Disclosure & Agent Responsibilities


Florida's Senior Consumer Law (con’d)





Agents, insurance agencies and issuing companies must put in place systems to assure agents make suitable recommendations and comply with this law.  At a minimum, this requires a set of written procedures and periodic audits to assure compliance.  Often, issuing companies will contract with third parties — such as managing agents or insurance agencies — to market their annuity products.   Issuers can also rely on these third parties to implement appropriate supervisory systems on their behalf to assure that agents under the third party's control follow the law when selling the issuer's products.   When issuing companies rely on third parties to fulfill this compliance role, the issuing company must make adequate inquiries into the third party's supervisory efforts and take whatever actions are necessary to assure that the third party is adequately meeting its compliance function.  Issuing companies may meet this obligation by periodically auditing third parties who represent the company, or obtaining an annual statement from the senior manager of the third party that the third party is continuing to fulfill its supervisory role.  When requested by the issuing company, managers of third parties must promptly provide a certification of continued compliance (or statement of non-compliance, if that is the case).  Industry groups have formed voluntary certification systems for third party supervisors.  Issuing companies and managing agents are only required to monitor agent compliance with the suitability requirements for products offered by that company or agency — they have no supervisory responsibility for products offered by other companies or agencies. 


The law mandates that certain documents be retained for at least five years.  The law simply states that issuing companies, agents, and third parties retain "records of the information collected from the senior consumer and other information used in making the recommendations" -- this would include annuity applications, questionnaires, illustrations, customer correspondence, account review documents and account statements


The prior law was vague as to who — agents, companies or third parties -- must retain supporting documentation.  The new law places the responsibility on all three. The annuity company can offer (but is not required) to maintain these records on behalf of its agents.  Original records may be retained, or the records can be kept in any other media (photographic, digital, etc.)  so long as a legible reproduction of the original is maintained.






One particularly important amendment to the new suitability law gives the Department of Financial Services (which regulates agents) and the Office of Insurance Regulation (which regulates insurers) the power to correct, or "mitigate" unsuitable annuity purchases.  The Office of Insurance Regulation can force an issuing company to rescind inappropriate contracts -- in effect, canceling the contract and refunding the client's money.  The amount of the refund is the greater of the client's investment or the accumulated value in the contract.  The Department of Financial Services may take "any reasonably appropriate corrective action" to undo harm to a senior client by an agent's recommendations.  The law also allows regulators to waive penalties for companies and agents that take prompt actions to correct harm caused by unsuitable recommendations.  (The offer to waive penalties is an incentive to get companies and agents to "do the right thing" to make the client whole.)


This new power to rescind annuity contracts is quite broad.  Other regulators in the state may pursue rescissions of various contract through the court system, but the unilateral power of the OIR to rescind annuity contracts is unprecedented in Florida.      


Agents or insurers who fail to meet the requirements of this law are subject to penalties and enforcement action by the Department of Financial Services or Office of Insurance Regulation.  This law does not give clients or others the right to sue privately for violations of these rules — although clients may pursue other claims such as breach of fiduciary trust or negligence in private, civil legal proceedings. 


The updated law includes a new provision to protect issuing companies from actions taken by unrelated, unauthorized parties:


“Nothing in this section shall subject an insurer to criminal or civil liability for the acts of independent individuals not affiliated with that insurer for selling its products, when such sales are made in a way not authorized by the insurer.”





Generally speaking the new disclosure requirements apply to the sale of annuities to individual, senior customers (age 65 or older). The law specifically exempts certain transactions from these requirements:


¨ sales resulting from direct mail solicitation in which no recommendation is made by the agent, or

¨ contracts sold to an employer's qualified retirement plan  (plans covered by ERISA, 401(k) plans, etc.), tax-sheltered annuities sold to non-profit organizations and church plans (403(b) plans), or government-provided retirement plans (457 plans), and

¨ sales to employer-provided non-qualified deferred compensation plans.


Note that annuities sold to Individual Retirement Accounts must follow the suitability requirements for that individual -- if the individual is age 65 or older.  




FINRA Exception


One odd legislative note about the updated law:  The prior state statute carved out an exception to the suitability rules for sales of variable annuities by agents who were affiliated with broker-dealers regulated by the NASD.  All agents selling variable annuities needed to be registered as a representative of a broker-dealer that belonged to the NASD — so this exception effectively put sales of all variable annuities outside the scope of this state law.  The premise for that exception was that the NASD had its own suitability requirements, and the state was simply deferring to the NASD's requirements for the sale of variable annuities. 


In the legislature's infinite wisdom, when they updated the language in 2008 (from NASD to FINRA), they extended this exception to cover the sale of any annuity (fixed or variable) by a FINRA affiliated agent. While FINRA (NASD's successor) has suitability rules for the sale of variable annuities, it has no jurisdiction over fixed annuities (including indexed annuities).  This leaves a possible loophole for the sale of fixed annuities by FINRA affiliated agents.   It is possible to read the new law in such a way as to exempt any FINRA affiliated agents from compliance with this law:


“Any person who is registered with a member of the Financial Industry Regulatory Authority, who is required to make a suitability determination, and who makes and documents such determination is deemed to satisfy the requirements under this section for the recommendation of annuities. “


The key phrase is: "who is required to make a suitability determination".  FINRA representatives are, generally speaking, prohibited from making unsuitable recommendations.  Is that general principle the same as  making a "suitability determination"?  If it is, then FINRA-affiliated reps need not follow the new state suitability rules when selling any type of annuity.  If one argues that FINRA has no jurisdiction over fixed annuities and therefore it cannot require a suitability determination for sales of fixed annuities — this exception then applies only to variable annuities, and state law applies to the sale of fixed annuities at FINRA institutions. (This was the original law's language and probably the legislature's intent when it updated the language.)   It is interesting to note, however, that the title of this exception was changed too — from "Application to Variable Annuities" to "Application to Annuities" — so perhaps the legislature intended to expand this exemption to the sale of all annuities by FINRA reps after all.  


State regulators jealously guard their jurisdiction.  Cautious agents affiliated with FINRA broker-dealers would be wise to follow the original law's intent — apply FINRA rules to the sales of variable annuities and comply with state suitability requirements when it comes to recommendations of fixed annuities (including EIAs) to senior consumers.




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