82R9754 AJA-F
By: Eiland H.B. No. 2278
A BILL TO BE ENTITLED
AN ACT
relating to the suitability of certain annuity transactions.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. 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 2. Section 1115.002, Insurance Code, is amended by
adding Subdivision (5) to read as follows:
(5) "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 3. Section 1115.003(a), Insurance Code, is amended
to read as follows:
(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 insurer; and
(2) results in the recommended purchase, replacement,
or exchange.
SECTION 4. Section 1115.051, Insurance Code, is amended to
read as follows:
Sec. 1115.051. SUITABILITY OF ANNUITY PRODUCT REQUIRED.
(a) 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:
(1) [(A)] the consumer's financial situation and needs
[status];
(2) [(B)] the consumer's investments [tax status]; and
(3) [(C)] the consumer's suitability information
[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:
(1) on the basis of [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
the consumer's [(2)] financial situation and needs, including the
consumer's suitability information, the recommendation is suitable
for the consumer;
(2) the consumer has been reasonably informed of the
various features of the annuity, such as the potential surrender
period and 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.
(c) 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.
(d) Except as permitted by Subsection (e), 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.
(e) [(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) the consumer refuses to provide relevant
information requested by the agent or insurer and the annuity
transaction is not recommended;
(2) the consumer received a recommendation that was
made and was later found to have been prepared based on materially
inaccurate information provided by the consumer; [fails to provide
complete or accurate information on the request of the agent or
insurer; or]
(3) the consumer decides to enter into a transaction
that is not based on a recommendation of the agent or insurer; or
(4) a recommendation is not made.
(f) [(d)] An agent's or insurer's recommendation subject to
Subsection (b) [(a)] must be reasonable under all the circumstances
actually known to the agent or insurer at the time of the
recommendation.
(g) An agent, or the responsible 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 this chapter;
(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.
(h) 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 5. Section 1115.052, Insurance Code, is amended to
read as follows:
Sec. 1115.052. SUPERVISION [COMPLIANCE] SYSTEM. (a) Each
insurer shall 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 compliance system 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 supervision [compliance] system established under
Subsection (a) [(b)] must [include]:
(1) include reasonable procedures to inform the
insurer's agents of the requirements of this chapter and
incorporate the requirements of this chapter into relevant agent
training manuals [maintenance of written procedures]; [and]
(2) establish standards for agent product training and
maintain reasonable procedures to require the insurer's agents to
comply with the requirements of Section 1115.056;
(3) provide product-specific training and training
materials that explain all material features of the insurer's
annuity products to the insurer's agents;
(4) maintain 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) maintain 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 provide 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 section does not prohibit an insurer from
contracting for the performance of a function, including
maintenance of procedures, required by Subsection (a). An insurer
is responsible for taking appropriate corrective action and may be
subject to sanctions and penalties under Section 1115.102
regardless of whether the insurer contracts for performance of a
function and regardless of the insurer's compliance with Subsection
(d).
(d) An insurer's supervision system under this section 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 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 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].
(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 insurer's supervision
[compliance] system an agent's recommendations to consumers of
products other than the annuities offered by the insurer[, agent,
or independent agency].
SECTION 6. Section 1115.054, Insurance Code, is amended by
amending Subsection (a) and adding Subsection (c) to read as
follows:
(a) Subject to Subsection (c), 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, satisfies the requirements of
[under] this chapter 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.
(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 7. 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 order:
(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;
(2) an agent to take reasonably appropriate corrective
action for any consumer harmed by the agent's violation of this
chapter; and
(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 8. Section 1115.053, Insurance Code, is repealed.
SECTION 9. 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 January 1, 2012, and
any transaction arising from that recommendation. A recommendation
made before January 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.
SECTION 10. This Act takes effect September 1, 2011.