The NAIC Suitability of Annuity Sales Working Group (the "Working Group") met twice during last week's NAIC Spring National Meeting in San Diego, Calif. The Working Group provided a revised draft of the Suitability Model Act (the "Model"), dated March 12, 2009, that, by its own admission, was more preliminary than the previous draft. The group's discussion focused on the following four issues:
(1) Whether the Ultimate Responsibility for the Suitability of a Sale Should Lie with the Producer or the Insurer
The Working Group appeared to reach a consensus, in which they believed that ultimate responsibility for the recommendation of a suitable annuity should be on the insurer, whether or not a producer was involved in the transaction. Section 6C of the revised draft reflects this concept by providing that "no insurer may issue an annuity...unless the annuity is suitable." The group noted that this provision in no way abdicated the producer's responsibility, where a producer is involved in the sale, to recommend only suitable annuities.
(2) What an Insurer's Monitoring and Supervisory Obligations Should be for Annuity Sales by Security Representatives' When Those Sales are Monitored by Broker-Dealers under FINRA
The Working Group did not reach a consensus on this issue, but did appear to agree that even if permitted to delegate supervision functions, an insurer may never delegate ultimate responsibility for a suitable sale. There was discussion regarding whether there should be a "presumption" of compliance with the Model when sales are made in compliance with FINRA standards. There was also discussion regarding whether the sale of fixed (or non-security) annuities sold by registered brokers should fall under any exception to the monitoring/supervisory requirements of insurers. Ultimately, the Working Group created a sub-group to analyze the issue.
(3) To What Extent There Should be Mandatory Training and Continuing Education Requirements for Producers (Generic and Product Specific) and to What Extent Companies Should be Required to Verify or Ensure That Producers have Received Such Training or Education
The discussion of this topic focused on three areas: (1) general suitability training and continuing education, (2) product specific training and continuing education, and (3) insurers' ability to verify or ensure either or both. The Working Group appeared to reach a consensus that general training and continuing education should be mandated on an industry-wide level and that insurers should be required to verify that producers have completed the training and continuing education. However, there was debate regarding what system insurers could use to complete verification. NIPR was suggested as a tool, as was forcing the industry to create, at its own cost, an industry-wide vendor for verification. As for product-specific training, the Working Group did not reach a consensus on the issue. Some members of the Working Group favored requiring product-specific training only, some favored requiring product-specific testing only (no training requirement), and some favored a training and testing requirement. Industry representatives strongly urged that mandatory product-specific training, and, in particular, testing, would be overly burdensome. Ultimately, the Working Group created a sub-group to further analyze the issue.
(4) Whether, and To What Extent, an Insurer Should be Allowed to "Contract Out" its Core Compliance Functions to an Entity Other Than a FINRA Broker-Dealer
The Working Group indicated that it considered an insurer's "core compliance functions" to include maintaining a suitability review system, conducting trending or sample analysis of unsuitable sales, supervising producers and verifying producer training. Some Working Group members opined that an organization like an independent marketing organization ("IMO"), whose core functions are marketing and sales, should not be a permissible entity for the insurer to contract out suitability compliance functions. Other Working Group members commented that a professional compliance vendor would be a permissible entity to contract out suitability compliance functions because it is not sales or marketing driven. Industry representatives commented that while many IMOs are marketing and sales focused, they can (and often do) have a separate compliance arm that would be capable of the core suitability compliance functions. Other industry representatives indicated that if the ultimate responsibility remains on the insurer to ensure suitability (as is contemplated under the draft), then the Model should not dictate how the insurer delegates the functions. Ultimately, the Working Group created a sub-group to analyze the issue and to become more educated on the different types of distributions systems currently in use.
The Working Group did not set definite dates for the meetings of the subgroups. However, the Working Group did commit to an interim in-person meeting before the Summer NAIC.