Senior Suitability



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, such as the Insurance Marketplace Standards Association (IMSA), 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 as quickly as possible.)


This new power to rescind annuity contracts is quite broad.  Other regulators in the state may pursue rescissions through the court system, but the unilateral power of the OIR to rescind 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 National Asssociation of Securities Dealers (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 2007, the NASD merged with the NYSE’s regulatory arm to create the Financial Industry Regulatory Authority (FINRA).


In the legislature's infinite wisdom, when they updated the language in 2008, they extended this exception to cover the sale of any annuity (fixed or variable) by a FINRA affiliated agent. While FINRA 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.


Summary of FINRA’s Suitability Requirements:


¨ FINRA rules apply to the purchase or exchange of deferred variable annuities only

¨ FINRA rules apply to the purchase or exchange by clients of any age

¨ Agents must document basic information (similar to that required by state law).

¨ Agents must obtain approval by a principal of their firm prior to executing the purchase or exchange

¨ Principals have 10 days to approve or deny the purchase or exchange

¨ Broker-dealer must train and supervise their registered representatives

¨ Broker-dealers must retain supporting documentation.



NAIC and Annuity Suitability


The National Association of Insurance Commissioners works to promote standardized state regulations nationwide. It does this by drafting "model laws" that can be the basis of actual legislation adopted by the states.  Much of Florida's Insurance Code is based, at least in part, on NAIC model laws.  Annuity suitability is no exception.  The NAIC's initial efforts regarding annuity suitability were aimed at protecting older consumers and the first NAIC model law on suitability, Senior Protection in Annuity Transactions Model Regulation, was adopted by the NAIC in 2003.  This model law covers the sales of annuities to consumers aged 65 and older.  Florida's initial suitability legislation in 2004 was based on that model law.  Other states have pursued other forms of investor protections some states extended the annuity protections to consumers of all ages, others extended suitability provisions to the sale of annuity and non-annuity insurance products, other states followed a model law drafted by the North American Securities Administrators Association (NASAA). 


In 2006, the NAIC drafted and approved a new model law, Suitability in Annuity Transactions Model Regulation that extends suitability protections to sales of annuities to consumers of all ages.  When Florida updated its original suitability law in 2008, it faced a choice and the Legislature chose to continue to apply the suitability requirements only to the sale of annuities to senior consumers.   With intense focus on this issue, it is quite possible that Florida, in the future, will join other states that expand that requirement to the sale of annuities to all consumers.  There certainly is nothing unethical if a Florida agent wishes to apply the senior rules to younger clients even if Florida law does not require it.  The disclosure requirements in Florida's senior law offer agents a convenient checklist of questions to ask prospects of any age before making a fixed annuity recommendation.     FINRA's requirements make no distinction based on age when it comes to recommendations for variable annuities.  FINRA and the NAIC seem to agree that suitability requirements should be "ageless".     







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Annuity Primer

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