On Friday, September 4, 2009, the Suitability of Annuity Sales (A) Working Group forwarded a proposed revision to the Suitability in Annuity Transactions Model Regulation prepared by a subgroup consisting of Jim Mumford, Rosanne Mead and Fred Nepple. This proposed revision moves away from the more detailed prescriptive requirements of the July 2, 2009 draft that had been criticized as inflexible and going beyond the suitability requirements of FINRA Rule 2821.

The subgroup's September 4, 2009 draft incorporates much of the suitability requirements of FINRA Rule 2821. In particular, the September 4th draft:

  • Requires the same "suitability information" as FINRA Rule 2821(b)(2), except that it also requires information on the consumer's financial situation and needs, including the source of funding of the annuity.
  • Imposes on the producer, or on the insurer if no producer is involved, an obligation to have reasonable grounds for believing that the recommendation is suitable.
  • Requires the insurer to establish a supervision system over its distribution system that is reasonably designed to achieve compliance with the suitability requirements.
  • In the case of a recommended annuity transaction, allows the insurer to issue the annuity only if "qualified staff" review the recommendation and approve it.
  • Allows the insurer to limit the qualified staff review to selected transactions based upon a system of selection criteria reasonably designed to prevent unsuitable recommendations.
  • Requires the insurer to maintain procedures for its qualified staff (or an independent qualified firm) to examine and report on the insurer's producers that is designed to assist in detecting and preventing suitability violations.
  • Requires the insurer to annually provide a report to senior management on the effectiveness of the insurer's supervision system, the exceptions found, and corrective action taken or recommended, if any.

The September 4th draft continues to allow an insurer to contract with third parties in satisfying the requirements to maintain a supervision system. It, however, makes clear that the insurer remains responsible and liable for compliance. In addition, the subgroup's draft grants insurers a safe harbor from the supervision system requirements for all annuity sales that a FINRA member subjects to its supervision as long as the insurer monitors the FINRA member and reports to the FINRA member information to assist the FINRA member to maintain its supervision system.

The subgroup's draft also requires insurers to establish training for its producers. The draft adopts an outline for the training requirement based on California's annuity training requirement.

The September 4th draft will be discussed at the Suitability of Annuity Sales (A) Working Group's September 21st meeting. Comments are due no later than September 17, 2009.