On July 2, 2009, the NAIC's Suitability of Annuity Sales (A) Working Group issued another draft of proposed revisions to its Suitability in Annuity Transactions Model Regulation. The July 2, 2009 draft incorporates revisions reflecting the Working Group's discussion with industry to gain a greater understanding of the different distribution channels for annuity products. This draft more closely models FINRA Rule 2821's suitability review and supervision requirements. Insurers may contract with third parties, including FINRA member broker dealers, to supervise annuity transactions. The July 2nd draft, however, makes clear that if an insurer contracts with a third party to perform the insurer's supervision function, the insurer remains responsible and liable for compliance and the insurer shall not issue an annuity recommended to a consumer unless the annuity is suitable.

The July 2nd draft continues the prior exemption from an insurer's obligation to perform a suitability review of annuity transactions for which a FINRA member broker dealer is responsible and the insurer has determined that the FINRA member broker dealer has a system of supervision that conforms to FINRA requirements for FINRA principal review. The July 2nd draft permits an insurer to use an automated system of review for suitability for all recommended annuity transactions through other distribution channels. The insurer, however, remains responsible for compliance with the suitability review requirements, including for any deficiency in the automated system.

In addition, the July 2nd draft clarifies the ongoing nature of insurers' requirements to monitor the distribution of its annuity products through insurance producers, insurance agencies and FINRA member broker dealers. It makes clear that insurers must establish a system that continuously monitors the sale of its annuity products that is reasonably designed to identify violations of the suitability requirement and failure to comply with the insurer's supervision system. Also, insurers must continuously collect and analyze relevant data and information, and evaluate the effectiveness of implemented supervision systems and procedures.

The July 2nd draft specifically addresses opt-outs by consumers to provide suitability information by imposing additional requirements on insurers, insurance producers and insurance agencies. Insurance producers and insurance agencies must not dissuade or attempt to dissuade a consumer from providing complete suitability information. In addition, prior to issuing an annuity product, insurers must interview each consumer failing to provide suitability information to verify that the consumer refused to provide the suitability information.

A number of provisions have been eliminated from the May 26th draft, including requirements that the insurer maintain a suitability supervisory organization that includes audit and special investigation units, and that the insurer's supervisory staff attempt to interview all customers who were either age 70 or over, or for whom the proposed transaction reasonably suggested that verification of the suitability information or the customer's understanding of product features was appropriate. The Working Group also eliminated other provisions of the May 26th draft, but specifically requested comment on alternative provisions. In particular, the July 2nd draft eliminated Section 13 on insurance producer product comparison, prohibiting reverse mortgages as a source of funding, and limiting producer compensation for unsolicited sales. Instead, the July 2nd draft asked interested parties to comment on whether:

  • A provision should be included that restricts or prohibits producer compensation for the sale of an annuity that is not recommended and when the producer does not obtain the consumer's suitability information.
  • Provisions should be included for funding by reverse mortgages and for comparison of features of financial products that are the source of funds with the features of the purchased annuity.

In addition, comments are being sought on whether:

  • The initial training requirements should include a "grandfather" exception, and if so, what standards should apply for the exception.
  • The training requirements are inconsistent with the Gramm-Leach-Bliley Act.

The Working Group has requested that comments on the latest draft be provided by August 7, 2009.