82R6815 AJA-F
By: Eiland H.B. No. 2277
A BILL TO BE ENTITLED
AN ACT
relating to the sale, exchange, or replacement of life insurance
and annuity contracts.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Section 541.058(b), Insurance Code, is amended
to read as follows:
(b) It is not a rebate or discrimination prohibited by
Section 541.056(a) or 541.057:
(1) for a life insurance or life annuity contract, to
pay a bonus to a policyholder or otherwise abate the policyholder's
premiums in whole or in part out of surplus accumulated from
nonparticipating insurance policies if the bonus or abatement:
(A) is fair and equitable to policyholders; and
(B) is in the best interests of the insurer and
its policyholders;
(2) for a life insurance policy issued on the
industrial debit plan, to make to a policyholder who has
continuously for a specified period made premium payments directly
to the insurer's office an allowance in an amount that fairly
represents the saving in collection expenses;
(3) for a group insurance policy, to readjust the rate
of premium based on the loss or expense experience under the policy
at the end of a policy year if the adjustment is retroactive for
only that policy year;
(4) for a life annuity contract, to waive surrender
charges under the contract when the contract holder exchanges that
contract for another annuity contract issued by the same insurer or
an affiliate of the same insurer that is part of the same holding
company group if:
(A) the waiver and the exchange are fully,
fairly, and accurately explained to the contract holder in a manner
that is not deceptive or misleading; and
(B) the contract holder is given credit for the
time that the previous contract was held when determining any
surrender charges under the new contract;
(5) in connection with an accident and health
insurance policy, to provide to policy or certificate holders, in
addition to benefits under the terms of the insurance contract,
health-related services or health-related information, or to
disclose the availability of those additional services and
information to prospective policy or certificate holders; or
(6) in connection with a health maintenance
organization evidence of coverage, to provide to enrollees, in
addition to benefits under the evidence of coverage, health-related
services or health-related information, or to disclose the
availability of those additional services and information to
prospective enrollees or contract holders.
SECTION 2. Section 1114.004(a), Insurance Code, is amended
to read as follows:
(a) Except as otherwise specifically provided by this
chapter, this chapter does not apply to transactions involving:
(1) credit life insurance;
(2) group life insurance or group annuities for which
there is no direct solicitation of individuals by an agent;
(3) [group] life insurance and annuities used to fund
prepaid funeral benefits contracts, as defined by Chapter 154,
Finance Code;
(4) an application to:
(A) exercise a contractual change or a conversion
privilege made to the insurer that issued the existing policy or
contract;
(B) replace an existing policy or contract by the
insurer that issued the existing policy or contract under a program
filed with and approved by the commissioner; or
(C) exercise a term conversion privilege among
corporate affiliates;
(5) life insurance proposed to replace life insurance
under a binding or conditional receipt issued by the same insurer;
(6) a policy or contract used to fund:
(A) an employee pension benefit plan or employee
welfare benefit plan that is covered by the Employee Retirement
Income Security Act of 1974 (29 U.S.C. Section 1001 et seq.);
(B) a plan described by Section 401(a), 401(k),
or 403(b), Internal Revenue Code of 1986, if established or
maintained by an employer;
(C) a government or church plan, as defined by
Section 414, Internal Revenue Code of 1986, a government or church
welfare benefit plan, or a deferred compensation plan of a state or
local government or tax exempt organization described under Section
457, Internal Revenue Code of 1986; or
(D) a nonqualified deferred compensation
arrangement established or maintained by an employer or plan
sponsor;
(7) new coverage provided under a life insurance
policy or contract if the cost is borne wholly by the insured's
employer or by an association of which the insured is a member;
(8) an existing life insurance policy that is a
nonconvertible term life insurance policy scheduled to expire in
five years or less and that cannot be renewed;
(9) immediate annuities purchased with proceeds from
an existing contract; or
(10) structured settlements.
SECTION 3. Subchapter B, Chapter 1114, Insurance Code, is
amended by adding Section 1114.057 to read as follows:
Sec. 1114.057. DISCLOSURE OF AVAILABILITY OF WAIVER OF
SURRENDER CHARGES. An insurer that offers to waive surrender
charges as described by Section 541.058(b)(4) shall provide
reasonable notice of that offer to the insurer's prospective or
current contract holders. The notice may be provided by any
available means, including a disclosure document or by display on a
link that is prominently placed on the insurer's Internet website.
SECTION 4. Section 1115.001, Insurance Code, is amended to
read as follows:
Sec. 1115.001. PURPOSE. The purpose of this chapter is to
establish standards and procedures regarding recommendations made
to a consumer that result in a transaction involving annuity
products, and to require insurers to establish a system to
supervise those recommendations, to ensure that the insurance needs
and financial objectives of the consumer as of the time of the
transaction are appropriately addressed.
SECTION 5. Section 1115.002, Insurance Code, is amended by
amending Subdivisions (2), (3), and (4) and adding Subdivisions
(2-a), (5), and (6) to read as follows:
(2) "Annuity" means an [a fixed, variable, or modified
guaranteed] annuity that is an insurance product under the laws of
this state that is individually solicited, whether the product is
classified as an individual annuity or group annuity.
(2-a) "Continuing education provider" means a person
authorized to offer continuing education courses under Chapter
4004.
(3) "Insurer" means a [an insurance] company
authorized to engage in the business of life insurance and
annuities in this state.
(4) "Recommendation" means advice provided by an
agent, or an insurer if no agent is involved, to an individual
consumer that results in a purchase, [or] exchange, or replacement
of an annuity made in accordance with that advice.
(5) "Replacement" means a transaction in which a new
policy or contract is to be purchased and the proposing agent, or
the proposing insurer if an agent is not involved, knows or should
know that, by reason of the transaction, an existing policy or
contract has been or is to be:
(A) lapsed, forfeited, surrendered or partially
surrendered, assigned to the replacing insurer, or otherwise
terminated;
(B) converted to reduced paid-up insurance,
continued as extended term insurance, or otherwise reduced in value
by the use of nonforfeiture benefits or other policy values;
(C) amended so as to effect either a reduction in
benefits or in the term for which coverage would otherwise remain in
force or for which benefits would be paid;
(D) reissued with any reduction in cash value; or
(E) used in a financed purchase.
(6) "Suitability information" means information that
is reasonably appropriate to determine the suitability of a
recommendation, including the following:
(A) age;
(B) annual income;
(C) financial situation and needs, including the
financial resources used for the funding of the annuity;
(D) financial experience;
(E) financial objectives;
(F) intended use of the annuity;
(G) financial time horizon;
(H) existing assets, including investment and
life insurance holdings;
(I) liquidity needs;
(J) liquid net worth;
(K) risk tolerance; and
(L) tax status.
SECTION 6. Section 1115.003, Insurance Code, is amended to
read as follows:
Sec. 1115.003. APPLICABILITY; EXEMPTIONS. (a) This
chapter applies to any recommendation to purchase, replace, or
exchange an annuity that:
(1) is made to a consumer by an agent, or an insurer if
an agent is not involved; and
(2) results in the recommended purchase, replacement,
or exchange.
(b) Unless otherwise specifically included, this chapter
does not apply to transactions [recommendations] involving:
(1) direct response solicitations if there is no
recommendation based on information collected from the consumer
under this chapter; or
(2) contracts used to fund:
(A) an employee pension benefit plan or employee
welfare benefit plan covered by the Employee Retirement Income
Security Act of 1974 (29 U.S.C. Section 1001 et seq.);
(B) a plan described by Section 401(a), 401(k),
403(b), 408(k), or 408(p), Internal Revenue Code of 1986, if
established or maintained by an employer;
(C) a government or church plan, as defined by
Section 414, Internal Revenue Code of 1986, a government or church
welfare benefit plan, or a deferred compensation plan of a state or
local government or tax exempt organization described under Section
457, Internal Revenue Code of 1986;
(D) a nonqualified deferred compensation
arrangement established or maintained by an employer or plan
sponsor;
(E) settlements of or assumptions of liabilities
associated with personal injury litigation or any dispute or claim
resolution process; or
(F) prepaid funeral benefits contracts, as
defined by Chapter 154, Finance Code.
SECTION 7. Section 1115.051, Insurance Code, is amended to
read as follows:
Sec. 1115.051. SUITABILITY OF ANNUITY PRODUCT REQUIRED.
(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 agent, or the
insurer if an agent is not involved, must have a reasonable basis to
believe that:
(1) the recommendation is suitable for the consumer on
the basis of the facts disclosed by the consumer as to the
consumer's investments and other insurance products and as to the
consumer's financial situation and needs, including the consumer's
suitability information;
(2) the consumer has been reasonably informed of
various features of the annuity, such as the potential surrender
period and the surrender charge, any 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;
(3) the consumer would benefit from certain features
of the annuity, such as tax-deferred growth, annuitization, or a
death or living benefit;
(4) the particular annuity as a whole, the underlying
subaccounts to which funds are allocated at the time of the purchase
or exchange of the annuity, and any riders or similar product
enhancements are suitable, and, in the case of an exchange or
replacement, the transaction as a whole is suitable, for the
particular consumer based on the consumer's suitability
information; and
(5) in the case of an exchange or replacement of an
annuity, the exchange or replacement is suitable, including taking
into consideration whether the consumer:
(A) 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) would benefit from product enhancements and
improvements; and
(C) has had another annuity exchange or
replacement, and in particular, an exchange or replacement in the
preceding 36 months.
(b) Before the execution of a purchase, exchange, or
replacement of an annuity resulting from a recommendation, an
agent, or an insurer if an agent is not involved, shall make
reasonable efforts to obtain the consumer's suitability
information.
(c) Except as permitted by Subsection (d), an insurer may
not issue an annuity recommended to a consumer unless the insurer
has a reasonable basis to believe the annuity is suitable based on
the consumer's suitability information.
(d) Subject to Subsection (e), an agent or insurer does not
have any obligation to a consumer related to an annuity transaction
if:
(1) the consumer refuses to provide suitability
information requested by the agent or insurer;
(2) the agent or insurer does not make a
recommendation;
(3) the agent or insurer makes a recommendation later
found to have been prepared based on inaccurate material
information provided by the consumer; or
(4) the consumer decides to enter into a transaction
that is not based on a recommendation of the agent or insurer.
(e) An insurer's issuance of an annuity under circumstances
described by Subsection (d) must be reasonable under all
circumstances actually known to the insurer at the time the annuity
is issued.
(f) An agent, or an insurer if an agent is not involved,
shall at the time of sale of an annuity:
(1) make a record of any recommendation made by the
agent or insurer that is subject to Subsection (a);
(2) obtain a customer-signed statement documenting
the customer's refusal, if any, to provide suitability information;
and
(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 agent's or insurer's recommendation. [Before the execution of a
purchase or exchange of an annuity resulting from a recommendation,
an agent, or the insurer if an agent is not involved, must make
reasonable efforts to obtain:
[(1) information from the consumer concerning:
[(A) the consumer's financial status;
[(B) the consumer's tax status; and
[(C) the consumer's investment objectives; and
[(2) other relevant information used or considered to
be reasonable by the agent or that insurer in making
recommendations to consumers.
[(b) In a recommendation to a consumer regarding the
purchase of an annuity or the exchange of an annuity that results in
another insurance transaction or series of insurance transactions,
an agent or the insurer, if an agent is not involved, has reasonable
grounds for believing that the recommendation is suitable for that
consumer based on the facts disclosed by the consumer regarding the
consumer's:
[(1) investments and other insurance products; and
[(2) financial situation and needs.
[(c) An agent, or an insurer if an agent is not involved, has
no obligation to a consumer related to a recommendation if the
consumer:
[(1) refuses to provide relevant information
requested by the agent or insurer;
[(2) fails to provide complete or accurate information
on the request of the agent or insurer; or
[(3) decides to enter into a transaction that is not
based on a recommendation of the agent or insurer.
[(d) An agent's or insurer's recommendation subject to
Subsection (a) must be reasonable under all the circumstances
actually known to the agent or insurer at the time of the
recommendation.]
SECTION 8. Section 1115.052, Insurance Code, is amended to
read as follows:
Sec. 1115.052. SUPERVISION [COMPLIANCE] SYSTEM. (a) Each
insurer shall establish supervision [operate a system,] that is
reasonably designed to achieve the insurer's and the insurer's
agents' compliance with this chapter[, to supervise
recommendations].
(b) An insurer may comply with Subsection (a) [by complying
with Subsections (c)-(e) or] by establishing and maintaining the
insurer's own supervision [compliance] system under which, at a
minimum, the insurer [that complies with Subsection (c). Each
agent and independent agency shall adopt an insurer's compliance
system or shall establish and maintain such a system.
[(c) A compliance system established under Subsection
(b) must include]:
(1) maintains reasonable procedures to inform the
insurer's agents of the requirements of this chapter and
incorporates the requirements of this chapter into relevant agent
training manuals [maintenance of written procedures]; [and]
(2) establishes standards for agent product training
and maintains reasonable procedures to require the insurer's agents
to comply with the requirements of Section 1115.056;
(3) provides product-specific training and training
materials that explain all material features of the insurer's
annuity products to the insurer's agents;
(4) maintains procedures to review each
recommendation electronically, physically, or otherwise before the
issuance of an annuity that:
(A) are designed to ensure that there is a
reasonable basis to determine that a recommendation is suitable;
and
(B) may:
(i) include the application of a screening
system to identify selected transactions for additional review; and
(ii) be designed to require additional
review only of those transactions identified for additional review
by the selection criteria;
(5) maintains reasonable procedures, such as
confirmation of consumer suitability information, systematic
customer surveys, interviews, confirmation letters, and programs
of internal monitoring, to detect recommendations that are not
suitable, which may involve applying sampling procedures or
confirming suitability information after the issuance or delivery
of the annuity; and
(6) annually provides a report to the insurer's 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 any corrective action
taken or recommended [periodic reviews of the insurer's or agent's
records in a manner reasonably designed to assist in detecting and
preventing violations of this chapter].
(c) This subsection does not prohibit an insurer from
contracting for the performance of a function, including
maintenance of procedures, required by Subsection (b). An
insurer's supervision system under Subsection (b) must include the
supervision of contractual performance under this subsection that
includes, at a minimum [(d) An agent or insurer may contract with a
third party, including an agent or independent agency, to establish
and maintain a compliance system with respect to agents under
contract with or employed by the third party. The agent or insurer
shall make reasonable inquiries sufficient to ensure that the third
party is performing the functions required under Subsection (a),
and shall take any action reasonable under the circumstances to
enforce the contractual obligation to perform those functions. An
agent or insurer may comply with the obligation to make reasonable
inquiries by]:
(1) annually obtaining certification that complies
with Section 1115.053 from a senior manager who represents that the
contracted function is properly performed [of the third party that
the third party is performing the required functions]; and
(2) monitoring and, as appropriate, conducting audits
to ensure that the contracted function is properly performed
[periodically selecting third parties, based on reasonable
selection criteria, for a review to determine whether the third
parties are performing the required functions].
(d) [(e) An agent or insurer shall adopt procedures for
conducting a review under Subsection (d)(2) that are reasonable
under the circumstances. An insurer that contracts with a third
party under Subsection (d) and that complies with the requirements
to supervise under Subsection (d) is deemed to have complied with
the insurer's responsibilities under Subsection (b).
[(f)] An insurer[, agent, or independent agency] is not
required by this section to[:
[(1) review, or provide for review of, all
agent-solicited transactions; or
[(2)] include in the supervision [compliance] system
an agent's recommendations to consumers of products other than the
annuities offered by the insurer[, agent, or independent agency].
(e) An agent may not dissuade, or attempt to dissuade, a
consumer from:
(1) truthfully responding to an insurer's request for
confirmation or suitability information;
(2) filing a complaint; or
(3) cooperating with the investigation of a complaint.
SECTION 9. Section 1115.053, Insurance Code, is amended to
read as follows:
Sec. 1115.053. CERTIFICATION REQUIREMENTS. [(a) On
request by an insurer, an agent or independent agency that
contracts with an insurer under Section 1115.052(d) shall promptly
obtain a certification as described under Section 1115.052(d)(1) or
give a clear statement that it is unable to meet the certification
criteria.
[(b)] A person may not provide a certification under Section
1115.052(c)(1) [1115.052(d)(1)] unless the person:
(1) is a senior manager with responsibility for the
delegated functions; and
(2) has a reasonable basis for making the
certification.
SECTION 10. Section 1115.054, Insurance Code, is amended to
read as follows:
Sec. 1115.054. COMPLIANCE WITH CERTAIN NATIONAL STANDARDS.
(a) Subject to Subsection (c), sales made in compliance
[Compliance] with the conduct rules of the Financial Industry
Regulatory Authority (FINRA) relating to suitability and
supervision of annuity transactions, or the rules of another
national organization recognized by the commissioner, satisfy
[satisfies] the requirements of [under] this chapter. This section
applies to FINRA member broker-dealer sales of variable annuities
and fixed annuities if the suitability and supervision conduct
rules are similar to those applied to variable annuity sales [for
the recommendation of annuities registered under the Securities Act
of 1933 (15 U.S.C. Section 77a et seq.) or rules or regulations
adopted under that Act].
(b) This section does not affect or limit the commissioner's
ability to enforce or investigate under this chapter.
(c) Subsection (a) applies only if the insurer:
(1) monitors the FINRA member broker-dealer using
information collected in the normal course of the insurer's
business; and
(2) provides to the FINRA member broker-dealer
information and reports that are reasonably appropriate to assist
the broker-dealer to maintain the broker-dealer's supervision
system.
SECTION 11. Section 1115.056, Insurance Code, is amended to
read as follows:
Sec. 1115.056. AGENT TRAINING [EDUCATION] REQUIREMENTS.
(a) An agent may not solicit the sale of an annuity product unless
the agent has adequate knowledge of the product to recommend the
annuity and is in compliance with the insurer's standards for
product training. An agent may rely on insurer-provided,
product-specific training standards and materials to comply with
this subsection.
(b) An agent who engages in the sale of annuity products
must complete a one-time training course approved by the department
and provided by a continuing education provider.
(c) The training required by Subsection (b) must be of a
length sufficient to qualify for at least four continuing education
credits, as determined by the commissioner in accordance with
Chapter 4004 and any rules adopted under that chapter, but may be
longer. The training required by Subsection (b) may be used to
satisfy the continuing education requirements under Subchapters B
and E, Chapter 4004, and is not in addition to the continuing
education requirements in Section 4004.202.
(d) The training required by Subsection (b) must include
information on the following topics:
(1) the types of annuities and various classifications
of annuities;
(2) identification of the parties to an annuity;
(3) how fixed, variable, and indexed annuity contract
provisions affect consumers;
(4) the application of income taxation of qualified
and nonqualified annuities;
(5) the primary uses of annuities; and
(6) appropriate sales practices, replacement, and
disclosure requirements.
(e) A provider of a course intended to comply with
Subsection (b) must cover all topics listed in Subsection (d) and
may not present any marketing information, provide training on
sales techniques, or provide specific information about a
particular insurer's products. Additional topics may be offered in
conjunction with and in addition to the required topics.
(f) A provider of a course intended to comply with
Subsection (b) must register as a continuing education provider in
this state and comply with the rules and guidelines applicable to
agent continuing education courses provided by Chapter 4004.
(g) An annuity training course may be conducted and
completed by classroom or self-study methods in accordance with
Chapter 4004.
(h) A provider of annuity training under Subsection (b) must
comply with the reporting requirements and issue certificates of
completion in accordance with Chapter 4004.
(i) The satisfaction of the training requirements of
another state that are substantially similar to the provisions of
this section is considered to satisfy the training requirements of
this section.
(j) An insurer must verify that an agent has completed the
annuity training course required by this section before allowing
the agent to sell an annuity product for that insurer. An insurer
may satisfy the insurer's responsibility under this section by:
(1) obtaining a certificate of completion of the
training course or obtaining an appropriate report provided by the
department;
(2) using a department-sponsored database or vendor;
or
(3) using a reasonably reliable commercial database
vendor that has a reporting arrangement with approved insurance
education providers. [A resident agent that intends to sell,
solicit, or negotiate a contract for an annuity in this state or to
represent an insurer in relation to such an annuity must submit
evidence satisfactory to the department of completion of at least
four hours of training relating to annuities before soliciting
individual consumers for the purpose of selling annuities.
[(b) The training required under Subsection (a) may be used
to satisfy the continuing education requirements imposed under this
code and rules adopted under this code for issuance of a license
under this code.]
SECTION 12. Section 1115.101, Insurance Code, is amended to
read as follows:
Sec. 1115.101. MITIGATION. An insurer is responsible for
compliance with this chapter. If a violation occurs because of the
action or inaction of the insurer or the insurer's agent, the [The]
commissioner may:
(1) order:
(A) the [(1) an] insurer to take reasonable
appropriate corrective action for any consumer harmed by the
insurer or by the insurer's agent because of a violation of this
chapter; or
(B) a general agency, independent agency, or the
[(2) an] agent to take reasonably appropriate corrective action
for any consumer harmed by the agent's violation of this chapter;
and
(2) impose appropriate sanctions as provided by
Section 1115.102 [(3) a managing general agent or independent
agency that employs or contracts with an agent to sell, or solicit
the sale of, annuities to consumers to take reasonably appropriate
corrective action for any consumer harmed by the agent's violation
of this chapter].
SECTION 13. Section 1115.102(b), Insurance Code, is amended
to read as follows:
(b) The commissioner shall [may] reduce or eliminate a
sanction for a violation of this chapter otherwise applicable if:
(1) corrective action for the consumer was taken
promptly by the agent or insurer after a violation was discovered;
or
(2) the violation was not part of a pattern or
practice.
SECTION 14. (a) Section 541.058(b), Insurance Code, as
amended by this Act, applies only to an exchange of life annuity
contracts on or after the effective date of this Act. An exchange
of life annuity contracts before the effective date of this Act is
governed by the law in effect immediately before the effective date
of this Act, and that law is continued in effect for that purpose.
(b) Section 1114.004(a), Insurance Code, as amended by this
Act, applies only to a transaction involving a life insurance or
annuity policy or contract occurring on or after the effective date
of this Act. A transaction involving a policy or contract occurring
before the effective date of this Act is governed by the law in
effect immediately before the effective date of this Act, and that
law is continued in effect for that purpose.
(c) Except as provided by this section, Chapter 1115,
Insurance Code, as amended by this Act, applies only to a
recommendation to purchase, exchange, or replace an annuity
contract made on or after June 1, 2012, and any transaction arising
from that recommendation. A recommendation made before June 1,
2012, and a transaction arising from that recommendation are
governed by the law in effect immediately before the effective date
of this Act, and that law is continued in effect for that purpose.
(d) An insurance agent who becomes licensed under Chapter
4054, Insurance Code, on or after the effective date of this Act is
subject to Section 1115.056, Insurance Code, as amended by this
Act. An agent licensed under Chapter 4054, Insurance Code, before
the effective date of this Act is not subject to Section 1115.056,
Insurance Code, as amended by this Act, before March 1, 2012. On
and after the effective date of this Act and before March 1, 2012,
an insurance agent licensed under Chapter 4054, Insurance Code,
before the effective date of this Act is subject to Section
1115.056, Insurance Code, as that section existed immediately
before the effective date of this Act, and that law is continued in
effect for that purpose.
SECTION 15. This Act takes effect September 1, 2011.