In June 2013, Florida Statute Section 627.4554 “Annuity Investments” was substantially revised to provide even greater clarity to the standards applicable to the sale of variable and fixed annuities. Some of the key revisions included expanding the definition of “suitability information,” and extensively defining the duties of insurers and agents in connection with the sale of annuity investments. Both of the pertinent statutory sections are copied below for reference.
The statutory definition of “suitability information”:
(g) “Suitability information” means information related to the consumer
which is reasonably appropriate to determine the suitability of a recommendation
made to the consumer, including the following:
1. Age;
2. Annual income;
3. Financial situation and needs, including the financial resources used
for funding the annuity;
4. Financial experience;
5. Financial objectives;
6. Intended use of the annuity;
7. Financial time horizon;
8. Existing assets, including investment and life insurance holdings;
9. Liquidity needs;
10. Liquid net worth;
11. Risk tolerance; and
12. Tax status.
The statute further extensively defines the duties of insurers and agents in connection with the sale of annuity investments:
(5) DUTIES OF INSURERS AND AGENTS.—
(a) When recommending the purchase or exchange of an annuity to a
consumer which results in an insurance transaction or series of insurance
transactions, the agent, or the insurer where no agent is involved, must have
reasonable grounds for believing that the recommendation is suitable for the
consumer, based on the consumer’s suitability information, and that there is
a reasonable basis to believe all of the following:
1. The consumer has been reasonably informed of various features of the
annuity, such as the potential surrender period and surrender charge;
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.
2. The consumer would benefit from certain features of the annuity, such
as tax-deferred growth, annuitization, or the death or living benefit.
3. The particular annuity as a whole, the underlying subaccounts to
which funds are allocated at the time of purchase or exchange of the annuity,
and riders and similar product enhancements, if any, are suitable; and, in the
case of an exchange or replacement, the transaction as a whole is suitable for
the particular consumer based on his or her suitability information.
4. In the case of an exchange or replacement of an annuity, the exchange
or replacement is suitable after considering 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 and similar product enhancements;
b. Would benefit from product enhancements and improvements; and
c. Has had another annuity exchange or replacement, including an
exchange or replacement within the preceding 36 months.
(b) Before executing a purchase, exchange, or replacement of an annuity
resulting from a recommendation, an insurer or its agent must make
reasonable efforts to obtain the consumer’s suitability information. The
information shall be collected on form DFS-H1-1980, which is hereby
incorporated by reference, and completed and signed by the applicant and
agent. Questions requesting this information must be presented in at least
12-point type and be sufficiently clear so as to be readily understandable by
both the agent and the consumer. A true and correct executed copy of the
form must be provided by the agent to the insurer, or to the person or entity
that has contracted with the insurer to perform this function as authorized
by this section, within 10 days after execution of the form, and shall be
provided to the consumer no later than the date of delivery of the contract or
contracts.
(c) Except as provided under paragraph (d), an insurer may not issue an
annuity recommended to a consumer unless there is a reasonable basis to
believe the annuity is suitable based on the consumer’s suitability information.
(d) An insurer’s issuance of an annuity must be reasonable based on all
the circumstances actually known to the insurer at the time the annuity is
issued. However, an insurer or its agent does not have an obligation to a
consumer related to an annuity transaction under paragraph (a) or
paragraph (c) if:
1. A recommendation has not been made;
2. A recommendation was made and is later found to have been based on
materially inaccurate information provided by the consumer;
3. A consumer refuses to provide relevant suitability information and the
annuity transaction is not recommended; or
4. A consumer decides to enter into an annuity transaction that is not
based on a recommendation of an insurer or its agent.
(e) At the time of sale, the agent or the agent’s representative must:
1. Make a record of any recommendation made to the consumer pursuant
to paragraph (a);
2. Obtain the consumer’s signed statement documenting his or her
refusal to provide suitability information, if applicable; and
3. Obtain the consumer’s signed statement acknowledging that an
annuity transaction is not recommended if he or she decides to enter into
an annuity transaction that is not based on the insurer’s or its agent’s
recommendation, if applicable.
(f) Before executing a replacement or exchange of an annuity contract
resulting from a recommendation, the agent must provide on form DFS-H1-
1981, which is hereby incorporated by reference, information that compares
the differences between the existing annuity contract and the annuity
contract being recommended in order to determine the suitability of the
recommendation and its benefit to the consumer. A true and correct executed
copy of this form must be provided by the agent to the insurer, or to the
person or entity that has contracted with the insurer to perform this function
as authorized by this section, within 10 days after execution of the form, and
must be provided to the consumer no later than the date of delivery of the
contract or contracts.
(g) An insurer shall establish a supervision system that is reasonably
designed to achieve the insurer’s and its agent’s compliance with this section.
1. Such system must include, but is not limited to:
a. Maintaining reasonable procedures to inform its agents of the
requirements of this section and incorporating those requirements into
relevant agent training manuals;
b. Establishing standards for agent product training;
c. Providing product-specific training and training materials that explain
all material features of its annuity products to its agents;
d. Maintaining procedures for the review of each recommendation before
issuance of an annuity which are designed to ensure that there is a
reasonable basis for determining that a recommendation is suitable. Such
review procedures may use a screening system for identifying selected
transactions for additional review and may be accomplished electronically or
through other means, including physical review. Such electronic or other
system may be designed to require additional review only of those
transactions identified for additional review using established selection
criteria;
e. Maintaining reasonable procedures to detect recommendations that
are not suitable, such as confirmation of consumer suitability information,
systematic customer surveys, consumer interviews, confirmation letters, and
internal monitoring programs. This sub-subparagraph does not prevent an
insurer from using sampling procedures or from confirming suitability
information after the issuance or delivery of the annuity; and
f. Annually providing a report to senior managers, including the senior
manager who is responsible for audit functions, which details a review, along
with appropriate testing, which is reasonably designed to determine the
effectiveness of the supervision system, the exceptions found, and corrective
action taken or recommended, if any.
2. An insurer is not required to include in its supervision system agent
recommendations to consumers of products other than the annuities offered
by the insurer.
3. An insurer may contract for performance of a function required under
subparagraph 1.
a. If an insurer contracts for the performance of a function, the insurer
must include the supervision of contractual performance as part of those
procedures listed in subparagraph 1. These include, but are not limited to:
(I) Monitoring and, as appropriate, conducting audits to ensure that the
contracted function is properly performed; and
(II) Annually obtaining a certification from a senior manager who has
responsibility for the contracted function that the manager has a reasonable
basis for representing that the function is being properly performed.
b. An insurer is responsible for taking appropriate corrective action and
may be subject to sanctions and penalties pursuant to subsection (7)
regardless of whether the insurer contracts for performance of a function
and regardless of the insurer’s compliance with sub-subparagraph a.
(h) An agent may not dissuade, or attempt to dissuade, a consumer from:
1. Truthfully responding to an insurer’s request for confirmation of
suitability information;
2. Filing a complaint; or
3. Cooperating with the investigation of a complaint.
(i) Sales made in compliance with FINRA requirements pertaining to the
suitability and supervision of annuity transactions satisfy the requirements
of this section. This applies to FINRA broker-dealer sales of variable
annuities and fixed annuities if the suitability and supervision is similar
to those applied to variable annuity sales. However, this paragraph does not
limit the ability of the office or the department to enforce, including
investigate, the provisions of this section. For this paragraph to apply, an
insurer must:
1. Monitor the FINRA member broker-dealer using information collected
in the normal course of an insurer’s business; and
2. Provide to the FINRA member broker-dealer information and reports
that are reasonably appropriate to assist the FINRA member broker-dealer
in maintaining its supervision system.