509.918.(a)Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
SEC. 11.SEC. 15.Section 10509.918 of the Insurance Code is amended and renumbered to read:10509.919.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
SEC. 12.Section 10509.920 is added to the Insurance Code, to read:10509.920.The act that added this section shall become operative on January 1, 2025, and shall apply only to annuities issued on or after January 1, 2025.(a)A life agent who sells life insurance policies shall satisfactorily complete four hours of training before soliciting individual consumers to sell life insurance policies. This training is in addition to, and is not a part of, the annuity training required by subdivision (a) of Section 1749.8.
(b)A life agent who sells life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour life insurance policy training required by subdivision (a) does not satisfy the two-hour life insurance policy training required by this subdivision. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to life insurance policies, California law, regulations, and requirements related to life insurance policies, 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. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. A course or seminar that is disapproved under this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner. The training required by this section is in addition to the topics listed in subdivision (c) of Section 10509.915.
(d)The training requirements set forth in this section shall not apply to nonresident agents representing an insurer that is a direct response provider.
(e)For the purposes of this section, direct response provider means an insurer that meets each of the following criteria:
(1)The insurer does not initiate telephone contact with insureds or prospective insureds.
(2)Agents of the insurer speak with insureds and prospective insureds only by telephone, and at the request of the insureds or prospective insureds.
(3)Agents of the insurer are assigned to speak with insureds or prospective insureds on a random basis, when contacted.
(4)Agents of the insurer are salaried and do not receive commissions for sales or referrals.
SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.The purpose of this article is to require insurance producers producers, as defined in Section 10509.913, to act in the best interest of the consumer when making a recommendation of an annuity or life insurance policy and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities or life insurance policies, annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. This article does not create or imply a private cause of action for a violation of this article or subject a producer to civil liability under the best interest standard of care outlined in Section 10509.914 or under standards governing the conduct of a fiduciary relationship.
SEC. 3.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation made to a consumer to purchase, exchange, convert, replace, or modify an annuity or life insurance policy, annuity, or to elect a contractual provision of an in-force annuity or life insurance policy. annuity.
(b)This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity or life insurance policy that is subject to this article.
SEC. 4.Section 10509.912 of the Insurance Code is amended to read:10509.912.Unless otherwise specifically included, this article does not apply to transactions involving any of the following:(a)Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this article.(b)Settlements of or assumptions of liabilities associated with personal injury litigation or a dispute or claim resolution process.(c)Formal prepaid funeral contracts.(d)Annuities and life insurance policies used to fund any of the following if a recommendation is not made to an individual consumer:(1)An employee pension or welfare benefit plan that is covered by the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.).(2)A plan described by Section 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.SEC. 5.SEC. 4.Section 10509.913 of the Insurance Code is amended to read:10509.913.For purposes of this article:
(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.
(b)Commissioner means the Insurance Commissioner.(c)(b)(1)Compensation means anything of value, if paid as commission or otherwise and if paid as cash or by some other means, received by a producer in connection with the recommendation or sale of an annuity or life insurance policy from an insurer, intermediary, or directly from the consumer.
(2)Compensation includes money, credits, loans, interest on premium, forgiveness of principal or interest, any discounts, concessions, fees, service fees, commissions, sales charges, overrides, cash benefits, trips, prizes, or gifts. Compensation also includes any health insurance, office rent, office support, and retirement benefits.
(3)Compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.
(d)(c)Consumer profile information means information that is reasonably appropriate to determine the suitability of a recommendation. whether a recommendation addresses the consumers financial situation, insurance needs, and financial objectives, including, at a minimum, the following:
(1)For a life insurance policy solely providing term life insurance with no cash value, consumer profile information means all of the following:(A)Age.(B)Annual income.(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the life insurance policy.(D)Insurance needs.(E)Financial objectives.(F)Intended use of the life insurance policy, including any riders attached thereto.(G)Financial time horizon, including the duration of existing liabilities and obligations.(H)Existing assets, including investment and insurance holdings.(I)Willingness to accept nonguaranteed elements in the policy, including variability in premium, death benefit, or fees.(J)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer or by observing the consumers circumstances.(2)For an annuity or life insurance policy other than a life insurance policy solely providing term life insurance with no cash value, consumer profile information means all of the following:(A)(1)Age.
(B)(2)Annual income.
(C)(3)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity or life insurance policy. annuity.
(D)(4)Financial experience.
(E)(5)Insurance needs.
(F)(6)Financial objectives.
(G)(7)Intended use of the annuity or life insurance policy, annuity, including any riders attached thereto.
(H)(8)Financial time horizon, including the duration of existing liabilities and obligations.
(I)(9)Existing assets, assets or financial products, including investments, annuity and life insurance, and other insurance holdings, and other financial products. annuity, and insurance holdings.
(J)(10)Liquidity needs.
(K)(11)Liquid net worth.
(L)(12)Risk tolerance, such as willingness to accept variability in premiums, returns, death benefits, values, credits, or fees and other charges, and other including, but not limited to, nonguaranteed elements in the annuity or life insurance policy. annuity.
(M)(13)Tax status.
(N)(14)Whether or not the consumer has a reverse mortgage.
(O)(15)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)(16)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer or by observing the consumers circumstances information. consumer.
(e)(d)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(f)(e)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(g)(f)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(h)Insurance producer means a person, as defined in Section 19, required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer. Producer includes an insurer when no producer is involved.(i)Insurer means either of the following:(1)A(g)Insurer means a company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities or life insurance policies. annuities.
(2)A fraternal benefit society, as defined in Section 10990.(j)(h)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities or life insurance policies by producers.
(k)Life insurance policy means a life insurance policy that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as individual or group life insurance.(l)(i)Material conflict of interest means a financial interest of the producer in the sale of an annuity or life insurance policy that a reasonable person would expect to influence the impartiality of a recommendation.
(m)(j)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity or life insurance policy, annuity, such as credited interest rates including any temporary bonus interest rate, dividends, noninterest based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(n)(1)Recommendation means advice, guidance, or acts directed to a consumer by a producer, or an insurer, that a consumer may reasonably interpret to be advice or guidance or that the producer intends to be advice or guidance regarding whether or not to do any of the following:(A)Purchase, exchange, convert, modify, or replace an annuity or a life insurance policy.(B)Refrain from purchasing, exchanging, converting, modifying, or replacing an annuity or a life insurance policy.(C)Elect a contractual provision with respect to an in-force annuity or life insurance policy in accordance with that advice, guidance, or those acts.(k)Producer means a person required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer. Producer includes an insurer when no producer is involved.
(l)(1)Recommendation means advice or guidance provided or made by a producer or an insurer to an individual consumer that was intended to result or does result in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.
(2)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(o)(m)Replacement means a transaction in which a new annuity or life insurance policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, regardless of whether or not there is a producer, a producer is involved, that by reason of the transaction, an existing annuity or life insurance policy has been or is to be any of the following:
(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.
(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.
(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.
(4)Reissued with any reduction in cash value.
(5)Used in a financed purchase.
(n)SEC means the United States Securities and Exchange Commission.
SEC. 6.SEC. 5.Section 10509.914 of the Insurance Code is repealed.SEC. 7.SEC. 6.Section 10509.914 is added to the Insurance Code, to read:10509.914.Insurers and producers have the following duties to ensure that annuities and life insurance policies that are recommended are only in the consumers best interest:
(a)Best Interest Obligation. A producer or insurer, producer, when making a recommendation of an annuity or a life insurance policy, annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made. made, without placing the producers or insurers financial interest ahead of the consumers interest. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity or life insurance policy, annuity, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the annuity or life insurance policy. product.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with those matters would use under the circumstances then prevailing.
(C)Only the interests of the consumer shall be considered in making the recommendation and complying with other obligations under this section.(D)The requirements under subparagraph (A) include all of the following:(i)Making reasonable efforts to obtain consumer profile information from the consumer before recommending an annuity or life insurance policy.(I)If the consumer does not provide the producer with complete consumer profile information, the producer shall not submit an application on behalf of the consumer to the insurer.(II)The insurer shall not issue the annuity or life insurance policy if the consumer has refused to provide complete consumer profile information.(ii)(I)Considering those factors generally relevant in making a determination about whether or not an annuity or life insurance policy effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives. The factors generally relevant in making this determination include the consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features. The features to be considered include:(ia)The length of the surrender charge period and surrender charge amounts.(ib)Product costs, such as cost of insurance charges, annual and other periodic fees and expense charges, mortality and expense fees, investment advisory fees, investment and interest option fees.(ic)Costs and features of riders or other options.(id)Minimum guarantees, including guaranteed interest rates, participation rates, caps, spreads, floors, buffers, and limitations on interest returns.(ie)Crediting rates.(if)Insurance and investment components.(ig)Potential changes in nonguaranteed elements of the annuity or life insurance policy.(ih)Market risk.(ii)Any secondary guarantee period, equity-index features, availability of cash value, annuity or life insurance policy exclusions or restrictions.(ij)Other relevant information that the producer knew or reasonably should have known about as provided by the consumer or by observing the consumers circumstances.(II)The level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case, but each factor shall not be considered in isolation.(iii)Having a reasonable basis to believe the consumer would benefit from certain features of the annuity or life insurance policy, such as annuitization, death or living benefit, or other insurance-related features.(E)The requirements under subparagraph (A) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, financial needs, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer. Producers shall be held to consumer protection standards that meet or exceed the standards set forth in this subdivision.(2)The requirements under paragraph (1) include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.
(3)The requirements under paragraph (1) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers shall be held to standards applicable to producers with similar authority and licensure.
(4)This subdivision does not create a fiduciary obligation or relationship and only creates a regulatory obligation as established in this article.
(5)The consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features are factors generally relevant in making a determination whether an annuity effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
(6)The requirements under paragraph (1) include having a reasonable basis to believe the consumer would benefit from the annuity.
(F)(7)The requirements under subparagraph (A) paragraph (1) apply to the particular annuity or life insurance policy as a whole and the underlying subaccounts, if any, subaccounts to which funds are allocated at the time of purchase or exchange of an annuity or life insurance policy, annuity, and riders and similar product enhancements, if any.
(G)The requirements under subparagraph (A) do not mean either of the following:(i)The(8)The requirements under paragraph (1) do not mean the annuity or life insurance policy with the lowest one-time or multiple occurrence compensation structure are always shall necessarily be in the best interest of the consumer.
(ii)The(9)The requirements under paragraph (1) do not mean the producer has ongoing monitoring obligations under the care obligation under this paragraph, although that such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(H)For(10)In the case of an exchange or replacement of an annuity or life insurance policy, the producer, or insurer if no producer is involved, annuity, the producer shall consider the whole transaction, which includes taking into consideration all of the following:
(i)If the consumer will do any of the following:(I)Lose existing benefits, such as:(ia)Contract provisions that prorate crediting between anniversaries or other contractually specified time periods.(ib)The loss or reduction of death benefits, living benefits, favorable index parameters, or other contractual benefits or features, including free withdrawals, loans, rate guarantees, bonus earnings, accelerated death benefits, and secondary guarantees.(ic)Decreased coverage duration.(id)Decreased income amount.(ie)Other contract benefits.(II)Be subject to surrender charges, a new graded or modified death benefits period, loss of unvested credits, recapture charges, loss of persistency-related credits, loss of prorated gains if in between anniversaries or other contractually specified time periods, or an adverse market-value adjustment or tax implications if the consumer surrenders or borrows from the policy.(III)Incur new or increased premiums, fees or charges, such as a new vesting schedule, a new surrender charge period or a change in surrender charges, an adverse change in health rating, new or different investment advisory fees, interest option fees, premium loads, or charges for riders, and similar product enhancements.(ii)How those items stated in clause (ii) of subparagraph (B) that are contained in the recommended annuity or life insurance policy compare with those in the annuity or life insurance policy that is being exchanged or replaced.(iii)If the(A)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 or similar product enhancements.
(B)The replacing product would provide a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is not unnecessary.
(iv)If the(C)The consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(I)(11)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including including, but not limited to, a securities license, in order to fulfill the duties and obligations of this section as long as provided the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(2)(b)Disclosure Obligation.
(A)At(1)Before or at the time of recommendation of an annuity or life insurance policy, annuity, the producer shall prominently disclose to the consumer orally and in writing using the Insurance Agent (Producer) Compensation Disclosure for Annuities and Life Insurance Policies form. No part of the form shall be amended or omitted. This form shall not be part of the application or policy. The disclosure form shall be in a freestanding document, using no smaller than 10-point type, and shall be in the following form: all of the following:
INSURANCE AGENT (PRODUCER) COMPENSATION DISCLOSUREFOR ANNUITIES and LIFE INSURANCE POLICIESDo Not Sign Unless You Have Read and Understand the Information in this FormDate: ____________________________INSURANCE AGENT (PRODUCER) INFORMATION (Me, I, My)First Name: Last Name: Business/Agency Name: Website: Business Mailing Address: Business Telephone Number: Email Address: California Producer License Number: CUSTOMER INFORMATION (You, Your)First Name: Last Name: What Types of Products Can I Sell You?I am licensed to sell annuities and/or life insurance policies to You in accordance with California law. If I recommend that You buy an annuity and/or life insurance policy, it means I believe that it effectively meets Your financial situation, insurance needs, and financial objectives. Other financial products, such as life insurance or stocks, bonds, and mutual funds, may also meet Your needs.I offer the following products:Annuities:Life Insurance:Immediate Fixed AnnuitiesTerm Life Insurance PoliciesDeferred Fixed AnnuitiesWhole Life Insurance PoliciesFixed Indexed AnnuitiesUniversal Life Insurance PoliciesVariable AnnuitiesVariable Universal LifeIndex-Linked VariableInsurance PoliciesAnnuitiesIndexed Universal Life Insurance PoliciesOther AnnuityVariable Life Insurance Policies(Specify): Other Life Insurance(Specify): I need a separate license to provide advice about or to sell noninsurance financial products. I have checked below any noninsurance financial products that I am licensed and authorized to provide advice about or to sell.Securities:Savings Products:Mutual FundsCertificates of DepositStocks and BondsOther Savings ProductsOptions(Specify): Other Securities(Specify): Whose Annuities and/or Life Insurance Policies Can I Sell to You?For purposes of this disclosure, insurance companies owned by the same insurance holding company or that otherwise share common management or control shall be considered to be one insurer.I am authorized to sell:Annuities from Only One InsurerLife Insurance Policies from OnlyOne InsurerAnnuities from Two or More InsurersLife Insurance Policies from Twoor More InsurersAnnuities from Two or More Insurers although I primarily sell annuities from: Life Insurance Policies from Two or More Insurers although I primarily sell life insurance from:Who I Do Work For and How Im Paid for My Work:Its important for You to understand who I work for and how Im paid for my work. I am an agent for one or more insurance companies whose products I sell. Depending on the particular annuity or life insurance policy You purchase, I may be paid a commission or a fee. Commissions are generally paid to Me by the insurance company, while fees are generally paid to Me by You. My commission may be based on the amount of premiums paid for the annuity or life insurance policy purchased.The compensation paid to Me may vary depending on a number of factors, including (if applicable) the annuity or life insurance policy and the insurance company that You select, the volume of business I provide to the insurance company, or the profitability of the annuities and life insurance policies that I provide to the insurer.Depending on the particular annuity or life insurance policy You buy, I will or may be paid cash compensation as follows:Commission, which is usually paid by the insurance company or other sources. If other sources, describe: Fees (such as a fixed amount, an hourly rate, or a percentage of your payment), which are usually paid directly by the customer.Other (Describe): _My Estimated Compensation for the Product(s) I am Recommending for You:My compensation may include commissions or fees. Here is an explanation of the commissions or fees I may receive for selling the product Im recommending for You. (Producer must include product name, insurance company, initial estimated premium, and estimated commissions or fees for years 1 through 10.) Complete an additional form for each product being recommended.Product NameInsurance Company NameInitial Estimated PremiumMy Estimated Commission or Fees (years 1 through 10)Material Conflicts of Interest that I am unable to eliminate1.2.3.4.5.6.7.8.9.10.TOTAL years 1-10:$My Ownership Interest in the Insurance Company or any Parent, Subsidiary or Affiliate of the Insurance Company (state % of ownership): Does the Insurance Company have an Ownership Interest in the Insurance Agency I Work With, or in any Parent, Affiliate or Subsidiary of the Agency? Yes No (check one)I am required to identify and eliminate any material conflicts of interest, if possible. If the material conflict of interest cannot be eliminated, I must (1) take action to ensure the conflict of interest does not prevent Me from acting in Your best interest, (2) disclose the material conflict of interest to You, and (3) disclose the actions taken to ensure the material conflicts of interest do not prevent Me from acting in Your best interests. These are the actions I have taken to ensure material conflicts of interest that I have not been able to eliminate do not prevent Me from acting in Your best interest: If Compensation Amounts or Values Are Unknown:If the nature, amount, or value of any compensation I am required to disclose is not known and cannot be estimated at the time this disclosure is required, then I shall include in the disclosure: (1) a description of the circumstances that may determine the receipt and amount or value of such compensation; and (2) a reasonable estimate of the amount or value, which may be stated as a range of amounts or values.Description of circumstances that may determine the receipt and amount or value of such compensation: Reasonable estimated range of compensation amounts or values: Alternate products discussed: (Producer must include product name, insurance company, initial estimated premium for each product, and estimated compensation for each (including estimated commission or fees for years 1 through 10) and attach additional page(s) if necessary):Product NameInsurance CompanyInitial Estimated PremiumEstimated Commission or Fees (years 1 through 10)1.2.3.4.5.6.7.8.9.10.TOTAL years 110:$1.2.3.4.5.6.7.8.9.10.TOTAL years 1-10:$If You have questions about the above compensation I will be paid for this transaction, please ask me.By signing below, You acknowledge that You have read and understand the information provided to You in this document.Customer SignatureAgent (Producer) SignatureDateDate(B)At the time of the recommendation of an annuity or life insurance policy, the producer shall have a reasonable basis to believe the consumer has been reasonably informed of various features of the annuity or life insurance policy, and potential consequences of the sale or in-force transaction, both favorable and unfavorable, such as the potential surrender period and surrender charge, any secondary guarantee period, equity-index features, availability of cash value, death benefit, mortality and expense fees, cost of insurance charges, investment advisory fees, any annual fees and other periodic fees, policy exclusions or restrictions, potential charges for and features of riders or other options of the annuity or life insurance policy, guaranteed interest rates, including whether any guaranteed interest rates are based on any period other than annual, such as retrospective or cumulative guarantees, limitations on interest returns, provisions that do not prorate investment or other credit to the date of policy or annuity termination, insurance and investment components, potential changes in nonguaranteed elements of the annuity or life insurance policy, insurance and investment components and market risk, and potential tax penalty if the consumer sells, modifies, exchanges, surrenders, or lapses the annuity or life insurance policy, or annuitizes the annuity.(A)A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.
(B)An affirmative statement on whether the producer is licensed and authorized to sell the following products:
(i)Fixed annuities.
(ii)Fixed indexed annuities.
(iii)Variable annuities.
(iv)Life insurance.
(v)Mutual funds.
(vi)Stocks and bonds.
(vii)Certificates of deposit.
(C)An affirmative statement describing the insurers the producer is authorized, contracted or appointed, or otherwise able to sell insurance products for, using the following descriptions:
(i)From one insurer.
(ii)From two or more insurers.
(iii)From two or more insurers, although primarily contracted with one insurer.
(D)A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services.
(E)A reasonable estimate of the amount of cash compensation to be received by the producer and whether the compensation is a one-time or multiple-occurrence amount.
(F)A notice of the consumers right to request additional information regarding cash compensation described in this subdivision.
(2)Before or at the time of recommendation or sale of an annuity, the producer shall inform the consumer of various features of the annuity, such as the potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components, and market risk.
(3)(c)Conflict of Interest Obligation. A producer shall identify and eliminate avoid or reasonably manage and prominently disclose any material conflicts of interest, if possible. If it is impossible to eliminate any material conflicts of interest, the producer shall disclose and reasonably manage the material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(A)The producers receipt of compensation or other incentives permitted by applicable California law is permitted if the amount of the compensation or the receipt of an incentive does not influence the recommendation. The only compensation that may be paid or provided to or received by a producer is commissions or fees.(B)If a material conflict of interest cannot be eliminated, the producer shall do all of the following:(i)Take action to ensure the conflict of interest does not prevent the producer from acting in the best interest of the consumer.(ii)Disclose the material conflict of interest to the consumer.(iii)Disclose the actions taken to ensure the material conflicts of interest do not prevent the producer from acting in the best interests of the consumer.(4)Documentation Obligation. At the time of recommendation, a producer shall do both of the following:(A)Provide the consumer and the insurer with a written record of any recommendation and, in a reasonable summary format, all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for any recommendations.(B)When the recommendation or sale is a replacement, the producer shall complete and provide the insurer with a written copy of the required Replacement Product Comparison Form. No part of the form shall be amended or omitted, however, additional pages may be attached that show additional relevant features that were compared and considered in determining the recommendation. This form shall not be part of the application or policy. The disclosure form shall be in no less than 10-point type and shall read as follows:REPLACEMENT PRODUCT COMPARISON FORMThe agent (producer) or insurer is required to complete this form when recommending the replacement of an annuity or life insurance policy. California Insurance Code Section 10509.2 defines the word replacement. A comparison shall be completed for each product being replaced, and shall consider, at a minimum, the features and benefits listed below, along with all of the items to be considered in California Insurance Code Section 10509.914.Existing Life Insurance PolicyExisting AnnuityProposed Replacement Policy1.Company NameReplacing within same insurer group?Yes No2.Product Name3.Policy NumberN/A4.Policy TypeTerm LifeWhole LifeUniversal LifeVariable UniversalLifeIndexed UniversalLifeVariable LifeOther Deferred Fixed AnnuityImmediateFixed AnnuityFixed Indexed AnnuityVariable AnnuityIndex-Linked VariableAnnuityOther LifeAnnuity[Insert Policy Type/Name]5.Issue Date6.Initial Premium$$$7.Source of Initial Premium8.Owner AgeN/AN/ACurrent Age 9.Has the owner surrendered,exchanged, orreplaced anotherpolicy within thelast 60 months?N/AN/AYes No10.Current Account Value$$11.Current Cash Surrender Value$$12.Current Surrender Charges$%$%%[Year 1 (%), 2 (%), 3 (%), etc.]13.Surrender Charge Schedule for Remaining Years (indicate percentage per year for existing policy)14.Market Value Adjustment (+/-)Yes No$Yes No$Yes No15.Interest RatesCurrent InterestRate % MinimumGuaranteedInterest Rate% Initial RateGuaranteePeriod and Rate% Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) Current InterestRate % MinimumGuaranteedInterest Rate% Initial RateGuaranteePeriod and Rate% Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) Current InterestRate % MinimumGuaranteedInterest Rate% Initial RateGuaranteePeriod and Rate% Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) 16.Current/ Proposed Death Benefit Amount$$$17.Bonus Amount or Bonus Interest Rate (include Bonus Time Constraints or Vesting Period)$or %N/A$or %N/A$or %N/A18.Accelerated Death Benefits?Yes NoYes NoYes No19.Annualized Premium = Base Policy + all Riders20.Fees and Charges21.Waivers, Riders, and Enhanced Benefits (e.g. Terminal Illness, LTC Rider, Living Benefit, Free Withdrawal %, Return of Premium Provision or Rider, etc.)Primary reason(s) for recommending the replacement:OTHER CONSIDERATIONS:Is the existing life insurance out of its contestability period?Yes NoIs there an Outstanding Loan against the policy?Yes NoOutstanding Loan Balance$ Has the Guaranteed Minimum Withdrawal Benefit (GMWB) been activated on the existing annuity?Yes NoN/AIf yes, at what %/value and frequency are the income payments? Has the Guaranteed Lifetime Withdrawal Benefit (GLWB) been activated on the existing annuity?Yes NoN/AIf yes, at what %/value and frequency are the income payments? Will a Bonus Recapture apply at the time of surrender or exchange of the existing policy?YesNoOriginal Bonus Rate % and Amount: ____% and $ Actual Bonus Recapture Amount $ Applicant Acknowledgment: I acknowledge that a copy of this completed comparison form has been provided to me, and that I can ask questions about the content of this form to the agent or insurer who completed it.Applicant First and Last Name:Applicant Email Address: Applicant SignatureDateAgent (Producer)/Insurer RepresentativeFirst and Last Name: Agent (Producer)/Insurer Email Address: Agent (Producer)/Insurer Business Telephone Number: Agent (Producer)/Insurer Statement: The replacing product would would not substantially benefit the consumer in comparison to the replaced product over the life of the product.Agent (Producer)/Insurer Representative SignatureDate(d)Documentation Obligation. A producer shall, at the time of recommendation or sale, provide the consumer and the insurer with a written record of any recommendation and the basis for the recommendation, subject to this article.
(5)(e)Application of the Best Interest Obligation. Any requirement applicable to a producer under this subdivision section shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether or not the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(f)Transactions not based on a recommendation.
(1)Except as provided under paragraph (2), a producer shall have no obligation to a consumer under paragraph (1) of subdivision (a) related to any annuity transaction if any of the following are true:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances that are actually known, or that after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.
(3)An insurance producer, or the responsible insurer representative if no insurance producer is involved, shall at the time of sale do all of the following:
(A)Make a record of any recommendation subject to subdivision (a).
(B)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(C)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producers or insurers recommendation.
(b)(g)Supervision System.
(1)An insurer shall not issue an annuity or life insurance policy recommended to a consumer unless there is a reasonable basis to believe the annuity or life insurance policy would be in the best interest of the consumer, confer a tangible financial benefit over the life of the annuity or life insurance policy based on the consumers consumer profile information and other relevant information that was obtained by the producer or insurer, and effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. If an annuity or life insurance policy is being replaced, the insurer shall review the Replacement Product Comparison Form required by subparagraph (B) of paragraph (4) of subdivision (a), and after doing so, the insurer shall determine if it also has a reasonable basis to believe the annuity or life insurance policy will confer a substantial financial benefit to the consumer over the life of the annuity or life insurance policy when compared to the replaced product.(1)Except as permitted under subdivision (b), an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumers financial situation, insurance needs, and financial objectives based on the consumers consumer profile information.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its insurance producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its insurance producers of the requirements of this article and shall incorporate the requirements of this article into relevant insurance producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for insurance producer product training, and shall maintain and utilize reasonable procedures to require its insurance producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuities and life insurance policies to its insurance annuity products to its producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuing issuance of an annuity or life insurance policy that are designed to ensure there is a reasonable basis to determine that the recommended annuity or life insurance policy would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. The Such review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)(i)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with this article. This consists of programs of internal monitoring and shall include at least three of the following methods: subdivisions (a), (b), (d), and (e). This may include, but is not limited to, confirmation of the consumers consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations, and programs of internal monitoring. This subparagraph does not prevent an insurer from complying with this subparagraph by applying sampling procedures, or by confirming consumer profile information or other required information under this section after issuance or delivery of the annuity.
(I)Confirmation of the consumers profile information.(II)Systematic customer surveys.(III)Producer and consumer interviews.(IV)Confirmation letters.(V)Producer statements or attestations.(ii)This subparagraph does not prevent an insurer from complying with this subdivision by applying sampling procedures, or by confirming consumer profile information or other required information under subdivision (a) after issuance or delivery of the annuity or life insurance policy.(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity or life insurance policy, annuity, whether or not a producer has provided to the consumer the information required to be provided under subdivision (a). this section.
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address consumer refusals to provide complete consumer profile information and consumer profile information that differs from what the consumer represented to the producer. information.
(H)An insurer shall not utilize any compensation structure for recommendations or sales that creates a material conflict of interest, including compensation structures that favor particular products offered by a producer. Insurers shall compensate producers only by paying commissions or fees. Insurers may not offer any sales contests, sales quotas, bonuses, noncash compensation, or other cash compensation. The requirements of this subparagraph do not prohibit the insurers employees from receiving health insurance, retirement benefits, or other employee benefits if the insurers employees compensation is not based upon the volume of sales of annuities or life insurance policies.(H)The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subparagraph are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees, as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time.
(I)The insurer shall biannually annually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (2). this subdivision. An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.917 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (2) this subdivision shall include reasonable supervision of contractual performance under this subdivision. This includes both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure assure that the contracted function is properly performed.
(ii)Biannually 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.
(4)An insurer is not required to include in its system of supervision an insurance either of the following:
(A)A producers recommendations to consumers of products other than the annuities or life insurance policies offered by the insurer.
(B)Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.
(c)(h)Prohibited Practices. An insurance A producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(d)(i)Safe Harbor.
(1)Recommendations and sales of annuities and life insurance policies made by financial professionals in compliance with laws, regulations, business rules, controls, and procedures that satisfy consumer protection standards that are equal to or greater than those contained in this article made in compliance with comparable standards shall satisfy the requirements under this article even if those standards would not otherwise apply to the product or recommendation at issue. article. This subdivision applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls, and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. However, this subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(2)Paragraph (1) does not limit the insurers obligation to comply with subdivision (b), paragraph (1) of subdivision (g), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional, such as the financial professionals broker-dealer or an investment adviser registered under federal or California securities laws using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1), such as the financial professionals broker-dealer or investment adviser registered under federal or California securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.
(3)(4)For purposes of this subdivision, financial professional means a producer that is regulated and acting as either any of the following:
(A)A broker-dealer registered under federal or California securities laws or a registered representative of a broker-dealer.
(A)(B)An investment adviser registered under federal or California laws. laws or an investment adviser representative associated with the federally or California-registered investment adviser.
(B)(C)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(4)Sales by FINRA-registered broker-dealers and registered representatives of broker-dealers shall be subject to paragraph (1) only after FINRA establishes consumer protection standards that meet or exceed those contained in subdivision (a), including the requirements that the producers recommendation to the consumer is based on an evaluation of the consumers relevant consumer profile information and other relevant information, and reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with the matters would use under the prevailing circumstances, and only the interests of the consumer shall be considered in making the recommendation and complying with other obligations under this article.(5)For paragraph (1) to apply, an insurer shall do both of the following:(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional using information collected in the normal course of an insurers business.(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1) information and reports that are reasonably appropriate to assist such entity to maintain its supervision system.(5)For purposes of this subdivision, comparable standards means:
(A)With respect to broker-dealers and registered representatives of broker-dealers, applicable rules of the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority pertaining to best interest obligations and supervision of annuity recommendations and sales, including, but not limited to, Regulation Best Interest and any amendments or successor regulations thereto.
(B)With respect to investment advisers registered under federal or California securities laws or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.) or applicable state securities law, including, but not limited to, the Form ADV and interpretations.
(C)With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions, and all other requirements attendant to such status under ERISA or the IRC, and any amendments or successor statutes thereto.
SEC. 8.SEC. 7.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)An insurance producer shall not solicit the sale of an annuity or life insurance policy product unless the insurance producer has adequate knowledge of the product to recommend the annuity or life insurance policy and the insurance producer is in compliance with the insurers standards for product training. An insurance A producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)An insurance A producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)Producers who hold a life insurance line of authority on the effective date of the act that added this paragraph and who desire to sell annuities shall complete the requirements of this subdivision within six months after the effective date of the act that added this paragraph. Individuals who obtain a life insurance line of authority on or after the effective date of the act that added this paragraph shall not engage in the sale of annuities until the annuity training course required under this subdivision has been completed.
(3)(4)The training required under this subdivision shall include information on all of 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, index-linked variable annuity, and indexed annuity contract provisions affect consumers.
(D)The application of income taxation of qualified and nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)(1)An insurance producer who is otherwise entitled to engage in the sale of life insurance policies shall complete a one-time, four-credit hour life insurance policy training course approved by the commissioner and provided by a commissioner-approved education provider before transacting life insurance policies, pursuant to subdivision (a) of 1749.81.(2)In addition to the requirement set forth in paragraph (1), a producer who engages in this state in the sale of life insurance policies shall satisfactorily complete two continuing education credits before license renewal every two years, pursuant to subdivision (b) of Section 1749.81.(3)The training required under this subdivision shall include information on all of the following topics:(A)The types of life insurance policies and various classifications of life insurance policies.(B)Identification of the parties to a life insurance policy.(C)How the provisions in term life, whole life, universal life, indexed universal life, and other variable life policies affect consumers.(D)The primary uses of life insurance policies and the potential advantages and disadvantages of purchasing the types of insurance listed in subparagraph (C).(E)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 life insurance policies, all as provided under California law, including, but not limited to, this article.(d)(c)Providers of courses intended to comply with this section shall cover all topics listed for annuities in paragraph (3) of subdivision (b) and life insurance policies in paragraph (3) of subdivision (c), in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(e)(d)A provider of an annuity or life insurance policy training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in Section 1749.8, Section 1749.81, and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(f)(e)Annuity and life insurance policy training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(g)(f)Providers of annuity and life insurance policy training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(h)(g)An insurer shall verify that an insurance producer has completed the annuity or life insurance policy training required under this section before allowing the producer to sell an annuity or life insurance policy for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
SEC. 9.SEC. 8.Section 10509.916 is added to the Insurance Code, to read:10509.916.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
SEC. 10.SEC. 9.Section 10509.916 of the Insurance Code is amended and renumbered to read:10509.917.(a) An insurer is responsible for compliance with this article. 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 other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harmed by the insurers, or by its insurance producers, violation of this article.
(2)A managing general agent or an insurance general agency, independent agency, or producer to take reasonably appropriate corrective action for any consumer harmed by the insurance producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
SEC. 11.SEC. 10.Section 10509.917 of the Insurance Code is amended and renumbered to read:10509.918.(a)Insurers and insurance Insurers, general agents, independent agencies, and 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 five 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 a producer.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
SEC. 12.SEC. 11.Section 10509.918 of the Insurance Code is amended and renumbered to read:10509.919.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. Those rules and regulations may include modifications of the Insurance Agent (Producer) Compensation Disclosure for Annuities and Life Insurance Policies form in paragraph (2) of subdivision (a) of Section 10509.914 and Replacement Product Comparison Form in subparagraph (B) of paragraph (4) of subdivision (a) of Section 10509.914 that the commissioner finds likely to increase consumer understanding of annuity or life insurance transactions. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
SEC. 12.Section 10509.920 is added to the Insurance Code, to read:10509.920.The act that added this section shall become operative on January 1, 2025, and shall apply only to annuities issued on or after January 1, 2025.
(a)A life agent who sells life insurance policies shall satisfactorily complete four hours of training before soliciting individual consumers to sell life insurance policies. This training is in addition to, and is not a part of, the annuity training required by subdivision (a) of Section 1749.8.
(b)A life agent who sells life insurance policies shall satisfactorily complete two hours of training before each license renewal. Completion of the four-hour life insurance policy training required by subdivision (a) does not satisfy the two-hour life insurance policy training required by this subdivision. This training is in addition to, and is not a part of, the annuity training required by subdivision (b) of Section 1749.8. For resident licensees, this requirement shall count toward the licensees continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section.
(c)The training required by this section shall be approved by the commissioner and shall consist of topics related to life insurance policies, California law, regulations, and requirements related to life insurance policies, 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. Subject matter determined by the commissioner to be primarily intended to promote the sale or marketing of life insurance policies shall not qualify for credit toward the training requirement. A course or seminar that is disapproved under this section shall be presumed invalid for credit toward the training requirement of this section unless it is approved in writing by the commissioner. The training required by this section is in addition to the topics listed in subdivision (c) of Section 10509.915.
(d)The training requirements set forth in this section shall not apply to nonresident agents representing an insurer that is a direct response provider.
(e)For the purposes of this section, direct response provider means an insurer that meets each of the following criteria:
(1)The insurer does not initiate telephone contact with insureds or prospective insureds.
(2)Agents of the insurer speak with insureds and prospective insureds only by telephone, and at the request of the insureds or prospective insureds.
(3)Agents of the insurer are assigned to speak with insureds or prospective insureds on a random basis, when contacted.
(4)Agents of the insurer are salaried and do not receive commissions for sales or referrals.
SEC. 2.Section 10509.910 of the Insurance Code is amended to read:10509.910.The purpose of this article is to require insurance producers to act in the best interest of the consumer when making a recommendation of an annuity or life insurance policy and to require insurers to establish establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuity products, annuities or life insurance policies, so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately effectively addressed.
SEC. 3.Section 10509.911 of the Insurance Code is amended to read:10509.911.(a)This article shall apply to any recommendation made to a consumer to purchase, exchange, or replace convert, replace, or modify an annuity made to a consumer that results in the purchase, exchange, or replacement that was recommended. or life insurance policy, or to elect a contractual provision of an in-force annuity or life insurance policy.
(b)Nothing in this act shall be interpreted to This article does not preclude, preempt, or otherwise interfere with the application of any other laws of this state that may apply in any matter involving the sale of an annuity or life insurance policy that is subject to this article.
SEC. 4.Section 10509.912 of the Insurance Code is amended to read:10509.912.Unless otherwise specifically included, this article shall does not apply to transactions involving any of the following:
(a)Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this article.
(b)Settlements of or assumptions of liabilities associated with personal injury litigation or a dispute or claim resolution process.
(c)Formal prepaid funeral contracts.
(b)Contracts(d)Annuities and life insurance policies used to fund any of the following: following if a recommendation is not made to an individual consumer:
(1)An employee pension or welfare benefit plan that is covered by the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.).
(2)A plan described by Section 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.(6)Formal prepaid funeral contracts.SEC. 5.Section 10509.913 of the Insurance Code is amended to read:10509.913.For purposes of this article:
(a)Annuity means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.
(b)Commissioner means the Insurance Commissioner.
(c)(1)Compensation means anything of value, if paid as commission or otherwise and if paid as cash or by some other means, received by a producer in connection with the recommendation or sale of an annuity or life insurance policy from an insurer, intermediary, or directly from the consumer.
(2)Compensation includes money, credits, loans, interest on premium, forgiveness of principal or interest, any discounts, concessions, fees, service fees, commissions, sales charges, overrides, cash benefits, trips, prizes, or gifts. Compensation also includes any health insurance, office rent, office support, and retirement benefits.
(3)Compensation does not mean tangible goods with the insurer name, logo, or other advertisement that have an aggregate value of less than one hundred fifty dollars ($150) per year per insurer.
(d)Consumer profile information means information that is reasonably appropriate to determine the suitability of a recommendation.
(1)For a life insurance policy solely providing term life insurance with no cash value, consumer profile information means all of the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the life insurance policy.
(D)Insurance needs.
(E)Financial objectives.
(F)Intended use of the life insurance policy, including any riders attached thereto.
(G)Financial time horizon, including the duration of existing liabilities and obligations.
(H)Existing assets, including investment and insurance holdings.
(I)Willingness to accept nonguaranteed elements in the policy, including variability in premium, death benefit, or fees.
(J)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer or by observing the consumers circumstances.
(2)For an annuity or life insurance policy other than a life insurance policy solely providing term life insurance with no cash value, consumer profile information means all of the following:
(A)Age.
(B)Annual income.
(C)Financial situation and needs, including debts and other obligations, and the financial resources used for the funding of the annuity or life insurance policy.
(D)Financial experience.
(E)Insurance needs.
(F)Financial objectives.
(G)Intended use of the annuity or life insurance policy, including any riders attached thereto.
(H)Financial time horizon, including the duration of existing liabilities and obligations.
(I)Existing assets, including investments, annuity and life insurance, and other insurance holdings, and other financial products.
(J)Liquidity needs.
(K)Liquid net worth.
(L)Risk tolerance, such as willingness to accept variability in premiums, returns, death benefits, values, credits, or fees and other charges, and other nonguaranteed elements in the annuity or life insurance policy.
(M)Tax status.
(N)Whether or not the consumer has a reverse mortgage.
(O)Whether or not the consumer intends to apply for means-tested government benefits, including Medi-Cal or the veterans aid and attendance benefit.
(P)Any other relevant information that the producer or the insurer knew or reasonably should have known about, as provided by the consumer or by observing the consumers circumstances information.
(c)(e)Continuing education credit or CE credit means one continuing education credit hour as defined in Section 2188.2(i) of Title 10 of the California Code of Regulations.
(d)(f)Continuing education provider or CE provider means an individual or entity that is certified to offer continuing education courses pursuant to Section 2186.1(b) and Section 2188 of Title 10 of the California Code of Regulations.
(g)FINRA means the Financial Industry Regulatory Authority or a successor agency.
(e)(h)Insurance producer means a person person, as defined in Section 19, required to be licensed under California law to sell, solicit, or negotiate insurance, including annuities. An insurance producer is also referred to in this article as a producer. Producer includes an insurer when no producer is involved.
(i)Insurer means either of the following:
(f)Insurer means a(1)A company required to be licensed or to hold a certificate of authority, or both, under California law to provide insurance products, including annuities. annuities or life insurance policies.
(g)Recommendation means advice or guidance provided or made by an insurance producer or by an insurer to an individual consumer that results in a purchase, exchange, or replacement of an annuity in accordance with that advice or guidance.(2)A fraternal benefit society, as defined in Section 10990.
(j)Intermediary means an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurers annuities or life insurance policies by producers.
(k)Life insurance policy means a life insurance policy that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as individual or group life insurance.
(l)Material conflict of interest means a financial interest of the producer in the sale of an annuity or life insurance policy that a reasonable person would expect to influence the impartiality of a recommendation.
(m)Nonguaranteed elements means the premiums, benefits, values, credits, charges, and other elements not guaranteed over the life of the annuity or life insurance policy, such as credited interest rates including any temporary bonus interest rate, dividends, noninterest based credits, index parameters, periodic expense charges, or elements of formulas used to determine any of these nonguaranteed elements, that are subject to insurer discretion and are not guaranteed at issue. An element is considered nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(n)(1)Recommendation means advice, guidance, or acts directed to a consumer by a producer, or an insurer, that a consumer may reasonably interpret to be advice or guidance or that the producer intends to be advice or guidance regarding whether or not to do any of the following:
(A)Purchase, exchange, convert, modify, or replace an annuity or a life insurance policy.
(B)Refrain from purchasing, exchanging, converting, modifying, or replacing an annuity or a life insurance policy.
(C)Elect a contractual provision with respect to an in-force annuity or life insurance policy in accordance with that advice, guidance, or those acts.
(2)Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
(h)(o)Replacement means a transaction in which a new annuity or life insurance policy or contract is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer, regardless of whether or not there is a producer, that by reason of the transaction, an existing annuity or life insurance policy or contract has been or is to be any of the following:
(1)Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated.
(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.
(3)Amended so as to effect either a reduction in benefits or a reduction in the term for which coverage would otherwise remain in force or for which benefits would be paid.
(4)Reissued with any reduction in cash value.
(5)Used in a financed purchase.
(i)Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including all of the following:(1)Age.(2)Annual income.(3)Financial situation and needs, including the financial resources used for the funding of the annuity.(4)Financial experience.(5)Financial objectives.(6)Intended use of the annuity.(7)Financial time horizon.(8)Existing assets, including investment and life insurance holdings.(9)Liquidity needs.(10)Liquid net worth.(11)Risk tolerance.(12)Tax status.(13)Whether or not the consumer has a reverse mortgage.(14)Whether or not the consumer intends to apply for means-tested government benefits, including, but not limited to, Medi-Cal or the veterans aid and attendance benefit.SEC. 6.Section 10509.914 of the Insurance Code is repealed.10509.914.(a)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 an insurer if 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 his or her investments and other insurance products and as to his or her financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:(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.(2)The consumer would receive a tangible net benefit from the transaction.(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 his or her suitability information.(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:(A)Whether 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.(B)Whether the consumer would benefit from product enhancements and improvements.(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.(b)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 consumers suitability information.(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.(d)(1)Except as provided under paragraph (2), neither an insurance producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:(A)No recommendation is made.(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the insurance producer.(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.(e)An insurance producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale do all of the following:(1)Make a record of any recommendation subject to subdivision (a).(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the insurance producers or insurers recommendation.(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its insurance producers compliance with this article, including, but not limited to, all of the following:(A)The insurer shall maintain reasonable procedures to inform its insurance producers of the requirements of this article and shall incorporate the requirements of this article into relevant insurance producer 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 10509.915.(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers.(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.(F)The insurer shall annually provide a report to its 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.(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.(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.(3)An insurer is not required to include in its system of supervision an insurance producers recommendations to consumers of products other than the annuities offered by the insurer.(g)An insurance producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:(1)Truthfully responding to an insurers request for confirmation of suitability information.(2)Filing a complaint.(3)Cooperating with the investigation of a complaint.(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:(A)The consumers income.(B)The intended use of the annuity.(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.SEC. 7.Section 10509.914 is added to the Insurance Code, to read:10509.914.Insurers and producers have the following duties to ensure that annuities and life insurance policies that are recommended are only in the consumers best interest:
(a)Best Interest Obligation. A producer or insurer, when making a recommendation of an annuity or a life insurance policy, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made. A producer has acted in the best interest of the consumer if they have satisfied all of the following obligations regarding care, disclosure, conflict of interest, and documentation:
(1)Care Obligation.
(A)The producer, in making a recommendation, shall exercise reasonable diligence, care, and skill to:
(i)Know the consumers financial situation, financial needs, insurance needs, and financial objectives.
(ii)Understand the available recommendation options after making a reasonable inquiry into options available to the producer.
(iii)Have a reasonable basis to believe the recommended option effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives over the life of the annuity or life insurance policy, as evaluated in light of the consumer profile information.
(iv)Have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the annuity or life insurance policy.
(v)Communicate the basis or bases of the recommendation to the consumer orally and in writing and to the insurer in writing.
(B)The producers or insurers recommendation to the consumer shall be based on an evaluation of the consumers relevant consumer profile information and other relevant information, and shall reflect the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with those matters would use under the circumstances then prevailing.
(C)Only the interests of the consumer shall be considered in making the recommendation and complying with other obligations under this section.
(D)The requirements under subparagraph (A) include all of the following:
(i)Making reasonable efforts to obtain consumer profile information from the consumer before recommending an annuity or life insurance policy.
(I)If the consumer does not provide the producer with complete consumer profile information, the producer shall not submit an application on behalf of the consumer to the insurer.
(II)The insurer shall not issue the annuity or life insurance policy if the consumer has refused to provide complete consumer profile information.
(ii)(I)Considering those factors generally relevant in making a determination about whether or not an annuity or life insurance policy effectively addresses the consumers financial situation, financial needs, insurance needs, and financial objectives. The factors generally relevant in making this determination include the consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features. The features to be considered include:
(ia)The length of the surrender charge period and surrender charge amounts.
(ib)Product costs, such as cost of insurance charges, annual and other periodic fees and expense charges, mortality and expense fees, investment advisory fees, investment and interest option fees.
(ic)Costs and features of riders or other options.
(id)Minimum guarantees, including guaranteed interest rates, participation rates, caps, spreads, floors, buffers, and limitations on interest returns.
(ie)Crediting rates.
(if)Insurance and investment components.
(ig)Potential changes in nonguaranteed elements of the annuity or life insurance policy.
(ih)Market risk.
(ii)Any secondary guarantee period, equity-index features, availability of cash value, annuity or life insurance policy exclusions or restrictions.
(ij)Other relevant information that the producer knew or reasonably should have known about as provided by the consumer or by observing the consumers circumstances.
(II)The level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case, but each factor shall not be considered in isolation.
(iii)Having a reasonable basis to believe the consumer would benefit from certain features of the annuity or life insurance policy, such as annuitization, death or living benefit, or other insurance-related features.
(E)The requirements under subparagraph (A) require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumers financial situation, financial needs, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer. Producers shall be held to consumer protection standards that meet or exceed the standards set forth in this subdivision.
(F)The requirements under subparagraph (A) apply to the particular annuity or life insurance policy as a whole and the underlying subaccounts, if any, to which funds are allocated at the time of purchase or exchange of an annuity or life insurance policy, and riders and similar product enhancements, if any.
(G)The requirements under subparagraph (A) do not mean either of the following:
(i)The annuity or life insurance policy with the lowest one-time or multiple occurrence compensation structure are always in the best interest of the consumer.
(ii)The producer has ongoing monitoring obligations under the care obligation under this paragraph, although that obligation may be separately owed under the terms of a fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.
(H)For an exchange or replacement of an annuity or life insurance policy, the producer, or insurer if no producer is involved, shall consider the whole transaction, which includes taking into consideration all of the following:
(i)If the consumer will do any of the following:
(I)Lose existing benefits, such as:
(ia)Contract provisions that prorate crediting between anniversaries or other contractually specified time periods.
(ib)The loss or reduction of death benefits, living benefits, favorable index parameters, or other contractual benefits or features, including free withdrawals, loans, rate guarantees, bonus earnings, accelerated death benefits, and secondary guarantees.
(ic)Decreased coverage duration.
(id)Decreased income amount.
(ie)Other contract benefits.
(II)Be subject to surrender charges, a new graded or modified death benefits period, loss of unvested credits, recapture charges, loss of persistency-related credits, loss of prorated gains if in between anniversaries or other contractually specified time periods, or an adverse market-value adjustment or tax implications if the consumer surrenders or borrows from the policy.
(III)Incur new or increased premiums, fees or charges, such as a new vesting schedule, a new surrender charge period or a change in surrender charges, an adverse change in health rating, new or different investment advisory fees, interest option fees, premium loads, or charges for riders, and similar product enhancements.
(ii)How those items stated in clause (ii) of subparagraph (B) that are contained in the recommended annuity or life insurance policy compare with those in the annuity or life insurance policy that is being exchanged or replaced.
(iii)If the replacing product would provide a substantial financial benefit to the consumer in comparison to the replaced product over the life of the product so that a reasonable person would believe the purchase is not unnecessary.
(iv)If the consumer has had another annuity or life insurance policy exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(I)This article does not require a producer to obtain a license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this state, including a securities license, in order to fulfill the duties and obligations of this section as long as the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.
(2)Disclosure Obligation.
(A)At the time of recommendation of an annuity or life insurance policy, the producer shall disclose to the consumer orally and in writing using the Insurance Agent (Producer) Compensation Disclosure for Annuities and Life Insurance Policies form. No part of the form shall be amended or omitted. This form shall not be part of the application or policy. The disclosure form shall be in a freestanding document, using no smaller than 10-point type, and shall be in the following form:
INSURANCE AGENT (PRODUCER) COMPENSATION DISCLOSURE
FOR ANNUITIES and LIFE INSURANCE POLICIES
Do Not Sign Unless You Have Read and Understand the Information in this Form
Date: ____________________________ |
INSURANCE AGENT (PRODUCER) INFORMATION (Me, I, My) |
First Name: Last Name: |
Business/Agency Name: Website: |
Business Mailing Address: |
Business Telephone Number: |
Email Address: |
California Producer License Number: |
|
First Name: Last Name: |
|
I am licensed to sell annuities and/or life insurance policies to You in accordance with California law. If I recommend that You buy an annuity and/or life insurance policy, it means I believe that it effectively meets Your financial situation, insurance needs, and financial objectives. Other financial products, such as life insurance or stocks, bonds, and mutual funds, may also meet Your needs. |
I offer the following products: | |
Annuities: | Life Insurance: |
Immediate Fixed Annuities | Term Life Insurance Policies |
Deferred Fixed Annuities | Whole Life Insurance Policies |
Fixed Indexed Annuities | Universal Life Insurance Policies |
Variable Annuities | Variable Universal Life |
Index-Linked Variable | Insurance Policies |
Annuities | Indexed Universal Life Insurance Policies |
Other Annuity | Variable Life Insurance Policies |
(Specify): | Other Life Insurance |
(Specify): |
I need a separate license to provide advice about or to sell noninsurance financial products. I have checked below any noninsurance financial products that I am licensed and authorized to provide advice about or to sell. | |
Securities: | Savings Products: |
Mutual Funds | Certificates of Deposit |
Stocks and Bonds | Other Savings Products |
Options | (Specify): |
Other Securities | |
(Specify): | |
Whose Annuities and/or Life Insurance Policies Can I Sell to You? |
For purposes of this disclosure, insurance companies owned by the same insurance holding company or that otherwise share common management or control shall be considered to be one insurer. |
I am authorized to sell: |
Annuities from Only One Insurer | Life Insurance Policies from Only |
Annuities from Two or More | Life Insurance Policies from Two |
Annuities from Two or More Insurers although I primarily sell annuities from: | Life Insurance Policies from Two or More Insurers although I primarily sell life insurance from: |
Who I Do Work For and How Im Paid for My Work: |
Its important for You to understand who I work for and how Im paid for my work. I am an agent for one or more insurance companies whose products I sell. Depending on the particular annuity or life insurance policy You purchase, I may be paid a commission or a fee. Commissions are generally paid to Me by the insurance company, while fees are generally paid to Me by You. My commission may be based on the amount of premiums paid for the annuity or life insurance policy purchased. |
The compensation paid to Me may vary depending on a number of factors, including (if applicable) the annuity or life insurance policy and the insurance company that You select, the volume of business I provide to the insurance company, or the profitability of the annuities and life insurance policies that I provide to the insurer. |
Depending on the particular annuity or life insurance policy You buy, I will or may be paid cash compensation as follows: |
Commission, which is usually paid by the insurance company or other sources. If other sources, describe: |
Fees (such as a fixed amount, an hourly rate, or a percentage of your payment), which are usually paid directly by the customer. |
Other (Describe): _ |
My Estimated Compensation for the Product(s) I am Recommending for You: |
My compensation may include commissions or fees. Here is an explanation of the commissions or fees I may receive for selling the product Im recommending for You. (Producer must include product name, insurance company, initial estimated premium, and estimated commissions or fees for years 1 through 10.) Complete an additional form for each product being recommended. |
Product Name | Insurance Company Name | Initial Estimated Premium | My Estimated Commission or Fees (years 1 through 10) | Material Conflicts of Interest that I am unable to eliminate |
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. TOTAL years 1-10: $ |
My Ownership Interest in the Insurance Company or any Parent, Subsidiary or Affiliate of the Insurance Company (state % of ownership): |
Does the Insurance Company have an Ownership Interest in the Insurance Agency I Work With, or in any Parent, Affiliate or Subsidiary of the Agency? Yes No (check one) |
I am required to identify and eliminate any material conflicts of interest, if possible. If the material conflict of interest cannot be eliminated, I must (1) take action to ensure the conflict of interest does not prevent Me from acting in Your best interest, (2) disclose the material conflict of interest to You, and (3) disclose the actions taken to ensure the material conflicts of interest do not prevent Me from acting in Your best interests. These are the actions I have taken to ensure material conflicts of interest that I have not been able to eliminate do not prevent Me from acting in Your best interest: |
If Compensation Amounts or Values Are Unknown: |
If the nature, amount, or value of any compensation I am required to disclose is not known and cannot be estimated at the time this disclosure is required, then I shall include in the disclosure: (1) a description of the circumstances that may determine the receipt and amount or value of such compensation; and (2) a reasonable estimate of the amount or value, which may be stated as a range of amounts or values. |
Description of circumstances that may determine the receipt and amount or value of such compensation: |
Reasonable estimated range of compensation amounts or values: |
Alternate products discussed: (Producer must include product name, insurance company, initial estimated premium for each product, and estimated compensation for each (including estimated commission or fees for years 1 through 10) and attach additional page(s) if necessary): |
Product Name | Insurance Company | Initial Estimated Premium | Estimated Commission or Fees (years 1 through 10) |
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. TOTAL years 110: $ | |||
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. TOTAL years 1-10: $ |
If You have questions about the above compensation I will be paid for this transaction, please ask me. |
By signing below, You acknowledge that You have read and understand the information provided to You in this document. | |
Customer Signature | Agent (Producer) Signature |
Date | Date |
(B)At the time of the recommendation of an annuity or life insurance policy, the producer shall have a reasonable basis to believe the consumer has been reasonably informed of various features of the annuity or life insurance policy, and potential consequences of the sale or in-force transaction, both favorable and unfavorable, such as the potential surrender period and surrender charge, any secondary guarantee period, equity-index features, availability of cash value, death benefit, mortality and expense fees, cost of insurance charges, investment advisory fees, any annual fees and other periodic fees, policy exclusions or restrictions, potential charges for and features of riders or other options of the annuity or life insurance policy, guaranteed interest rates, including whether any guaranteed interest rates are based on any period other than annual, such as retrospective or cumulative guarantees, limitations on interest returns, provisions that do not prorate investment or other credit to the date of policy or annuity termination, insurance and investment components, potential changes in nonguaranteed elements of the annuity or life insurance policy, insurance and investment components and market risk, and potential tax penalty if the consumer sells, modifies, exchanges, surrenders, or lapses the annuity or life insurance policy, or annuitizes the annuity.
(3)Conflict of Interest Obligation. A producer shall identify and eliminate any material conflicts of interest, if possible. If it is impossible to eliminate any material conflicts of interest, the producer shall disclose and reasonably manage the material conflicts of interest, including material conflicts of interest relating to an ownership interest.
(A)The producers receipt of compensation or other incentives permitted by applicable California law is permitted if the amount of the compensation or the receipt of an incentive does not influence the recommendation. The only compensation that may be paid or provided to or received by a producer is commissions or fees.
(B)If a material conflict of interest cannot be eliminated, the producer shall do all of the following:
(i)Take action to ensure the conflict of interest does not prevent the producer from acting in the best interest of the consumer.
(ii)Disclose the material conflict of interest to the consumer.
(iii)Disclose the actions taken to ensure the material conflicts of interest do not prevent the producer from acting in the best interests of the consumer.
(4)Documentation Obligation. At the time of recommendation, a producer shall do both of the following:
(A)Provide the consumer and the insurer with a written record of any recommendation and, in a reasonable summary format, all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for any recommendations.
(B)When the recommendation or sale is a replacement, the producer shall complete and provide the insurer with a written copy of the required Replacement Product Comparison Form. No part of the form shall be amended or omitted, however, additional pages may be attached that show additional relevant features that were compared and considered in determining the recommendation. This form shall not be part of the application or policy. The disclosure form shall be in no less than 10-point type and shall read as follows:
REPLACEMENT PRODUCT COMPARISON FORM
The agent (producer) or insurer is required to complete this form when recommending the replacement of an annuity or life insurance policy. California Insurance Code Section 10509.2 defines the word replacement. A comparison shall be completed for each product being replaced, and shall consider, at a minimum, the features and benefits listed below, along with all of the items to be considered in California Insurance Code Section 10509.914.
Existing Life Insurance Policy | Existing Annuity | Proposed Replacement Policy | |
1.Company Name | Replacing within same insurer group? Yes No | ||
2.Product Name | |||
3.Policy Number | N/A | ||
4.Policy Type | Term Life Whole Life Universal Life Variable Universal Life Indexed Universal Life Variable Life Other | Deferred Fixed Annuity Immediate Fixed Annuity Fixed Indexed Annuity Variable Annuity Index-Linked Variable Annuity Other | Life Annuity [Insert Policy Type/Name] |
5.Issue Date | |||
6.Initial Premium | $ | $ | $ |
7.Source of Initial Premium | |||
8.Owner Age | N/A | N/A | Current Age |
9.Has the owner surrendered, exchanged, or replaced another policy within the last 60 months? | N/A | N/A | Yes |
10.Current Account Value | $ | $ | |
11.Current Cash Surrender Value | $ | $ | |
12.Current Surrender Charges | $ % | $ % | % [Year 1 (%), 2 (%), 3 (%), etc.] |
13.Surrender Charge Schedule for Remaining Years (indicate percentage per year for existing policy) | |||
14.Market Value Adjustment (+/-) | Yes No $ | Yes No $ | Yes No |
15.Interest Rates | Current Interest Rate % Minimum Guaranteed Interest Rate % Initial Rate Guarantee Period and Rate % Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) | Current Interest Rate % Minimum Guaranteed Interest Rate % Initial Rate Guarantee Period and Rate % Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) | Current Interest Rate % Minimum Guaranteed Interest Rate % Initial Rate Guarantee Period and Rate % Interest Crediting Method (prorated, non-prorated, quarterly, anniversary, etc.) |
16.Current/ Proposed Death Benefit Amount | $ | $ | $ |
17.Bonus Amount or Bonus Interest Rate (include Bonus Time Constraints or Vesting Period) | $ or % N/A | $ or % N/A | $ or % N/A |
18.Accelerated Death Benefits? | Yes | Yes | Yes |
19.Annualized Premium = Base Policy + all Riders | |||
20.Fees and Charges | |||
21.Waivers, Riders, and Enhanced Benefits (e.g. Terminal Illness, LTC Rider, Living Benefit, Free Withdrawal %, Return of Premium Provision or Rider, etc.) |
Primary reason(s) for recommending the replacement: |
OTHER CONSIDERATIONS: |
Is the existing life insurance out of its contestability period? Yes No | Is there an Outstanding Loan against the policy? Yes No Outstanding Loan Balance $ |
Has the Guaranteed Minimum Withdrawal Benefit (GMWB) been activated on the existing annuity? Yes NoN/A If yes, at what %/value and frequency are the income payments? | Has the Guaranteed Lifetime Withdrawal Benefit (GLWB) been activated on the existing annuity? Yes NoN/A If yes, at what %/value and frequency are the income payments? |
Will a Bonus Recapture apply at the time of surrender or exchange of the existing policy?YesNo Original Bonus Rate % and Amount: ____% and $ Actual Bonus Recapture Amount $ | |
Applicant Acknowledgment: I acknowledge that a copy of this completed comparison form has been provided to me, and that I can ask questions about the content of this form to the agent or insurer who completed it. | |
Applicant First and Last Name: | Applicant Email Address: |
Applicant Signature | Date |
Agent (Producer)/Insurer Representative First and Last Name: | |
Agent (Producer)/Insurer Email Address: | |
Agent (Producer)/Insurer Business Telephone Number: | |
Agent (Producer)/Insurer Statement: The replacing product would would not substantially benefit the consumer in comparison to the replaced product over the life of the product. | |
Agent (Producer)/Insurer Representative Signature | Date |
(5)Application of the Best Interest Obligation. Any requirement applicable to a producer under this subdivision shall apply to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether or not the producer has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
(b)Supervision System.
(1)An insurer shall not issue an annuity or life insurance policy recommended to a consumer unless there is a reasonable basis to believe the annuity or life insurance policy would be in the best interest of the consumer, confer a tangible financial benefit over the life of the annuity or life insurance policy based on the consumers consumer profile information and other relevant information that was obtained by the producer or insurer, and effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. If an annuity or life insurance policy is being replaced, the insurer shall review the Replacement Product Comparison Form required by subparagraph (B) of paragraph (4) of subdivision (a), and after doing so, the insurer shall determine if it also has a reasonable basis to believe the annuity or life insurance policy will confer a substantial financial benefit to the consumer over the life of the annuity or life insurance policy when compared to the replaced product.
(2)An insurer shall establish, maintain, and utilize a supervision system that is reasonably designed to achieve the insurers and its insurance producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall establish, maintain, and utilize reasonable procedures to inform its insurance producers of the requirements of this article and shall incorporate the requirements of this article into relevant insurance producer training manuals.
(B)The insurer shall establish, maintain, and utilize reasonable standards for insurance producer product training, and shall maintain and utilize reasonable procedures to require its insurance producers to comply with the requirements of Section 10509.915.
(C)The insurer shall provide product-specific training and training materials that explain all material features of its annuities and life insurance policies to its insurance producers.
(D)The insurer shall establish, maintain, and utilize procedures for review of each recommendation before issuing an annuity or life insurance policy that are designed to ensure there is a reasonable basis to determine that the recommended annuity or life insurance policy would effectively address the particular consumers financial situation, financial needs, insurance needs, and financial objectives. The review procedures shall 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)(i)The insurer shall establish, maintain, and utilize reasonable procedures to detect recommendations that are not in compliance with this article. This consists of programs of internal monitoring and shall include at least three of the following methods:
(I)Confirmation of the consumers profile information.
(II)Systematic customer surveys.
(III)Producer and consumer interviews.
(IV)Confirmation letters.
(V)Producer statements or attestations.
(ii)This subparagraph does not prevent an insurer from complying with this subdivision by applying sampling procedures, or by confirming consumer profile information or other required information under subdivision (a) after issuance or delivery of the annuity or life insurance policy.
(F)The insurer shall establish, maintain, and utilize reasonable procedures to assess, before or upon issuance or delivery of an annuity or life insurance policy, whether or not a producer has provided to the consumer the information required to be provided under subdivision (a).
(G)The insurer shall establish, maintain, and utilize reasonable procedures to identify and address consumer refusals to provide complete consumer profile information and consumer profile information that differs from what the consumer represented to the producer.
(H)An insurer shall not utilize any compensation structure for recommendations or sales that creates a material conflict of interest, including compensation structures that favor particular products offered by a producer. Insurers shall compensate producers only by paying commissions or fees. Insurers may not offer any sales contests, sales quotas, bonuses, noncash compensation, or other cash compensation. The requirements of this subparagraph do not prohibit the insurers employees from receiving health insurance, retirement benefits, or other employee benefits if the insurers employees compensation is not based upon the volume of sales of annuities or life insurance policies.
(I)The insurer shall biannually provide a written report to its senior management, including to the senior manager responsible for audit functions, that 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.
(3)(A)This subdivision does not restrict an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (2). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.917 regardless of whether or not the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (2) shall include reasonable supervision of contractual performance under this subdivision. This includes both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(ii)Biannually 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.
(4)An insurer is not required to include in its system of supervision an insurance producers recommendations to consumers of products other than the annuities or life insurance policies offered by the insurer.
(c)Prohibited Practices. An insurance producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of the consumer profile information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(d)Safe Harbor.
(1)Recommendations and sales of annuities and life insurance policies made by financial professionals in compliance with laws, regulations, business rules, controls, and procedures that satisfy consumer protection standards that are equal to or greater than those contained in this article shall satisfy the requirements under this article even if those standards would not otherwise apply to the product or recommendation at issue. This subdivision does not limit the insurance commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(2)Paragraph (1) does not limit the insurers obligation to comply with subdivision (b), although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.
(3)For purposes of this subdivision, financial professional means a producer that is regulated and acting as either of the following:
(A)An investment adviser registered under federal or California laws.
(B)A plan fiduciary under Section 3(21) of the federal Employee Retirement Income Security Act (ERISA) of 1974 (29 U.S.C. Sec. 1001 et seq.) or fiduciary under Section 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.
(4)Sales by FINRA-registered broker-dealers and registered representatives of broker-dealers shall be subject to paragraph (1) only after FINRA establishes consumer protection standards that meet or exceed those contained in subdivision (a), including the requirements that the producers recommendation to the consumer is based on an evaluation of the consumers relevant consumer profile information and other relevant information, and reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with the matters would use under the prevailing circumstances, and only the interests of the consumer shall be considered in making the recommendation and complying with other obligations under this article.
(5)For paragraph (1) to apply, an insurer shall do both of the following:
(A)Monitor the relevant conduct of the financial professional seeking to rely on paragraph (1) or the entity responsible for supervising the financial professional using information collected in the normal course of an insurers business.
(B)Provide to the entity responsible for supervising the financial professional seeking to rely on paragraph (1) information and reports that are reasonably appropriate to assist such entity to maintain its supervision system.
SEC. 8.Section 10509.915 of the Insurance Code is amended to read:10509.915.(a)An insurance producer shall not solicit the sale of an annuity product or life insurance policy unless the insurance producer has adequate knowledge of the product to recommend the annuity or life insurance policy and the insurance producer is in compliance with the insurers standards for product training. An insurance producer may rely on insurer-provided product-specific training standards and materials to comply with this subdivision.
(b)(1)An insurance producer who is otherwise entitled to engage in the sale of annuity products shall complete a one-time eight credit-hour eight-credit hour annuity training course approved by the commissioner and provided by a commissioner-approved education provider, prior to commencing the transaction of annuities, pursuant to subdivision (a) of Section 1749.8.
(2)In addition to the requirement set forth in paragraph (1), every producer who engages in this state in the sale of annuity products shall satisfactorily complete four continuing education credits prior to license renewal every two years, pursuant to subdivision (b) of Section 1749.8.
(3)The training required under this subdivision shall include information on all of 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, index-linked variable annuity, and indexed annuity contract provisions affect consumers.
(D)The application of income taxation of qualified and nonqualified annuities.
(E)The primary uses of annuities.
(F)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, all as provided under California law, including, but not limited to, this article.
(c)(1)An insurance producer who is otherwise entitled to engage in the sale of life insurance policies shall complete a one-time, four-credit hour life insurance policy training course approved by the commissioner and provided by a commissioner-approved education provider before transacting life insurance policies, pursuant to subdivision (a) of 1749.81.
(2)In addition to the requirement set forth in paragraph (1), a producer who engages in this state in the sale of life insurance policies shall satisfactorily complete two continuing education credits before license renewal every two years, pursuant to subdivision (b) of Section 1749.81.
(3)The training required under this subdivision shall include information on all of the following topics:
(A)The types of life insurance policies and various classifications of life insurance policies.
(B)Identification of the parties to a life insurance policy.
(C)How the provisions in term life, whole life, universal life, indexed universal life, and other variable life policies affect consumers.
(D)The primary uses of life insurance policies and the potential advantages and disadvantages of purchasing the types of insurance listed in subparagraph (C).
(E)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 life insurance policies, all as provided under California law, including, but not limited to, this article.
(4)(d)Providers of courses intended to comply with this section shall cover all topics listed in the prescribed outline for annuities in paragraph (3) of subdivision (b) and life insurance policies in paragraph (3) of subdivision (c), and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurers products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5)(e)A provider of an annuity or life insurance policy training course intended to comply with this section shall register as a CE provider in this state and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in Section 1749.8, in Section 1749.81, and subdivisions (d) and (e) of Section 1749.1, and in Sections 2188, 2188.1, 2188.2, 2188.3, 2188.4, 2188.6, 2188.7, 2188.8, 2188.50, and 2188.9 of Title 10 of the California Code of Regulations.
(6)(f)Annuity and life insurance policy training courses may be conducted and completed by classroom or self-study methods in accordance with Sections 2188.2 and 2188.3 of Title 10 of the California Code of Regulations.
(7)(g)Providers of annuity and life insurance policy training shall comply with the reporting requirements and shall issue certificates of completion in accordance with Section 2188.8 of Title 10 of the California Code of Regulations.
(8)(h)An insurer shall verify that an insurance producer has completed the annuity or life insurance policy training required under this section before allowing the producer to sell an annuity product or life insurance policy for that insurer. An insurer may satisfy its responsibility under this paragraph 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.
SEC. 9.Section 10509.916 is added to the Insurance Code, to read:10509.916.(a)A life insurer shall provide to all consumers who purchase an annuity a buyers guide that shall be delivered as a stand-alone document with the annuity or before delivery of the annuity.
(b)For the purposes of this section, buyers guide means the National Association of Insurance Commissioners approved Annuity Buyers Guide most relevant to the type of product being recommended.
SEC. 10.Section 10509.916 of the Insurance Code is amended and renumbered to read:10509.916.10509.917.(a) An insurer is responsible for compliance with this article. 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 other available penalties, remedies, or administrative actions, order any or all of the following:
(1)An insurer to take reasonably appropriate corrective action for any consumer harmed by the insurers, or by its insurance producers, violation of this article.
(2)A managing general agent or an insurance producer to take reasonably appropriate corrective action for any consumer harmed by the insurance producers violation of this article.
(3)Penalties and sanctions pursuant to Section 10509.9. For purposes of Section 10509.9, this article shall be deemed to be part of Article 8 (commencing with Section 10509), and the commissioner may in a single enforcement action seek penalties for a first and a second or subsequent violation.
(b)Nothing in this article shall affect any obligation of an insurer for acts of its agents, or any consumer remedy or cause of action that is otherwise provided for.
SEC. 11.Section 10509.917 of the Insurance Code is amended and renumbered to read:10509.917.10509.918.(a)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 five 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.
(b)Records required to be maintained by this article may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media, or by any process that accurately reproduces the actual document.
SEC. 12.Section 10509.918 of the Insurance Code is amended and renumbered to read:10509.918.10509.919.The commissioner shall, from time to time as conditions warrant, after notice and hearing, adopt reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article. Those rules and regulations may include modifications of the Insurance Agent (Producer) Compensation Disclosure for Annuities and Life Insurance Policies form in paragraph (2) of subdivision (a) of Section 10509.914 and Replacement Product Comparison Form in subparagraph (B) of paragraph (4) of subdivision (a) of Section 10509.914 that the commissioner finds likely to increase consumer understanding of annuity or life insurance transactions. The commissioner may adopt regulations not inconsistent with this article pursuant to Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203).
All matter omitted in this version of the bill appears in the bill as introduced in the Senate, January 30, 2023. (JR11)(a)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 an insurer if 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 his or her their investments and other insurance products and as to his or her their financial situation and needs, including the consumers suitability information, and that there is a reasonable basis to believe all of the following:
(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.
(2)The consumer would receive a tangible net benefit from the transaction.
(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 his or her their suitability information.
(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:
(A)Whether 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.
(B)Whether the consumer would benefit from product enhancements and improvements.
(C)Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b)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 consumers suitability information.
(c)Except as permitted under subdivision (d), 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 consumers suitability information. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d)(1)Except as provided under paragraph (2), neither an insurance producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A)No recommendation is made.
(B)A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C)A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D)A consumer decides to enter into an annuity transaction that is not based on a recommendation of the insurer or the insurance producer.
(2)An insurers issuance of an annuity subject to paragraph (1) shall be reasonable under all the circumstances which are actually known, or which after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.
(e)An insurance producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale do all of the following:
(1)Make a record of any recommendation subject to subdivision (a).
(2)Obtain a customer-signed statement documenting the customers refusal to provide suitability information, if any.
(3)Obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the insurance producers or insurers recommendation.
(f)(1)An insurer shall establish a supervision system that is reasonably designed to achieve the insurers and its insurance producers compliance with this article, including, but not limited to, all of the following:
(A)The insurer shall maintain reasonable procedures to inform its insurance producers of the requirements of this article and shall incorporate the requirements of this article into relevant insurance producer 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 10509.915.
(C)The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers.
(D)The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E)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 subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F)The insurer shall annually provide a report to its 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.
(2)(A)Nothing in this subdivision restricts an insurer from contracting for performance of a function, including maintenance of procedures, required under paragraph (1). An insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurers compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurers compliance with subparagraph (B).
(B)An insurers supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i)Reasonable monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.
(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.
(3)An insurer is not required to include in its system of supervision an insurance producers recommendations to consumers of products other than the annuities offered by the insurer.
(g)An insurance producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(1)Truthfully responding to an insurers request for confirmation of suitability information.
(2)Filing a complaint.
(3)Cooperating with the investigation of a complaint.
(h)(1)This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2)Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A)The consumers income.
(B)The intended use of the annuity.
(3)Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4)Nothing in this subdivision shall limit the commissioners ability to enforce, including conducting investigations related to, the provisions of this article.
(5)FINRA means the Financial Industry Regulatory Authority or a successor agency.
|
Date
|
Status
|
|---|---|
| Feb 29, 2024 | Chaptered by Secretary of State. Chapter 2, Statutes of 2024. |
| Feb 29, 2024 | Approved by the Governor. |
| Feb 23, 2024 | Enrolled and presented to the Governor at 2 p.m. |
| Feb 20, 2024 | Assembly amendments concurred in. (Ayes 37. Noes 0. Page 3186.) Ordered to engrossing and enrolling. |
| Feb 12, 2024 | In Senate. Concurrence in Assembly amendments pending. |
| Feb 12, 2024 | Read third time. Passed. (Ayes 70. Noes 0. Page 4059.) Ordered to the Senate. |
| Feb 8, 2024 | Read third time and amended. |
| Feb 8, 2024 | Ordered to third reading. |
| Jan 22, 2024 | Read second time. Ordered to third reading. |
| Jan 18, 2024 | From committee: Do pass. (Ayes 15. Noes 0.) (January 18). |
| Sep 1, 2023 | September 1 hearing postponed by committee. |
| Aug 16, 2023 | August 16 set for first hearing. Placed on suspense file. |
| Jun 28, 2023 | From committee: Do pass and re-refer to Com. on APPR. (Ayes 13. Noes 0.) (June 28). Re-referred to Com. on APPR. |
| Jun 21, 2023 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on INS. |
| Jun 8, 2023 | Referred to Com. on INS. |
| May 31, 2023 | In Assembly. Read first time. Held at Desk. |
| May 30, 2023 | Read third time. Passed. (Ayes 33. Noes 0. Page 1345.) Ordered to the Assembly. |
| May 18, 2023 | Read second time. Ordered to third reading. |
| May 18, 2023 | From committee: Do pass. (Ayes 6. Noes 0. Page 1163.) (May 18). |
| May 16, 2023 | Set for hearing May 18. |
| May 15, 2023 | May 15 hearing: Placed on APPR suspense file. |
| May 5, 2023 | Set for hearing May 15. |
| May 2, 2023 | Read second time and amended. Re-referred to Com. on APPR. |
| May 1, 2023 | From committee: Do pass as amended and re-refer to Com. on APPR. (Ayes 4. Noes 0. Page 891.) (April 26). |
| Apr 17, 2023 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on INS. |
| Mar 30, 2023 | Set for hearing April 26. |
| Mar 15, 2023 | Re-referred to Com. on INS. |
| Mar 7, 2023 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on RLS. |
| Feb 9, 2023 | Referred to Com. on RLS. |
| Jan 31, 2023 | From printer. May be acted upon on or after March 2. |
| Jan 30, 2023 | Introduced. Read first time. To Com. on RLS. for assignment. To print. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Feb 20, 2024 | Unfinished Business SB263 Dodd Motions Concurrence | Senate Floor |
Passed |
|
| Feb 12, 2024 | SB 263 Dodd Senate Third Reading By Calderon | Assembly Floor |
Passed |
|
| Jan 18, 2024 | Do pass. | Assembly Standing Committee on Appropriations |
Passed |
|
| Jun 28, 2023 | Do pass and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Insurance |
Passed |
|
| May 30, 2023 | Senate 3rd Reading SB263 Dodd | Senate Floor |
Passed |
|
| May 18, 2023 | Do pass | Senate Standing Committee on Appropriations |
Passed |
|
| May 15, 2023 | Placed on suspense file | Senate Standing Committee on Appropriations |
Passed |
|
| Apr 26, 2023 | Do pass as amended, but first amend, and re-refer to the Committee on [Appropriations] | Senate Standing Committee on Insurance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| 403bwise.org | ** Support | |
| American Council Of Life Insurers | ** Against | |
| American Fidelity Life Insurance Group | * Against Unless Amend | Apr 26, 2023 |
| Association Of California Life & Health Insurance Companies | ** Against | |
| California Advocates for Nursing Home Reform | ** Support | |
| California Commission on Aging | ** Support | |
| California Department of Insurance | ** Support | |
| Center Economic Justice | ** Against | |
| Center for Economic Justice | ** Against | |
| Chartered Financial Analyst | ** Against | |
| Consumer Federation of America | ** Against | |
| Consumer Federation Of California | ** Against | |
| Federation of Americans for Consumer Choice | * Against Unless Amend | Apr 26, 2023 |
| Federation of Americans for Consumer Choice | ** Against | |
| Finseca | ** Against | |
| Independent Insurance Agents & Brokers of California, Inc. | ** Against | |
| Insurance Commissioner Ricardo Lara / California Department of Insurance | ** Support | |
| Insurance Retirement Institute | ** Against | |
| Insured Retirement Institute | ** Against | |
| Legal Assistance for Seniors | ** Support | |
| Life Insurance Consumer Advocacy Center | ** Against | |
| Life Insurance Consumer Advocacy Center | * Against | Apr 26, 2023 |
| LPL Financial | ** Against | |
| National Association for Fixed Annuities | ** Against | |
| National Association Of Insurance And Financial Advisors - California | ** Against | |
| United Policyholders | ** Against |
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | SB 263 |
UNFINISHED BUSINESS
Bill No: SB 263
Author: Dodd (D)
Amended: 2/8/24
Vote: 21
SENATE INSURANCE COMMITTEE: 4-0, 4/26/23
AYES: Rubio, Alvarado-Gil, Dodd, Portantino
NO VOTE RECORDED: Nguyen, Jones, Niello
SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/18/23
AYES: Portantino, Jones, Ashby, Bradford, Wahab, Wiener
NO VOTE RECORDED: Seyarto
SENATE FLOOR: 33-0, 5/30/23
AYES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk
NO VOTE RECORDED: Dahle, Gonzalez, Grove, Nguyen, Niello, Ochoa Bogh, Seyarto
ASSEMBLY FLOOR: 70-0, 2/12/24 - See last page for vote
SUBJECT: Insurance: annuities and life insurance policies
SOURCE: California Department of Insurance
DIGEST:
This bill revises the Suitability Requirements for Annuity Transactions in California law to generally reflect changes made by the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation #275 (Model #275) of 2020, with some changes, as specified.
Assembly Amendments:
- Correct numerous drafting errors, and made structural changes. Restructure the bill to modify how the current annuity statutes sunset so that the California Department of Insurance (CDI) will maintain enforcement authority over sales prior to the date the new law takes effect. Change the bill to now sunset current Article 9, commencing with Section 10509.910, and replace it with a new Article 9.5 commencing with Section 10509.9200.
- Modify, to ensure that life insurance sales training requirements focus on complex products, training requirements to exempt term life with no cash value and an exemption for direct response providers was removed. Clarify the date of applicability for the training requirements.
- Expand applicability of the annuity best interest standard to expressly include a sale or replacement transaction. Exempt, for existing annuity policyholders, elections of a contractual provision.
- Modify language requiring that a producer’s recommendation reflect the care, skill, prudence, and diligence that a prudent person would use, to require the producer’s recommendation to reflect the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances then prevailing.
- Apply expressly the disclosure obligation at the time of recommendation, and a producer is expressly required to use NAIC Model #275 Appendix A form. Producers are also subject to more stringent disclosures about the insurers they work for.
- Add clarification language for insurers to utilize transaction monitoring systems to ensure the provisions of the best interest standard are being implemented.
- Modify safe harbor provisions to ensure that the CDI retains enforcement authority over any annuity transaction in California, including when a producer utilizes the safe harbor provision and makes a transaction in compliance with a comparable standard.
ANALYSIS:
Existing law:
- Prohibits any unfair or deceptive practice in the business of insurance.
- Grants, generally speaking, the Insurance Commissioner (Commissioner) broad powers to determine if annuities and life insurance products are fair to the public.
- Requires that all annuity and life insurance forms be filed with the Commissioner before being used in the market, but specifies that prior approval by the Commissioner before marketing or use is not required.
- Requires all individual life insurance policies to include a right to return of not less than 10 days nor more than 30 days, specifies that return of the policy within the “free look” period voids the policy and requires all premiums and fees paid to be refunded. Requires a notice of that right be printed on the policy or attached to it.
- Regards, generally speaking, senior citizens a protected class in the sale of life insurance and annuities, specifies that all insurance agents and brokers owe a senior 65 and older a duty of honesty, good faith and fair dealing, and requires every individual life insurance or individual annuity contract issued to a senior to include a right of return of no less than 30 days.
- Regulates, broadly, the sale of replacement life insurance and annuities, and imposes penalties for violation of those provisions.
- Defines replacement of a life insurance or annuity to include products that are lapsed, forfeited, surrendered, or otherwise terminated, or other methods that generally reduce the benefits due to the consumer under the existing product.
- Imposes specified duties on insurance agents and brokers (producers) who accept an application for life insurance or an annuity, including a signed statement indicating whether the agent knows replacement is or may be involved in the transaction, and if a replacement is involved, provide a specified notice to the applicant regarding decisions about replacement that must be signed by both the producer and applicant.
- Requires the insurer to ensure its producers or other personnel responsible in the application process comply with this requirement, and requires each completed application for life insurance or an annuity to include a statement signed by the applicant on whether the product will replace an existing life insurance policy or annuity and that recommends the consumer seek more information about the implications of such a decision.
- Creates a rebuttable presumption of a violation of the statute if a producer or insurer recommends the replacement of a policy by presenting materially inaccurate information in the comparison of the existing policy’s premiums and benefits or dividends and values, or if recommends a senior purchase an unnecessary replacement annuity.
- Requires insurers to have a system to supervise recommendations and establish standards and procedures for the sale of annuity products, whether purchase, exchange or replacement, so that the needs and financial objectives of consumers at the time of the transaction are appropriately addressed.
- Requires, before recommending an annuity product to a consumer, the producer, or insurer if no producer is involved, to have reasonable grounds to believe the annuity is suitable, as specified.
- Defines “suitability information” to include all of the following information from the consumer:
- Age;
- Annual income;
- Financial situation of needs, including the financial resources used for funding the annuity;
- Financial experience;
- Financial objectives;
- Intended use of the annuity;
- Financial time horizon;
- Existing assets, including investment and life insurance holdings;
- Liquidity needs;
- Liquid net worth;
- Risk tolerance;
- Tax status;
- Whether consumer has a reverse mortgage; and
- Whether the consumer intends to apply for means tested government benefits, including Medi-Cal.
- Requires the producer, or insurer if no producer is involved, to have a reasonable basis to believe that the consumer has been informed of the features of the annuity and the consumer would receive a tangible net benefit from the transaction.
- Prohibits an insurer from issuing 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, as specified.
- Provides that no violation has occurred if no recommendation has been made or if the recommendation was made based on materially inaccurate information provided by the consumer or if the consumer refuses to provide relevant suitability information and no recommendation is made.
- Provides that if no recommendation is made, or if the consumer proceeds without providing all suitability information and an annuity transaction is not recommended, the producer shall obtain a customer signed statement documenting the consumer’s refusal to provide suitability information and acknowledging that an annuity transaction is not recommended.
- Requires a minimum of 20 hours of pre-licensing study to qualify for a life insurance agent license, and an additional 12 hours of study on ethics and the Insurance Code.
- Requires a life insurance agent to complete 24 hour hours of continuing education, including 3 hours of ethics training prior to license renewal. 20) Requires any life insurance agent who sells annuities to complete 8 hours of training prior to soliciting individual consumers to sell annuities, and requires 4 hours of training prior to each license renewal, as specified.
- Requires an insurer to verify that a producer has completed the required training prior to selling any annuity products for the insurer.
- Specifies that an insurer is responsible for compliance with the above provisions, and if a violation occurs the Commissioner may impose penalties, remedies, or administrative actions, as specified.
This bill:
- Requires any life insurance agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete four hours of training prior to soliciting individual consumers to sell these life insurance policies, and requires two hours of training prior to each license renewal, as specified.
- States this bill's purpose as ensuring insurance producers, as defined, act in the best interest of the consumer when making a recommendation of an annuity product, and requiring insurers to supervise such recommendations by producers.
- States, expressly, that no private cause of action is created by the best interest standard of care.
- Adds or changes several definitions, including:
- Defines "compensation" as anything of value, if paid as commission, or otherwise and if paid in cash or some other means received by a producer in connection with the recommendation or sale of an annuity, and includes health insurance, office rent, office support, and retirement benefits, but excludes products with the insurer name or logo with an aggregate value of $150 per year.
- Defines "material conflict of interest" as a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
- Redefines "producer" as someone licensed to sell or negotiate insurance, including annuities, and if no agent is involved, the insurer is the producer.
- Redefines "recommendation" as advice or guidance made by a producer to an individual consumer that was intended to result or does result in the purchase, exchange or replacement of an annuity.
- Establishes duties for producers to ensure that annuities are in the consumer's best interest and prohibits the producer from placing the producer's or insurer's financial interest ahead of the consumer's interest when recommending an annuity.
- Requires the producer, in making a recommendation, to exercise reasonable diligence and skill to, among other things:
- Know the consumer's financial situation, financial needs, insurance needs, and financial objectives.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, as provided, and to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
- Communicate the bases of the recommendation to the consumer both orally and in writing and to the insurer in writing.
- Exercise the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances.
- Make a reasonable effort to obtain consumer profile information from the consumer prior to the recommendation of an annuity, as provided.
- States it does not require the producer to analyze or consider any products outside the authority and license of the producer, and does not create a fiduciary obligation or relationship between the producer and the consumer.
- Requires the producer to prominently disclose specified information to the consumer, including but not limited to, a description of the scope and terms of the relationship with the consumer, a description of the products the producer is licensed and authorized to sell, a description of the sources and types of compensation and non-cash compensation to be received by the producer as a result of the sale of an annuity, a reasonable estimate of the amount of cash compensation to be received, and a notice of the customer's right to request more information regarding the producer's compensation.
- Requires a producer to identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
- Requires a producer, at the time of recommendation or sale, to satisfy several documentation requirements, as specified.
- Provides that a producer has no obligation to a consumer if no recommendation is made, if a recommendation is made but was based on materially inaccurate information provided by the consumer, if a consumer refuses to provide relevant consumer profile information and no recommendation is made, or if a consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
- Requires an insurer to establish, maintain, and utilize a supervision system that is reasonably designed to ensure the insurer's and its producers' compliance with these requirements, as specified.
- Requires the insurer to incorporate the requirements under this article into producer training manuals, provide product specific training and training materials that explain all material features of its annuity products to its producers, and maintain and utilize procedures to require its producers to comply with producer annuity training requirements.
- Prohibits an insurer or producer from dissuading, or attempting to dissuade, a consumer from truthfully responding to a request for consumer profile information, filing a complaint, or cooperating with the investigation of a complaint.
- Provides a "safe harbor" for recommendations and sales of annuities by financial professionals, as defined, made in compliance with specified comparable business rules, controls, and procedures that satisfy a comparable standard, but provides that the Commissioner retains authority to enforce, and conduct investigations related to, the requirements in the statute, regardless of whether the financial professional is operating under a comparable standard.
- Requires the insurer to monitor the conduct of the financial professional seeking to utilize the safe harbor, as specified.
- Requires life insurance agents to complete additional annuity product training requirements, as specified.
- Requires a life insurer to provide all consumers who purchase an annuity with a NAIC approved annuity buyer's guide as a standalone document with the annuity or prior to delivery of the annuity.
- Grants the Commissioner authority to adopt reasonable rules and regulations to implement these provisions.
- Maintains the authority of the Commissioner to impose sanctions and penalties, as provided.
Comments
Annuities are specialized insurance contracts that offer a guaranteed income stream, usually for retirees. This bill provides consumer protections to all consumers, but is particularly important for the protections it offers seniors and underserved communities in assuring the sale of an annuity is made in the consumers' best interest. This bill builds on, and in some instances exceeds, the requirements set forth in the 2020 NAIC’s Model #275.
The NAIC's Model #275 was created in 2003 to set standards and procedures that insurance producers must follow when recommending annuity products to consumers. In 2010, NAIC’s Model #275 was revised to require producers to collect certain information from consumers for the purpose of having reasonable grounds for making recommendations. In 2011, California adopted NAIC’s Model #275, with additional consumer protections beyond what was in the model, with AB 689 (Blumenfield, Chapter 295, Statutes of 2011).
NAIC’s Model #275 was updated again in 2020. Section 989J of the Federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled: (1) has adopted requirements that "substantially meet or exceed the minimum requirements" established by the 2010 version of the NAIC’s Model #275; and (2) "adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation" within five years of the adoption by the NAIC. Therefore, by 2025, California needs to adopt the updates to California law which contain consumer protections that are at least as stringent as NAIC’s Model #275 to avoid dual regulation of fixed annuities by the CDI and the federal government.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No
According to the Assembly Appropriations Committee, “Costs of approximately $25,000 in fiscal year (FY) 2023-24, $2.8 million in FY 2024-25, and $4.0 million ongoing thereafter to the Department of Insurance (CDI) to approve training courses and ensure compliance with specified producer and insurer fiduciary duties (Insurance Fund).”
SUPPORT: (Verified 2/13/24)
California Department of Insurance (source)
California Commission on Aging
OPPOSITION: (Verified 2/13/24)
Center for Economic Justice
Consumer Federation of America
Consumer Federation of California
Life Insurance Consumer Advocacy Center
United Policyholders
Arguments in Support: California Department of Insurance writes in support saying this bill is needed "to avoid federal preemption as well as create additional consumer protections to ensure California's insurance companies and licensed producers who sell annuities are following the highest standards of conduct."
Arguments in Opposition: Several consumer groups, including the Life Insurance Consumer Advocacy Center and the Consumer Federation of California, have an "oppose unless amended" position on this bill. These groups argue that the version of this bill from March 7, 2023 had greater consumer protections and therefore this bill should more closely mirror that version instead of its current form. In their letter these groups write, "If the bill is to accomplish its stated goals, it needs amendments to restore critical consumer protections that have been deleted from the bill." Among their concerns are the definition of "material conflict of interest," the timing of when certain disclosures need to be delivered to the consumer, and the existence of the safe-harbor provision.
ASSEMBLY FLOOR: 70-0, 2/12/24
AYES: Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Holden, Hoover, Irwin, Jackson, Jones-Sawyer, Lackey, Lee, Low, Maienschein, Mathis, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Wicks, Wilson, Wood, Zbur, Robert Rivas
NO VOTE RECORDED: Addis, Bryan, Megan Dahle, Vince Fong, Kalra, Lowenthal, McCarty, Jim Patterson, Rendon, Weber
Prepared by: Jill Rice / INS. / (916) 651-4110
2/15/24 13:54:37
SENATE THIRD READING
STR Bill Id:SB 263
Author:(Dodd)
As Amended Ver: February 8, 2024
Majority vote
SUMMARY
Revises and recasts, beginning January 1, 2025, provisions related to the standards and procedures for the recommendation of annuity products and requires producers, with respect to the sales or recommendations of annuities made on or after January 1, 2025, to act in the best interest of the consumer.
Major Provisions
- Requires any life insurance agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete four hours of training prior to soliciting individual consumers to sell these life insurance policies, and requires two hours of training prior to each license renewal, as specified.
- States the bill's purpose as ensuring insurance producers, as defined, act in the best interest of the consumer when making a recommendation of an annuity product, and requiring insurers to supervise such recommendations by producers.
- Expressly states that no private cause of action is created by the best interest standard of care.
- Adds or changes several definitions, including:
- Defines "compensation" as anything of value, if paid as commission, or otherwise and if paid in cash or some other means received by a producer in connection with the recommendation or sale of an annuity, and includes health insurance, office rent, office support, and retirement benefits, but excludes products with the insurer name or logo with an aggregate value of $150 per year.
- Defines "material conflict of interest" as a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
- Redefines "producer" as someone licensed to sell or negotiate insurance, including annuities, and if no agent is involved, the insurer is the producer.
- Redefines "recommendation" as advice or guidance made by a producer to an individual consumer that was intended to result or does result in the purchase, exchange or replacement of an annuity.
- Establishes duties for producers to ensure that annuities are in the consumer's best interest and prohibits the producer from placing the producer's or insurer's financial interest ahead of the consumer's interest when recommending an annuity.
- Requires the producer, in making a recommendation, to exercise reasonable diligence and skill to, among other things:
- Know the consumer's financial situation, financial needs, insurance needs, and financial objectives.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, as provided, and to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
- Communicate the bases of the recommendation to the consumer both orally and in writing and to the insurer in writing.
- Exercise the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances.
- Make a reasonable effort to obtain consumer profile information from the consumer prior to the recommendation of an annuity, as provided.
- States it does not require the producer to analyze or consider any products outside the authority and license of the producer, and does not create a fiduciary obligation or relationship between the producer and the consumer.
- Requires the producer to prominently disclose specified information to the consumer, including but not limited to, a description of the scope and terms of the relationship with the consumer, a description of the products the producer is licensed and authorized to sell, a description of the sources and types of compensation and non-cash compensation to be received by the producer as a result of the sale of an annuity, a reasonable estimate of the amount of cash compensation to be received, and a notice of the customer's right to request more information regarding the producer's compensation.
- Requires a producer to identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
- Requires a producer, at the time of recommendation or sale, to satisfy several documentation requirements, as specified.
- Provides that a producer has no obligation to a consumer if no recommendation is made, if a recommendation is made but was based on materially inaccurate information provided by the consumer, if a consumer refuses to provide relevant consumer profile information and no recommendation is made, or if a consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
- Requires an insurer to establish, maintain, and utilize a supervision system that is reasonably designed to ensure the insurer's and its producers' compliance with these requirements, as specified.
- Requires the insurer to incorporate the requirements under this article into producer training manuals, provide product specific training and training materials that explain all material features of its annuity products to its producers, and maintain and utilize procedures to require its producers to comply with producer annuity training requirements.
- Prohibits an insurer or producer from dissuading, or attempting to dissuade, a consumer from truthfully responding to a request for consumer profile information, filing a complaint, or cooperating with the investigation of a complaint.
- Provides a "safe harbor" for recommendations and sales of annuities by financial professionals, as defined, made in compliance with specified comparable business rules, controls, and procedures that satisfy a comparable standard, but provides that the Insurance Commissioner (Commissioner) retains authority to enforce, and conduct investigations related to, the requirements in the statute, regardless of whether the financial professional is operating under a comparable standard.
- Requires the insurer to monitor the conduct of the financial professional seeking to utilize the safe harbor, as specified.
- Requires life insurance agents to complete additional annuity product training requirements, as specified.
- Requires a life insurer to provide all consumers who purchase an annuity with a National Association of Insurance Commissioners (NAIC) approved annuity buyer's guide as a standalone document with the annuity or prior to delivery of the annuity.
- Grants the Commissioner authority to adopt reasonable rules and regulations to implement these provisions
- Maintains the authority of the Commissioner to impose sanctions and penalties, as provided.
COMMENTS
Annuities are specialized insurance contracts that offer a guaranteed income stream, usually for retirees. This bill provides consumer protections to all consumers, but is particularly important for the protections it offers seniors and underserved communities in assuring the sale of an annuity is made in the consumers' best interest.
This bill builds on, and in some instances exceeds, the requirements set forth in the 2020 NAIC Model. The NAIC's Model #275 was created in 2003 to set standards and procedures that insurance producers must follow when recommending annuity products to consumers. In 2010, Model #275 was revised to require producers to collect certain information from consumers for the purpose of having reasonable grounds for making recommendations. In 2011, California adopted Model #275, with additional consumer protections beyond what was in the model. (AB 689 (Blumenfield), Chapter 295, Statutes of 2011)
NAIC Model #275 was updated again in 2020. Section 989J of the Federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled: 1) has adopted requirements that "substantially meet or exceed the minimum requirements" established by the 2010 version of the NAIC Suitability in Annuity Transactions Model Regulation (#275); and 2) "adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation" within 5 years of the adoption by the NAIC.
Therefore, by 2025, California needs to adopt the updates to California law which contain consumer protections that are at least as stringent as NAIC Model #275 to avoid dual regulation of fixed annuities by the California Department of Insurance (CDI) and the federal government.
According to the Author
This bill will protect consumers, including vulnerable seniors, from potential abuse and exploitation by curtailing harmful sales of annuities by requiring producers to consider the best interest of the consumer in making a recommendation and complying with the obligations set forth in SB 263. A producer or an insurer will now be required to satisfy a best interest standard of conduct by satisfying four obligations: 1) care; 2) disclosure; 3) conflict of interest; and 4) documentation. SB 263 exceeds the requirements of the NAIC model through additional required training, stronger enforcement mechanisms and other obligations that increase consumer awareness of their purchase of an annuity.
Arguments in Support
CDI, the sponsor of this bill, writes in support saying this bill is needed "to avoid federal preemption as well as create additional consumer protections to ensure California's insurance companies and licensed producers who sell annuities are following the highest standards of conduct."
Arguments in Opposition
Several consumer groups, including the Life Insurance Consumer Advocacy Center (LICAC) and the Consumer Federation of California, have an "oppose unless amended" position on this bill. These groups argue that the version of this bill from March 7, 2023 had greater consumer protections and therefore this bill should more closely mirror that version instead of its current form. In their letter these groups write, "If the bill is to accomplish its stated goals, it needs amendments to restore critical consumer protections that have been deleted from the bill." Among their concerns are the definition of "material conflict of interest" and the timing of when certain disclosures need to be delivered to the consumer.
FISCAL COMMENTS
According to the Assembly Appropriations Committee, "Costs of approximately $2.8 million for 14 positions in FY 2024-25, and $4.0 million for 28 positions ongoing thereafter to the Department of Insurance (CDI) to approve training courses and ensure compliance with specified producer and insurer duties (Insurance Fund)."
VOTES
SENATE FLOOR: 33-0-7
YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk
ABS, ABST OR NV: Dahle, Gonzalez, Grove, Nguyen, Niello, Ochoa Bogh, Seyarto
ASM INSURANCE: 13-0-1
YES: Calderon, Essayli, Berman, Cervantes, Chen, Vince Fong, Gipson, Grayson, Jones Sawyer, Ortega, Soria, Valencia, Wood
ABS, ABST OR NV: Rodriguez
ASM APPROPRIATIONS: 15-0-1
YES: Holden, Sanchez, Arambula, Wood, Calderon, Connolly, Dixon, Mike Fong, Grayson, Haney, Hart, Lowenthal, Pellerin, Ta, Villapudua
ABS, ABST OR NV: Megan Dahle
UPDATED
VERSION: February 8, 2024
CONSULTANT: Claire Wendt / INS. / (916) 319-2086 FN: 0002634
SENATE THIRD READING
STR Bill Id:SB 263
Author:(Dodd)
As Amended Ver:June 21, 2023
Majority vote
SUMMARY
Revises and recasts, beginning January 1, 2025, provisions related to the standards and procedures for the recommendation of annuity products, including any recommendation to purchase, exchange, or replace an annuity.
Major Provisions
- Requires any life insurance agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete four hours of training prior to soliciting individual consumers to sell these life insurance policies, and requires two hours of training prior to each license renewal, as specified.
- States the bill's purpose as ensuring insurance producers, as defined, act in the best interest of the consumer when making a recommendation of an annuity product, and requiring insurers to supervise such recommendations by producers.
- Expressly states that no private cause of action is created by the best interest standard of care.
- Adds or changes several definitions, including:
- Defines "compensation" as anything of value, if paid as commission, or otherwise and if paid in cash or some other means received by a producer in connection with the recommendation or sale of an annuity, and includes health insurance, office rent, office support, and retirement benefits, but excludes products with the insurer name or logo with an aggregate value of $150 per year.
- Defines "material conflict of interest" as a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
- Redefines "producer" as someone licensed to sell or negotiate insurance, including annuities, and if no agent is involved, the insurer is the producer.
- Redefines "recommendation" as advice or guidance made by a producer to an individual consumer that was intended to result or does result in the purchase, exchange or replacement of an annuity.
- Establishes duties for producers to ensure that annuities are in the consumer's best interest and prohibits the producer from placing the producer's or insurer's financial interest ahead of the consumer's interest when recommending an annuity.
- Requires the producer, in making a recommendation, to exercise reasonable diligence and skill to, among other things:
- Know the consumer’s financial situation, financial needs, insurance needs, and financial objectives.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, as provided, and to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
- Communicate the bases of the recommendation to the consumer both orally and in writing and to the insurer in writing.
- Exercise the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances.
- Make a reasonable effort to obtain consumer profile information from the consumer prior to the recommendation of an annuity, as provided.
- States it does not require the producer to analyze or consider any products outside the authority and license of the producer, and does not create a fiduciary obligation or relationship between the producer and the consumer.
- Requires the producer to prominently disclose specified information to the consumer, including but not limited to, a description of the scope and terms of the relationship with the consumer, a description of the products the producer is licensed and authorized to sell, a description of the sources and types of compensation and non-cash compensation to be received by the producer as a result of the sale of an annuity, a reasonable estimate of the amount of cash compensation to be received, and a notice of the customer’s right to request more information regarding the producer’s compensation.
- Requires a producer to identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
- Requires a producer, at the time of recommendation or sale, to satisfy several documentation requirements, as specified.
- Provides that a producer has no obligation to a consumer if no recommendation is made, if a recommendation is made but was based on materially inaccurate information provided by the consumer, if a consumer refuses to provide relevant consumer profile information and no recommendation is made, or if a consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
- Requires an insurer to establish, maintain, and utilize a supervision system that is reasonably designed to ensure the insurer's and its producers’ compliance with these requirements, as specified.
- Requires the insurer to incorporate the requirements under this article into producer training manuals, provide product specific training and training materials that explain all material features of its annuity products to its producers, and maintain and utilize procedures to require its producers to comply with producer annuity training requirements.
- Prohibits an insurer or producer from dissuading, or attempting to dissuade a consumer from truthfully responding to a request for consumer profile information, filing a complaint, or cooperating with the investigation of a complaint.
- Provides a "safe harbor" for recommendations and sales of annuities by financial professionals, as defined, made in compliance with specified comparable business rules, controls, and procedures that satisfy a comparable standard, but provides that the Insurance Commissioner (Commissioner) retains authority to enforce, and conduct investigations related to, the requirements in the statute, regardless of whether the financial professional is operating under a comparable standard.
- Requires the insurer to monitor the conduct of the financial professional seeking to utilize the safe harbor, as specified.
- Requires life insurance agents to complete additional annuity product training requirements, as specified.
- Requires a life insurer to provide all consumers who purchase an annuity with a National Association of Insurance Commissioners (NAIC) approved annuity buyer's guide as a standalone document with the annuity or prior to delivery of the annuity.
- Grants the Commissioner authority to adopt reasonable rules and regulations to implement these provisions.
COMMENTS
Annuities are specialized insurance contracts that offer a guaranteed income stream, usually for retirees. This bill provides consumer protections to all consumers, but is particularly important for the protections it offers seniors and underserved communities in assuring the sale of an annuity is made in the consumers' best interest.
This bill builds on, and in some instances exceeds, the requirements set forth in the 2020 NAIC Model. The NAIC's Model #275 was created in 2003 to set standards and procedures that insurance producers must follow when recommending annuity products to consumers. In 2010, Model #275 was revised to require producers to collect certain information from consumers for the purpose of having reasonable grounds for making recommendations. In 2011, California adopted Model #275, with additional consumer protections beyond what was in the model. (AB 689 (Blumenfield), Chapter 295, Statutes of 2011)
NAIC Model #275 was updated again in 2020. Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled: 1) has adopted requirements that "substantially meet or exceed the minimum requirements" established by the 2010 version of the NAIC Suitability in Annuity Transactions Model Regulation (#275); and 2) "adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation" within 5 years of the adoption by the NAIC.
Therefore, by 2025, California needs to adopt the updates to California law which contain consumer protections that are at least as stringent as NAIC Model #275 to avoid dual regulation of fixed annuities by the California Department of Insurance (CDI) and the federal government.
According to the Author
SB 263 will protect consumers, including vulnerable seniors, from potential abuse and exploitation by curtailing harmful sales of annuities by requiring producers to consider the best interest of the consumer in making a recommendation and complying with the obligations set forth in SB 263. A producer or an insurer will now be required to satisfy a best interest standard of conduct by satisfying four obligations: 1) care; 2) disclosure; 3) conflict of interest; and 4) documentation. SB 263 exceeds the requirements of the NAIC model through additional required training, stronger enforcement mechanisms and other obligations that increase consumer awareness of their purchase of an annuity.
Arguments in Support
CDI, the sponsor of this bill, writes in support say this bill is needed "to avoid federal preemption as well as create additional consumer protections to ensure California's insurance companies and licensed producers who sell annuities are following the highest standards of conduct."
Arguments in Opposition
Several consumer groups, including the Life Insurance Consumer Advocacy Center (LICAC) and the Consumer Federation of California, have an "oppose unless amended" position on this bill. These groups argue that the version of this bill from March 7, 2023 had greater consumer protections and therefore this bill should more closely mirror that version instead of its current form. In their letter these groups write, "If the bill is to accomplish its stated goals, it needs amendments to restore critical consumer protections that have been deleted from the bill." Among their concerns are the definition of "material conflict of interest" and the timing of when certain disclosures need to be delivered to the consumer.
FISCAL COMMENTS
According to the Assembly Appropriations Committee, "Costs of approximately $25,000 in fiscal year (FY) 2023-24, $2.8 million in FY 2024-25, and $4.0 million ongoing thereafter to the Department of Insurance (CDI) to approve training courses and ensure compliance with specified producer and insurer fiduciary duties (Insurance Fund)."
VOTES
SENATE FLOOR: 33-0-7
YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk
ABS, ABST OR NV: Dahle, Gonzalez, Grove, Nguyen, Niello, Ochoa Bogh, Seyarto
ASM INSURANCE: 13-0-1
YES: Calderon, Essayli, Berman, Cervantes, Chen, Vince Fong, Gipson, Grayson, Jones-Sawyer, Ortega, Soria, Valencia, Wood
ABS, ABST OR NV: Rodriguez
ASM APPROPRIATIONS: 15-0-1
YES: Holden, Sanchez, Arambula, Wood, Calderon, Connolly, Dixon, Mike Fong, Grayson, Haney, Hart, Lowenthal, Pellerin, Ta, Villapudua
ABS, ABST OR NV: Megan Dahle
UPDATED
VERSION: June 21, 2023
CONSULTANT: Claire Wendt / INS. / (916) 319-2086 FN: 0002589
Date of Hearing: August 16, 2023
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Chris Holden, Chair
SBPCA Bill Id:SB 263
Author:(Dodd) – As Amended Ver:June 21, 2023
Policy Committee: | Insurance | Vote: | 13 - 0 |
|
| ||
|
|
Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill revises, beginning January 1, 2025, procedures and standards for the recommendation and issuance of annuity products.
Specifically, this bill:
- Requires a life agent selling certain types of life insurance policies to complete training, approved by the Insurance Commissioner (IC), related to the policies sold.
- Requires an insurance producer to act in the best interest of the consumer when making a recommendation of an annuity and specifies duties and obligations, such as those related to disclosure, conflict of interest, and documentation, to ensure a producer acts accordingly.
- Requires an insurance producer to complete an annuity training course approved by the IC before transacting annuities.
- Requires an insurer to establish a supervision system for producer compliance with these requirements and provide a buyer’s guide to all consumers who purchase an annuity.
FISCAL EFFECT:
Costs of approximately $25,000 in fiscal year (FY) 2023-24, $2.8 million in FY 2024-25, and $4.0 million ongoing thereafter to the Department of Insurance (CDI) to approve training courses and ensure compliance with specified producer and insurer fiduciary duties (Insurance Fund).
COMMENTS:
- Purpose. According to the author:
SB 263 will protect consumers, including vulnerable seniors, from potential abuse and exploitation by curtailing harmful sales of annuities by requiring producers to consider the best interest of the consumer in making a recommendation and complying with the obligations set forth in SB 263…[which] exceeds the requirements of the NAIC model through additional required training, stronger enforcement mechanisms and other obligations that increase consumer awareness of their purchase of an annuity.
- Support and Opposition. This bill is sponsored by IC Ricardo Lara, who argues adopting the updated National Association of Insurance Commissioners’ (NAIC) Suitability in Annuity Transactions Model Regulation (Model #275) will “provide more consumer protections with higher standards of conduct, more rigorous communication requirements between the consumer, producers, and insurance company, and additional required training for producers selling life insurance policies.” IC Lara adds that “As an active member of the NAIC and representing the state in which the most fixed annuities are sold nationwide, I, along with my Department staff, worked with several other states and consumer advocates to push for as much of a consumer protection standard as possible.”
This bill is opposed by a coalition of consumer organizations led by the Life Insurance Consumer Advocacy Center unless amended to more closely model legislation in New York, which “has taken strong action in this area; California should use that as the model and not the [NAIC] model that the insurance industry strongly prefers.” The coalition adds that this “bill does a grave disservice to consumers by making it appear that consumers are protected (and allowing agents to say that consumers are protected), when in fact that is not the case.”
- Background.
Annuities. Annuities are specialized insurance contracts that pay out invested funds in a fixed income stream, generally to help retirees address the risk of outliving their savings. Annuities require no individual underwriting for insurers and are often accompanied by high commissions for producers. However, annuities come in many complex forms and upfront premium monies invested in these products are unavailable to a retiree for many years, with early withdrawal of funds subject to large penalties.
NAIC Model Law. Model #275 was initially created in 2003 to set standards and procedures that insurance producers must follow when recommending annuity products to consumers. Model #275 was revised in 2010 to require producers to collect information from consumers to better establish reasonable grounds for recommendations. AB 689 (Blumenfield), Chapter 295, Statutes of 2011, adopted Model #275 in California with additional consumer protections.
The federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 confirmed state authority to regulate the sale of fixed annuities and provided an exemption for such annuities from federal securities regulation under certain conditions, including when a state has adopted requirements that “substantially meet or exceed the minimum requirements” established in the 2010 version of Model #275 or successor modifications to the model regulation within five years of adoption by the NAIC. Model #275 was subsequently updated in 2020. Thus, to avoid dual regulation of fixed annuities by CDI and the federal government, existing state law must be updated to meet or exceed the 2020 version of Model #275 by 2025. The author intends this bill to satisfy this threshold.
Recent Amendments. This bill was previously opposed by a coalition of insurers led by the Association of California Life and Health Insurance Companies unless amended due to “a number of deviations from the NAIC standard that imperil the workability of the statute, create confusion for consumers and producers, and have the potential to be litigation traps for our members.” However, this coalition moved to a neutral position following the June 21, 2023 amendments. For its part, the coalition of consumer organizations opposed to this bill argue “consumers and their representatives have largely been excluded from the actual crafting of the bill” and each round of amendments “harms consumers a bit more and hews more closely to what the insurance industry wants.”
- Prior Legislation. SB 927 (Archuleta), of the 2021-2022 Legislative Session, would have enacted consumer protections for life insurance policies and annuities. SB 927 was held on the Senate Appropriations Committee’s suspense file.
Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081
Date of Hearing: June 28, 2023
ASSEMBLY COMMITTEE ON INSURANCE
Lisa Calderon, Chair
SBPCA Bill Id:SB 263
Author:(Dodd) – As Amended Ver:June 21, 2023
SENATE VOTE: 33-0
SUBJECT: Insurance: annuities and life insurance policies
SUMMARY: Revises and recasts, beginning January 1, 2025, provisions related to the standards and procedures for the recommendation of annuity products, including any recommendation to purchase, exchange, or replace an annuity. Specifically, this bill:
- Requires any life insurance agent, licensed on or after January 1, 2024, who engages in the sale of specified life insurance policies on or after January 1, 2025, to complete four hours of training prior to soliciting individual consumers to sell these life insurance policies, and requires two hours of training prior to each license renewal, as specified.
- States the bill’s purpose as ensuring insurance producers, as defined, act in the best interest of the consumer when making a recommendation of an annuity product, and requiring insurers to supervise such recommendations by producers.
- Expressly states that no private cause of action is created by the best interest standard of care.
- Adds or changes several definitions, including:
- Defines “compensation” as anything of value, if paid as commission, or otherwise and if paid in cash or some other means received by a producer in connection with the recommendation or sale of an annuity, and includes health insurance, office rent, office support, and retirement benefits, but excludes products with the insurer name or logo with an aggregate value of $150 per year.
- Defines “material conflict of interest” as a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
- Redefines “producer” as someone licensed to sell or negotiate insurance, including annuities, and if no agent is involved, the insurer is the producer.
- Redefines “recommendation” as advice or guidance made by a producer to an individual consumer that was intended to result or does result in the purchase, exchange or replacement of an annuity.
- Establishes duties for producers to ensure that annuities are in the consumer’s best interest and prohibits the producer from placing the producer’s or insurer’s financial interest ahead of the consumer’s interest when recommending an annuity.
- Requires the producer, in making a recommendation, to exercise reasonable diligence and skill to, among other things:
- Know the consumer’s financial situation, financial needs, insurance needs, and financial objectives.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, as provided, and to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
- Communicate the bases of the recommendation to the consumer both orally and in writing and to the insurer in writing.
- Exercise the care, skill, prudence, and diligence that a reasonable producer with similar authority and licensure who is familiar with those matters would use under the circumstances.
- Make a reasonable effort to obtain consumer profile information from the consumer prior to the recommendation of an annuity, as provided.
- States it does not require the producer to analyze or consider any products outside the authority and license of the producer, and does not create a fiduciary obligation or relationship between the producer and the consumer.
- Requires the producer to prominently disclose specified information to the consumer, including but not limited to, a description of the scope and terms of the relationship with the consumer, a description of the products the producer is licensed and authorized to sell, a description of the sources and types of compensation and non-cash compensation to be received by the producer as a result of the sale of an annuity, a reasonable estimate of the amount of cash compensation to be received, and a notice of the customer’s right to request more information regarding the producer’s compensation.
- Requires a producer to identify and avoid or reasonably manage and prominently disclose any material conflicts of interest, including material conflicts of interest relating to an ownership interest.
- Requires a producer, at the time of recommendation or sale, to satisfy several documentation requirements, as specified.
- Provides that a producer has no obligation to a consumer if no recommendation is made, if a recommendation is made but was based on materially inaccurate information provided by the consumer, if a consumer refuses to provide relevant consumer profile information and no recommendation is made, or if a consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
- Requires an insurer to establish, maintain, and utilize a supervision system that is reasonably designed to ensure the insurer’s and its producers’ compliance with these requirements, as specified.
- Requires the insurer to incorporate the requirements under this article into producer training manuals, provide product specific training and training materials that explain all material features of its annuity products to its producers, and maintain and utilize procedures to require its producers to comply with producer annuity training requirements.
- Prohibits an insurer or producer from dissuading, or attempting to dissuade a consumer from truthfully responding to a request for consumer profile information, filing a complaint, or cooperating with the investigation of a complaint.
- Provides a “safe harbor” for recommendations and sales of annuities by financial professionals, as defined, made in compliance with specified comparable business rules, controls, and procedures that satisfy a comparable standard, but provides that the Insurance Commissioner (Commissioner) retains authority to enforce, and conduct investigations related to, the requirements in the statute, regardless of whether the financial professional is operating under a comparable standard.
- Requires the insurer to monitor the conduct of the financial professional seeking to utilize the safe harbor, as specified.
- Requires life insurance agents to complete additional annuity product training requirements, as specified.
- Requires a life insurer to provide all consumers who purchase an annuity with a National Association of Insurance Commissioners (NAIC) approved annuity buyer’s guide as a standalone document with the annuity or prior to delivery of the annuity.
- Grants the Commissioner authority to adopt reasonable rules and regulations to implement these provisions.
EXISTING LAW:
- Provides for the regulation of insurers, agents and brokers, and other insurance-like organizations by the Commissioner.
- Requires the producer, or insurer if no producer is involved, to have a reasonable basis to believe that the consumer has been informed of the features of the annuity and the consumer would receive a tangible net benefit from the transaction. (Ins. Code Section 10509.914)
- Prohibits an insurer from issuing 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, as specified. (Ins. Code Section 10509.914)
- Provides that no violation has occurred if no recommendation has been made or if the recommendation was made based on materially inaccurate information provided by the consumer or if the consumer refuses to provide relevant suitability information and no recommendation is made. (Ins. Code Section 10509.914)
- Provides that if no recommendation is made, or if the consumer proceeds without providing all suitability information and an annuity transaction is not recommended, the producer shall obtain a customer signed statement documenting the consumer’s refusal to provide suitability information and acknowledging that an annuity transaction is not recommended. (Ins. Code Section 10509.914)
- Requires any life insurance agent who sells annuities to complete 8 hours of training prior to soliciting individual consumers to sell annuities, and requires 4 hours of training prior to each license renewal, as specified. (Ins. Code Section 10509.915)
- Specifies that an insurer is responsible for compliance with the above provisions, and if a violation occurs the Commissioner may impose penalties, remedies, or administrative actions, as specified. (Ins. Code Section 10509.916)
- Grants the Commissioner authority to adopt reasonable rules and regulations to implement existing law. (Ins. Code Section 10509.918)
FISCAL EFFECT: Unknown
COMMENTS:
- Purpose. According to the author:
SB 263 will protect consumers, including vulnerable seniors, from potential abuse and exploitation by curtailing harmful sales of annuities by requiring producers to consider the best interest of the consumer in making a recommendation and complying with the obligations set forth in SB 263. A producer or an insurer will now be required to satisfy a best interest standard of conduct by satisfying four obligations: 1) care; 2) disclosure; 3) conflict of interest; 5 and 4) documentation. SB 263 exceeds the requirements of the NAIC model through additional required training, stronger enforcement mechanisms and other obligations that increase consumer awareness of their purchase of an annuity.
- Annuities. Annuities are specialized insurance contracts that offer a guaranteed income stream, usually for retirees. The intention of an annuity is to pay out invested funds in a fixed income stream in the future to help individuals address the risk of outliving their savings. For insurers, producers, and consumers, annuities are appealing because they require no individual underwriting for insurers, they are easily marketed as a guarantee of adequate income for life for seniors, and are often accompanied by high commissions for producers.
Annuities come in many forms and require a greater level of sophistication and education by the consumer versus other insurance products they might be familiar with. Many people do not understand some of the basic features of annuities, and particularly deferred annuities.
Seniors sometimes are persuaded to invest their entire life savings in these types of products, leaving them with no liquid assets or income for years. The upfront premium monies invested are unavailable for many years and the withdrawal of funds from annuities frequently involves the payment of large penalties.
This bill provides consumer protections to all consumers, but is particularly important for the protections it offers seniors and underserved communities in assuring the sale of an annuity is made in the consumers’ best interest.
- National Association of Insurance Commissioners (NAIC) Model Law. This bill builds on, and in some instances exceeds, the requirements set forth in the 2020 NAIC Model. The NAIC’s Model #275 was created in 2003 to set standards and procedures that insurance producers must follow when recommending annuity products to consumers. In 2010, Model #275 was revised to require producers to collect certain information from consumers for the purpose of having reasonable grounds for making recommendations. In 2011, California adopted Model #275, with additional consumer protections beyond what was in the model. (AB 689 (Blumenfield) Chapter 295, Statutes of 2011)
NAIC Model #275 was updated again in 2020. Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled: 1) has adopted requirements that “substantially meet or exceed the minimum requirements” established by the 2010 version of the NAIC Suitability in Annuity Transactions Model Regulation (#275); and 2) “adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation” within 5 years of the adoption by the NAIC. Therefore, by 2025, California needs to adopt the updates to California law which contain consumer protections that are at least as stringent as NAIC Model #275 to avoid dual regulation of fixed annuities by the California Department of Insurance (CDI) and the federal government.
- Arguments in Support. CDI, the sponsor of this bill, writes in support say this bill is needed “to avoid federal preemption as well as create additional consumer protections to ensure California’s insurance companies and licensed producers who sell annuities are following the highest standards of conduct.”
- Arguments in Opposition. Several consumer groups, including the Life Insurance Consumer Advocacy Center (LICAC) and the Consumer Federation of California, have an “oppose unless amended” position on this bill. These groups argue that the version of this bill from March 7, 2023 had greater consumer protections and therefore this bill should more closely mirror that version instead of its current form. In their letter these groups write, “If the bill is to accomplish its stated goals, it needs amendments to restore critical consumer protections that have been deleted from the bill.” Among their concerns are the definition of “material conflict of interest” and the timing of when certain disclosures need to be delivered to the consumer.
Note that as a result of the June 21, 2023 amendments several organizations that previously had an “oppose unless amended” position on this bill are now neutral, including the Federation of Americans for Consumer Choice, the National Association of Insurance and Financial Advisors of California, the Independent Insurance Agents & Brokers of California, the Association of California Life and Health Insurance Companies, and Finesca.
- Prior Legislation.
- SB 927 (Archuleta) of 2022 would have extended the “free look” period for life insurance policies. Held in Senate Appropriations.
- AB 689 (Blumenfield) Chapter 295, Statutes of 2011) enacted the 2010 NAIC Suitability in Annuity Transactions Model Regulation in California.
REGISTERED SUPPORT / OPPOSITION:
Support
California Commission on Aging
Insurance Commissioner Ricardo Lara / California Department of Insurance
Oppose Unless Amended
Center Economic Justice
Chartered Financial Analyst
Consumer Federation of California
Life Insurance Consumer Advocacy Center
United Policyholders
Opposition
None on file.
Analysis Prepared by: Claire Wendt / INS. / (916) 319-2086
SENATE RULES COMMITTEE Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | SB 263 |
THIRD READING
Bill No: SB 263
Author: Dodd (D)
Amended: 5/2/23
Vote: 21
SENATE INSURANCE COMMITTEE: 4-0, 4/26/23
AYES: Rubio, Alvarado-Gil, Dodd, Portantino
NO VOTE RECORDED: Nguyen, Jones, Niello
SENATE APPROPRIATIONS COMMITTEE: 6-0 5/18/23
AYES: Portantino, Jones, Ashby, Bradford, Wahab, Wiener
NO VOTE RECORDED: Seyarto
SUBJECT: Insurance: annuities and life insurance policies
SOURCE: California Department of Insurance
DIGEST:
This bill revises the Suitability Requirements for Annuity Transactions in California law to generally reflect changes made by the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation #275 of 2020, with some changes, as specified.
ANALYSIS:
Existing law:
- Prohibits any unfair or deceptive practice in the business of insurance.
- Grants, generally speaking, the Insurance Commissioner (IC) broad powers to determine if annuities and life insurance products are fair to the public.
- Requires that all annuity and life insurance forms be filed with the IC before being used in the market, but specifies that prior approval by the IC before marketing or use is not required.
- Regards, generally speaking, senior citizens a protected class in the sale of life insurance and annuities, specifies that all insurance agents and brokers owe a senior 65 and older a duty of honesty, good faith and fair dealing, and requires every individual life insurance or individual annuity contract issued to a senior to include a right of return of no less than 30 days.
- Regulates the sale of replacement life insurance and annuities, and imposes penalties for violation of those provisions.
- Defines replacement of a life insurance or annuity to include products that are lapsed, forfeited, surrendered, or otherwise terminated, or other methods that generally reduce the benefits due to the consumer under the existing product.
- Imposes specified duties on insurance agents and brokers (producers) who accept an application for life insurance or an annuity, including a signed statement indicating whether the agent knows replacement is or may be involved in the transaction, and if a replacement is involved, provide a specified notice to the applicant regarding decisions about replacement that must be signed by both the producer and applicant.
- Requires the insurer to ensure its producers or other personnel responsible in the application process comply with this requirement, and requires each completed application for life insurance or an annuity to include a statement signed by the applicant on whether the product will replace an existing life insurance policy or annuity and that recommends the consumer seek more information about the implications of such a decision.
- Creates a rebuttable presumption of a violation of the statute if a producer or insurer recommends the replacement of a policy by presenting materially inaccurate information in the comparison of the existing policy’s premiums and benefits or dividends and values, or if recommends a senior purchase an unnecessary replacement annuity.
- Requires insurers to have a system to supervise recommendations and establish standards and procedures for the sale of annuity products, whether purchase, exchange or replacement, so that the needs and financial objectives of consumers at the time of the transaction are appropriately addressed.
- Requires, before recommending an annuity product to a consumer, the producer, or insurer if no producer is involved, to have reasonable grounds to believe the annuity is suitable, as specified.
- Defines “suitability information” to include specified information from the consumer.
- Requires the producer, or insurer if no producer is involved, to have a reasonable basis to believe that the consumer has been informed of the features of the annuity and the consumer would receive a tangible net benefit from the transaction.
- Prohibits an insurer from issuing 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, as specified.
- Provides that no violation has occurred if no recommendation has been made or if the recommendation was made based on materially inaccurate information provided by the consumer or if the consumer refuses to provide relevant suitability information and no recommendation is made.
- Provides that if no recommendation is made, or if the consumer proceeds without providing all suitability information and an annuity transaction is not recommended, the producer shall obtain a customer signed statement documenting the consumer’s refusal to provide suitability information and acknowledging that an annuity transaction is not recommended.
- Requires a minimum of 20 hours of pre-licensing study to qualify for a life insurance agent license, and an additional 12 hours of study on ethics and the Insurance Code.
- Requires a life insurance agent to complete 24 hour hours of continuing education, including 3 hours of ethics training prior to license renewal.
- Requires any life insurance agent who sells annuities to complete 8 hours of training prior to soliciting individual consumers to sell annuities, and requires 4 hours of training prior to each license renewal, as specified.
- Requires an insurer to verify that a producer has completed the required training prior to selling any annuity products for the insurer.
- Specifies that an insurer is responsible for compliance with the above provisions, and if a violation occurs the IC may impose penalties, remedies, or administrative actions, as specified.
This bill:
- Requires, beginning January 1, 2025, an agent who sells life insurance policies to complete four hours of training before soliciting individual consumers to sell life insurance policies and an additional two hours of training before each license renewal. Specifies both of these trainings are in addition to, and not part of other annuity training requirements, as specified.
- Requires both trainings to be approved by the commissioner and consist of topics and requirements related to life insurance policies, California law, regulations, prohibited sales practices, fraudulent and unfair trade practices, and the recognition of indicators that a prospective insured may lack the short-term memory or judgement to knowing purchase an insurance product.
- Provides that these training requirements do not apply to nonresident agents representing an insurer that is a direct response provider, as specified.
- Recasts provisions related to the best interest standard of conduct for producers when making a recommendation to a consumer to purchase, exchange, convert, replace, or modify an annuity, or when soliciting the sale of an annuity product to a consumer, as specified.
- Specifies that the purpose of the suitability requirements for annuity transactions is to require producers to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.
- Specifies insurers and producers have specific duties to ensure that annuities that are recommended are in the consumer’s best interest. Provides that a producer has acted in the best interest of the consumer if they have satisfied the following obligations, as specified: Care Obligation, Disclosure Obligation, Conflict of Interest Obligation, Documentation Obligation, Application of the Best Interest Obligation, transactions not based on a recommendation, Supervision System, and Safe Harbor.
- Requires producers and individuals who hold or obtain a life insurance line of authority to complete specified training requirements, as specified.
- Provides that these updates become operative on January 1, 2025.
- States that there is no private cause of action created by the best interest standard of care.
- Requires, beginning January 1, 2025, a life insurer to provide a buyer’s guide to all consumers who purchase an annuity. Requires the guide to be delivered as a stand-alone document with the annuity or before delivery of the annuity.
- Establishes new and revises existing definitions for purposes of the suitability requirements for annuity transactions.
- Makes other technical and conforming changes.
Comments
According to the author:
SB 263 builds on, and in some instances exceeds, the requirements set forth in the 2020 NAIC Model, to provide consistency with current California consumer protection laws and include other important protections to consumers for … annuity … sales.
SB 263 will protect consumers, including vulnerable seniors, from potential abuse and exploitation of harmful annuity … transactions by requiring a more robust evaluation of the consumer’s financial situation, financial needs, insurance needs, and financial objectives to ensure that sales are in the consumers’ best interest. SB 263 requires producers to put the consumer’s interests ahead of their sales and to consider required information about a consumer before making recommendations.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No
According to the Senate Appropriations Committee, the Department of Insurance (CDI) reports costs of $25,000 and 0.16 personnel years (PYs) in Fiscal Year (FY) 2023-24, $2,847,000 and 14.32 PYs in FY 2024-25, and $4,027,000 and 28.40 PYs ongoing (Insurance Fund). Costs include additional investigatory and enforcement resources to ensure producers are upholding their fiduciary duty in a client’s best interest.
SUPPORT: (Verified 5/19/23)
California Department of Insurance (source)
OPPOSITION: (Verified 5/19/23)
American Council of Life Insurers |
Association of California Life & Health Insurance Companies |
Center for Economic Justice |
Consumer Federation of America |
Consumer Federation of California |
Federation of Americans for Consumer Choice |
Finseca |
Independent Insurance Agents & Brokers of California, Inc. |
Insured Retirement Institute Life Insurance Consumer Advocacy Center National Association for Fixed Annuities |
National Association of Insurance and Financial Advisors - California |
United Policyholders |
ARGUMENTS IN SUPPORT: The California Department of Insurance has sponsored SB 263 because to date, 27 states have adopted versions of this NAIC Model, thereby avoiding dual oversight and regulation of fixed annuities by those states’ departments of insurance and the federal government (namely the U.S. Securities and Exchange Commission) by 2025, a necessary step further mandated with the enactment of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act. SB 263 would help bring about much-needed reform and provide more consumer protections with higher standards of conduct, stronger enforcement tools for the regulator, more rigorous communication requirements between the consumer, producers, and insurance company, and additional required training for producers, among other consumer protections. The Commissioner asserts that California can and should do more to stop the financial abuse of our seniors and other vulnerable individuals, especially as it pertains to the sale of unsuitable annuities and believes that this bill does just that.
ARGUMENTS IN OPPOSITION: A coalition of insurance, producer, and financial service trade associations, including American Council of Life Insurers, Association of California Life & Health Insurance Companies, National Association of Insurance and Financial Advisors – California, Finseca, Independent Insurance Agents & Brokers of California, Inc., Insured Retirement Institute, Federation of Americans for Consumer Choice, and National Association for Fixed Annuities have a number of amendments they are seeking, including:
Section 5: §10509.911 A change to the bill’s current definition of its scope which is to include any recommendation “to purchase, exchange, convert, replace or modify an annuity, or elect a contractual provision of an in-force annuity.” Because the term “convert” typically applies to life insurance products which are now out of scope of the bill. And applying best interest duties of care to in-force annuity modifications, or the election of a contractual provision are so broad that these phrases will certainly capture situations when no compensation is being received by a producer. This seems counter to what the bill is trying to achieve and the bill.
Section 9: §10509.914 Regarding the ways in which a producer must communicate the basis of a recommendation, adding the explicit requirement that a recommendation is communicated orally, is discriminatory against deaf consumers, creates a compliance monitoring challenge for carriers, and it is generally duplicative of §10509.914(d) where a written record of a communication is required. Therefore, we believe this section should adopt the NAIC Model language that requires a communication of the basis of a recommendation but is neutral on how that is done
Section 12: §10509.920 Prior versions of this bill included the important clarification that the bill is only prospective and has no retroactive applicability, however the most recent set of amendments completely removed this clarification. We believe this amendment should be reinstated. Lastly, we believe it is critically important to keep the safe harbor language in current law: INS §10509.912. This language has been in place and working effectively for the current suitability statute enacted 11 years ago. It recognizes the fact that other regulatory regimes provide substantially similar levels of consumer protection and therefore consumer interests are not further served by requiring producers and insurers to comply with multiple sets of rules that effectively achieve the same objectives.
Prepared by: Jill Rice / INS. / (916) 651-4110
5/20/23 12:41:11
**** END ****
SENATE COMMITTEE ON APPROPRIATIONS
Senator Anthony Portantino, Chair
2023 - 2024 Regular Session
SB 263 (Dodd) - Insurance: annuities and life insurance policies
Version: May 2, 2023 | Policy Vote: INS. 4 - 0 |
Urgency: No | Mandate: No |
Hearing Date: May 15, 2023 | Consultant: Janelle Miyashiro |
Bill Summary:
SB 263 recasts provisions related to the best interest standard of conduct for producers to reflect changes made by the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation #275 of 2020 and adds additional training requirements for licensees selling life insurance policies and annuities, as specified.
Fiscal Impact:
The Department of Insurance (CDI) reports costs of $25,000 and 0.16 personnel years (PYs) in Fiscal Year (FY) 2023-24, $2,847,000 and 14.32 PYs in FY 2024-25, and $4,027,000 and 28.40 PYs ongoing (Insurance Fund). Costs include additional investigatory and enforcement resources to ensure producers are upholding their fiduciary duty in a client’s best interest.
Background:
Suitability in Annuity Transactions Model Regulation #275. Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled:
- Has adopted requirements that “substantially meet or exceed the minimum requirements” established by the 2010 version of the NAIC’s Suitability in Annuity Transactions Model Regulation #275; and
- “Adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation” within 5 years of the adoption by the NAIC. The only exception to this requirement is if the product is issued by an insurance company that adopts and implements practices on a nationwide basis that meet or exceed the minimum requirements established by the NAIC’s Model #275, “and any successor thereto.”
The NAIC considers the 2020 version to be a successor modification to the model that exceeds the requirements of the 2010 version. Therefore, by February 2025, California needs to adopt the updates which contain consumer protections that are at least as stringent as NAIC Model #275 to avoid dual regulation of fixed annuities by the CDI and the federal government.
Best Interest Standard of Conduct. To satisfy the best interest obligation, a producer or an insurer must satisfy four obligations: 1) care; 2) disclosure; 3) conflict of interest; and 4) documentation.
According to the NAIC, to satisfy the four obligations, when making a recommendation, producers must:
- Know the consumer’s financial situation, insurance needs and financial objectives;
- Understand the available recommendation options;
- Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives;
- Communicate the basis of the recommendation to the consumer;
- Disclose their role in the transaction, their compensation, and any material conflicts of interest; and
- Document, in writing, any recommendation and the justification for such recommendation.
All recommendations made by a producer or insurer to purchase, exchange or replace an annuity product must comply with the best interest standard of conduct. Specifically, a “recommendation” is advice provided by a producer to an individual consumer that was intended to result or does result in a purchase, an exchange or a replacement of an annuity in accordance with that advice. A recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
Proposed Law:
- Beginning January 1, 2025, requires an agent who sells life insurance policies to complete four hours of training before soliciting individual consumers to sell life insurance policies and an additional two hours of training before each license renewal. Specifies both of these trainings are in addition to, and not part of other annuity training requirements, as specified.
- Requires both trainings to be approved by the commissioner and consist of topics and requirements related to life insurance policies, California law, regulations, prohibited sales practices, fraudulent and unfair trade practices, and the recognition of indicators that a prospective insured may lack the short-term memory or judgement to knowing purchase an insurance product.
- Provides that these training requirements do not apply to nonresident agents representing an insurer that is a direct response provider, as specified.
- Recasts provisions related to the best interest standard of conduct for producers when making a recommendation to a consumer to purchase, exchange, convert, replace, or modify an annuity, or when soliciting the sale of an annuity product to a consumer, as specified.
- Specifies that the purpose of the suitability requirements for annuity transactions is to require producers to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish, maintain, and utilize a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuities, so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.
- Specifies insurers and producers have specific duties to ensure that annuities that are recommended are in the consumer’s best interest. Provides that a producer has acted in the best interest of the consumer if they have satisfied the following obligations, as specified: Care Obligation, Disclosure Obligation, Conflict of Interest Obligation, Documentation Obligation, Application of the Best Interest Obligation, transactions not based on a recommendation, Supervision System, and Safe Harbor.
- Requires producers and individuals who hold or obtain a life insurance line of authority to complete specified training requirements, as specified.
- Provides that these updates become operative on January 1, 2025.
- States that there is no private cause of action created by the best interest standard of care.
- Beginning January 1, 2025, requires a life insurer to provide a buyer’s guide to all consumers who purchase an annuity. Requires the guide to be delivered as a stand-alone document with the annuity or before delivery of the annuity.
- Establishes new and revises existing definitions for purposes of the suitability requirements for annuity transactions.
- Makes other technical and conforming changes.
-- END --
SENATE COMMITTEE ON INSURANCE
Senator Susan Rubio, Chair
2023 - 2024 Regular
Bill No: SB 263 Hearing Date: April 26, 2023
Author: | Dodd | ||
Version: | April 17, 2023 | ||
Urgency: | No | Fiscal: | Yes |
Consultant: | Erin Ryan | ||
SUBJECT: Insurance: annuities and life insurance policies
DIGEST:
Revises the Suitability Requirements for Annuity Transactions in California law to generally reflect changes made by the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation #275 of 2020, with some changes, as specified; and adds additional training requirements for those licensed or seeking a license to sell life insurance or annuities.
ANALYSIS:
Existing law:
- Prohibits any unfair or deceptive practice in the business of insurance.
- Generally speaking, grants the Insurance Commissioner (IC) broad powers to determine if annuities and life insurance products are fair to the public.
- Requires that all annuity and life insurance forms be filed with the IC before being used in the market, but specifies that prior approval by the IC before marketing or use is not required.
- Requires all individual life insurance policies to include a right to return of not less than 10 days nor more than 30 days, specifies that return of the policy within the “free look” period voids the policy and requires all premiums and fees paid to be refunded; and requires a notice of that right be printed on the policy or attached to it.
- Generally speaking regards senior citizens a protected class in the sale of life insurance and annuities, specifies that all insurance agents and brokers owe a senior 65 and older a duty of honesty, good faith and fair dealing, and requires every individual life insurance or individual annuity contract issued to a senior to include a right of return of no less than 30 days.
- Broadly regulates the sale of replacement life insurance and annuities, and imposes penalties for violation of those provisions.
- Defines replacement of a life insurance or annuity to include products that are lapsed, forfeited, surrendered, or otherwise terminated, or other methods that generally reduce the benefits due to the consumer under the existing product.
- Imposes specified duties on insurance agents and brokers (producers) who accept an application for life insurance or an annuity, including a signed statement indicating whether the agent knows replacement is or may be involved in the transaction, and if a replacement is involved, provide a specified notice to the applicant regarding decisions about replacement that must be signed by both the producer and applicant.
- Requires the insurer to ensure its producers or other personnel responsible in the application process comply with this requirement, and requires each completed application for life insurance or an annuity to include a statement signed by the applicant on whether the product will replace an existing life insurance policy or annuity and that recommends the consumer seek more information about the implications of such a decision.
- Creates a rebuttable presumption of a violation of the statute if a producer or insurer recommends the replacement of a policy by presenting materially inaccurate information in the comparison of the existing policy’s premiums and benefits or dividends and values, or if recommends a senior purchase an unnecessary replacement annuity.
- Requires insurers to have a system to supervise recommendations and establish standards and procedures for the sale of annuity products, whether purchase, exchange or replacement, so that the needs and financial objectives of consumers at the time of the transaction are appropriately addressed.
- Before recommending an annuity product to a consumer, requires the producer, or insurer if no producer is involved, to have reasonable grounds to believe the annuity is suitable, as specified.
- Defines “suitability information” to include all of the following information from the consumer:
- Age
- Annual income
- Financial situation of needs, including the financial resources used for funding the annuity
- Financial experience
- Financial objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets, including investment and life insurance holdings
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Tax status
- Whether consumer has a reverse mortgage
- Whether the consumer intends to apply for means tested government benefits, including Medi-Cal.
- Requires the producer, or insurer if no producer is involved, to have a reasonable basis to believe that the consumer has been informed of the features of the annuity and the consumer would receive a tangible net benefit from the transaction.
- Prohibits an insurer from issuing 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, as specified.
- Provides that no violation has occurred if no recommendation has been made or if the recommendation was made based on materially inaccurate information provided by the consumer or if the consumer refuses to provide relevant suitability information and no recommendation is made.
- Provides that if no recommendation is made, or if the consumer proceeds without providing all suitability information and an annuity transaction is not recommended, the producer shall obtain a customer signed statement documenting the consumer’s refusal to provide suitability information and acknowledging that an annuity transaction is not recommended.
- Requires a minimum of 20 hours of pre-licensing study to qualify for a life insurance agent license, and an additional 12 hours of study on ethics and the Insurance Code.
- Requires a life insurance agent to complete 24 hour hours of continuing education, including 3 hours of ethics training prior to license renewal.
- Requires any life insurance agent who sells annuities to complete 8 hours of training prior to soliciting individual consumers to sell annuities, and requires 4 hours of training prior to each license renewal, as specified.
- Requires an insurer to verify that a producer has completed the required training prior to selling any annuity products for the insurer.
- Specifies that an insurer is responsible for compliance with the above provisions, and if a violation occurs the IC may impose penalties, remedies, or administrative actions, as specified.
This bill:
- Requires a life insurance agent to complete 4 hours of training before soliciting individual consumers to sell life insurance policies and 2 hours prior to each license renewal, in addition to existing training requirements, as specified.
- States the bill’s purpose as ensuring insurance producers, as defined, act in the best interest of the consumer when making a recommendation of an annuity product, and requiring insurers to supervise such recommendations by producers.
- Expressly states that no private cause of action is created by the best interest standard of care.
- Adds or changes several definitions, including:
- Defines “compensation” as anything of value, if paid as commission, or otherwise and if paid in cash or some other means received by a producer in connection with the recommendation or sale of an annuity, and includes health insurance, office rent, office support, and retirement benefits, but excludes products with the insurer name or logo with an aggregate value of $150 per year.
- Defines “material conflict of interest” as a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
- Defines “producer” as someone licensed to sell or negotiate insurance, including annuities, and if no agent is involved, the insurer is the producer.
- Defines “recommendation” as advice or guidance made by a producer to an individual consumer that was intended to result or does result in the purchase, exchange or replacement of an annuity.
- Broadly establishes duties for producers to ensure that annuities are in the consumer’s best interest, including:
- Prohibits the producer from placing the producer’s or insurer’s financial interest ahead of the consumer’s interest when recommending an annuity.
- Requires the producer to exercise reasonable diligence, care and skill to know the consumer’s financial situation, financial needs, insurance needs and financial objectives, and have a reasonable basis to believe that the consumer would receive a tangible net benefit from the transaction over the life of the product.
- Requires the producer to communicate the bases of the recommendation to the consumer both orally and in writing, and to the insurer in writing.
- Requires the producer’s recommendation to be based on the consumer’s relevant profile information, and reflect the care, skill, prudence and diligence that a prudent person acting in a like capacity would use under similar circumstances.
- Requires the producer to make reasonable efforts to obtain consumer profile information from the consumer prior to making a recommendation.
- Specifically states it does not require the producer to analyze or consider any products outside the authority and license of the producer, and does not create a fiduciary obligation or relationship between the producer and the consumer.
- States that the best interest of the consumer standard does not necessarily mean that the annuity with the lowest producer compensation is in the consumer’s best interest; and the standard of care does not mean the producer has an ongoing monitoring obligation to the consumer, unless such an obligation separately owed under the terms of a fiduciary, consulting, investment advisor, or financial planning agreement between the producer and consumer.
- Specifies additional factors to be considered if the annuity is an exchange or replacement of an annuity.
- Requires the producer to prominently disclose specified information to the consumer, including a description of the scope and terms of the relationship with the consumer, a description of the products the producer is licensed and authorized to sell, a description of the sources and types of compensation and non-cash compensation to be received by the producer as a result of the sale of an annuity, a reasonable estimate of the amount of cash compensation to be received, and a notice of the customer’s right to request more information regarding the producer’s compensation.
- Requires the producer, prior to or at the time of recommendation of an annuity, to inform the consumer of various features of the annuity, including potential surrender period and surrender charges, potential tax penalty if the consumer sells, exchanges or surrenders the annuity, associated fees, potential charges, and any market risk associated with the annuity.
- Requires a producer to identify and avoid or reasonably manage, and prominently disclose to the consumer any material conflicts of interest, including any ownership interest in the insurer.
- Requires a producer, at the time of recommendation sale, to provide the consumer with a written record of any recommendation and the basis for the recommendation.
- Specifies that the best interest obligation applies to every producer who has exercised material control or influence in the making of the recommendation and received direct compensation as a result of the recommendation or sale, regardless of whether the producer has direct contact with the consumer.
- Provides that a producer has no obligation to a consumer if no recommendation is made, if a recommendation is made but was based on materially inaccurate information provided by the consumer, if a consumer refuses to provide relevant consumer profile information and no recommendation is made, or if a consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.
- Requires an insurer’s issuance of an annuity under (15) above to be reasonable under all circumstances that are actually, or that after reasonable inquiry should be known to the insurer at the time the annuity is issued.
- Requires the producer, or the responsible insurer representative if no producer is involved, to make a record of any recommendation; obtain a customer signed statement documenting a customer’s refusal to provide suitability information; and obtain a customer signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the producer’s or insurer’s recommendation.
- Provides that, except as specifically permitted, an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the consumer’s needs based on the consumer’s consumer profile information.
- Requires an insurer to establish, maintain and utilize a supervision system that is reasonably designed to ensure the insurer’s and its producers’ compliance with these requirements, as specified.
- Requires the insurer to incorporate the requirements under this article into producer training manuals, provide product specific training and training materials that explain all material features of its annuity products to its producers, and maintain and utilize procedures to require its producers to comply with producer annuity training requirements.
- Requires the insurer to have reasonable procedure in place to detect recommendations that are not in compliance with the producer requirements of the statute before or upon issuance or delivery of an annuity.
- Requires the insurer to establish and maintain reasonable procedures to identify and eliminate any sales contests, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.
- Allows an insurer to contract with a third party to perform specified supervision functions, but requires the insurer to reasonably monitor those contracted functions.
- Provides that the insurer is responsible for taking appropriate corrective action, and may be subject to sanctions and penalties for actions of its third party contractors and producers.
- Prohibits an insurer or producer from dissuading, or attempting to dissuade a consumer from truthfully responding to a request for consumer profile information, filing a complaint, or cooperating with the investigation of a complaint.
- Provides a “safe harbor” for recommendation and sales of annuities by financial professionals (broker-dealer, investment adviser) made in compliance with comparable business rules, controls and procedures that satisfy a comparable standard, even if the producer also holds a life agent license, but specifies the IC retains authority to enforce, and conduct investigations related to, the requirements in the statute.
- Requires the insurer to monitor the conduct of the financial professional seeking to utilize the safe harbor, as specified.
- Requires life insurance agents to complete additional annuity product training requirements, as specified.
- Requires a life insurer to provide all consumers who purchase an annuity an NAIC approved annuity buyer’s guide as a standalone document with the annuity or prior to delivery of the annuity.
- Grants the IC authority to adopt reasonable rules and regulations to implement these provisions.
Background
Section 989J of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act confirms state authority to regulate the sale of fixed and fixed indexed annuities and provides an exemption for such annuities from federal securities regulation when certain conditions are met, including when the state in which the contract is issued or the state in which the insurer issuing the contract is domiciled: 1) has adopted requirements that “substantially meet or exceed the minimum requirements” established by the 2010 version of the NAIC Suitability in Annuity Transactions Model Regulation (#275); and 2) “adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulation” within 5 years of the adoption by the NAIC. NAIC Model #275 was updated in 2020. Therefore, by 2025, California needs to adopt the updates to California law which contain consumer protections that are at least as stringent as NAIC Model #275 to avoid dual regulation of fixed annuities by the California Department of Insurance (CDI) and the federal government.
The NAIC’s Model #275 was created in 2003 in response to increasingly egregious and numerous financial abuses occurring in the annuity market throughout the United States. Seven years later in 2010, the NAIC updated Model #275 again as overly aggressive tactics utilized by insurance companies and their agents to sell annuities to seniors and other consumers remained prevalent. AB 689 (Blumenfield, Ch. 295, Stat. of 2011) was the first to implement the NAIC Suitability in Annuity Transactions Model Regulation in California, with some changes to enhance consumer protections. That bill required insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers for the sale of annuities to ensure that the financial and insurance needs and objectives of the consumer purchasing the annuity are appropriately addressed.
Annuities are specialized contracts sold by an insurance company which are designed to provide payments to the holder at specified intervals, usually after retirement. For insurers, producers and consumers, annuities are appealing because they require no individual underwriting for insurers, they are easily marketed as a guarantee of adequate income for life for seniors, and are often accompanied by high commissions for producers. Annuities can be valuable and appropriate investment products when sold by responsible insurers and agents and purchased by suitable consumers who understand their features.
With the purchase of an annuity, the insurance company accepts payment from the buyer and then, at a contracted future time, a stream of payments to the individual begins. They are often used to secure a steady cash flow during retirement. Annuities can be structured according to a wide array of details and factors, such as the how long annuity payments can be guaranteed to continue. Annuities can also be structured to provide either fixed or variable payments. Variable annuities let an annuitant receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. While this provides for a less stable cash flow than a fixed annuity, it allows annuitants to reap a benefit when returns are strong. While the variety of annuities give buyers flexibility to pick one that fits their situation, it also makes buyers more dependent on the skill and training of their agent or financial advisor, hence the concern to strengthen suitability and training requirements.
Annuities require a greater level of sophistication and education by the consumer than other insurance products they might be familiar with. Many people do not understand some of the basic features of annuities, and particularly deferred annuities. Most deferred annuities are back-end loaded, which means that they contain surrender charges. These charges are imposed if the money is withdrawn, and can be substantial. They usually decrease over time but can last many years, even 20 or more in some cases. Customers who purchase a back-end loaded deferred annuity and then change their mind are essentially locked in—they cannot get their money out without paying a surrender charge. The consumer may believe that they are getting a better return on an annuity, for instance, versus a certificate of deposit. What they may not understand is that while the early surrender on a CD may result in a subtraction from the interest, early surrender of a deferred annuity may cause a deduction from the principal.
Seniors sometimes are persuaded invest their entire life savings in these types of products, leaving them with no liquid assets or income for years. The upfront premium monies invested are unavailable for many years and the withdrawal of funds from annuities frequently involves the payment of large penalties. Interestingly, although abuses still occur, complaints about annuities have fallen. The NAIC has yet to tackle the problem of abuses in the broader life insurance industry, however, where more and more complex products are being marketed to consumers who do not fully understand the products and risks involved.
Recent amendments to the bill deleted a specific disclosure form and product comparison form that were different than the NAIC Model and required significantly more information be provided to the consumer about the nature of the producer’s relationship with the consumer and the nature and amount of compensation to be received by the producer as a result of a recommendation or sale of an annuity. The bill still describes information that must be provided to the consumer at or before a recommendation of an annuity, both orally and in writing. Proposed amendments include the NAIC disclosure form by reference, and require the disclosure form used to be “substantially similar” to that form.
Questions
- Is it possible to “avoid or reasonably manage” a material conflict of interest created by the receipt of compensation by a producer resulting from the recommendation or sale of an annuity? In the NAIC Model Act compensation is not considered a material conflict of interest. Should compensation be removed from qualifying as a material conflict of interest? See arguments in opposition, below.
- Possible amendment: on page 8, line 24, ADD: “material conflict of interest” does not include cash compensation or non-cash compensation.”
- The NAIC producer disclosure form being incorporated into the bill by reference does not require the producer to disclose an estimate of the amount of compensation the producer will receive as a result of the recommendation or sale of an annuity. The required disclosures currently in the bill do require such information to be disclosed. Should this requirement be stricken from the bill?
- Possible amendment: on page 21, DELETE lines 31-33.
- Should a life agent producer who also holds a broker dealer license be able to avail themselves of the safe harbor and choose which “comparable” standards apply to the recommendation or sale of an annuity? Shouldn’t they be held to the highest standard? If the annuity does not qualify as a security, are securities laws and standards the appropriate standards to apply?
- Possible amendment: on page 32, line 31, after “and sales of annuities” ADD “that also qualify as securities”
Suggested Amendments
- On page 5, DELETE lines 13-23 after (b) (definition of compensation (1 and 2))
- On page 5, line 13 ADD (1) “Cash compensation” means any discount, concession, fee, service fee, commission, sales charges, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from a consumer.
- On page 5, line 24, CHANGE (3) to (2)
- On page 8, line 25 ADD (j) “Non-cash compensation” means any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support and retirement benefits
- On page 8, line 26, CHANGE (j) to (k)
- On page 9, line 8, CHANGE (k) to (l)
- On page 9, line 13, CHANGE (l) to (m)
- On page 9, line 23, CHANGE (m) to (n)
- On page 10, line 1, CHANGE (n) to (o)
- On page 13, lines 7-9 Amend to read the following “The requirements under paragraph (1) include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance related features”
- On page 15, REPLACE lines 9-17 with the following: Before or at the time of recommendation or sale of an annuity, the producer shall prominently disclose all of the following information to the consumer on a form substantially similar to the “Insurance Agent (Producer) Disclosure for Annuities” form in Appendix A of the 2020 National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation.
- On page 21, line 14, ADD a new (v) “Other life and annuity products, as specified” and renumber subsequent subparagraphs.
- On page 28, lines 21-22 DELETE this subparagraph (drafting error)
- On page 30, lines 33-36 AMEND as follows: after “identify and address” ”suspicious consumer refusals to provide complete consumer profile information.”
- On page 39, amend to correct operational issue involving the deletion and replacement of existing code sections so that there is no gap in statutory operation (per Legislative Counsel)
Related/Prior Legislation
AB 689 (Blumenfield, Ch. 295, Stat. or 2011) enacted the 2010 NAIC Suitability in Annuity Transactions Model Regulation in California.
SB 927 (Archuleta, 2022) would have extended the “free look” period for life insurance policies and annuities to at least 30 days; provided that a policy owner, in deciding whether to cancel a life insurance policy or annuity is entitled to rely on any information received regardless of whether the information was received before or after the policy was delivered to the policy owner; allowed an insurance agent to receive compensation incentives related to the sale of a life insurance policy or annuity if the amount did not influence the recommendation to the consumer; required several new disclosures to the consumer regarding agent compensation, potential tax benefits, all fees and charges under the policy, and crediting rates and surrender charges, as specified.
ARGUMENTS IN SUPPORT:
The Insurance Commissioner has sponsored SB 263 because despite the numerous improvements made by the NAIC Model as adopted in California in 2011 setting forth standards and procedures for insurance producers recommending annuity products to consumers, unsuitable annuity sales have continued to occur. The NAIC updated Model #275 in 2020 to once again attempt to improve the standards of conduct governing the sale of annuity products. The California Department of Insurance continues to see numerous complaints and cases which have the ability to ruin consumers’ lives. For example, a recent case involved a 94-year-old consumer who was persuaded to liquidate their existing annuity policy and use their inheritance to buy new policies which were later deemed unsuitable, causing a monetary loss of $220,000 and consequences to their income tax and social security benefits. Another recent example involved an agent using high-pressure tactics, manipulation, misrepresentation, fraud, and false impersonation to induce the consumer to use their savings and move them out of their existing annuity contracts and investments in order to sell them new annuities. This scheme generated commissions of approximately $500,000 for the agent. The updates contained in this bill notably require all recommendations by agents and insurers to be in the best interest of the consumer and the producer may not place their financial interest ahead of the consumers’ interest in making a recommendation. I believe that California can and should do more to stop financial abuse of our seniors and other citizens.
The California Commission on Aging supports SB 263 because they stand in support of legislation which protects older adults’ financial futures and ensures insurance producers are acting in the best interest of consumers. Financial instruments are often complex with many requiring expertise in finance just to understand what they do. Most consumers do not have the specified knowledge to understand the complexities of annuities. They must rely on those who are selling them the product to act in their best interest. Thus, it is necessary that those who are entrusted with providing guidance on a person’s financial future are legally obligated to do so in a manner that puts the consumer first
ARGUMENTS IN OPPOSITION:
The Independent Insurance Agents and Brokers of California (IIABCal) and National Association of Insurance and Financial Advisors (NAIFA) oppose the bill unless it is amended to more closely reflect provisions in the NAIC Annuity Suitability Model that impose on insurance agents certain obligations and certain disclosures prior to the sale of an annuity to a consumer. The Model Act requires the producer to identify and manage any conflicts of interest, including material conflict related to an ownership interest. The most recent amendments to SB 263 requires the producer to avoid or reasonably manage material conflicts of interest. Both SB 263 and the Model Act define a conflict of interest as: “a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.” However, the Model Act further states that “Material conflict of interest” does not include cash compensation or non-cash compensation. Without the modifying language indicating that compensation paid to the producer is not a material conflict of interest, every sale of an annuity by a producer appointed by an insurer would qualify as a material conflict of interest and thus require the producer to somehow deal with that conflict. Under the Model Act, the mere payment of compensation would not be a material conflict of interest and it would not be a material conflict of interest because the Model already requires the producer to disclose that he or she is an appointed agent of the insurer, being paid compensation by the insurer, and whether that compensation is a commission as part of premium or other remuneration received by the insurer. As such, the intent of the Model Act was that a material conflict of interest be something other than compensation, such as a significant ownership interest in the insurer whose product the producer is recommending. The producer is already obligated to disclose such compensation and the agency relationship with the insurer as part of the other provisions in SB 263.
SUPPORT:
California Advocates for Nursing Home Reform (March 7, 2023 version)
California Commission on Aging
California Department of Insurance (sponsor)
Legal Assistance for Seniors (March 7, 2023 version)
403bwise.org (March 7, 2023 version)
OPPOSITION:
Insurance Retirement Institute
OPPOSE UNLESS AMENDED:
American Council of Life Insurers
Association of California Life and Health Insurance Companies
Center for Economic Justice
Consumer Federation of America
Consumer Federation of California
Federation of Americans for Consumer Choice
Finseca
Independent Insurance Agents and Brokers of California
Life Insurance Consumer Advocacy Center
LPL Financial
National Association of Insurance and Financial Advisors
United Policyholders
-- END --
Bill Author
Bill Co-Author(s):