Chapter 1 — Suitability

• Fixed annuities are regulated by state insurance authorities; variable annuities fall under both state and FINRA/SEC jurisdiction
• The Dodd-Frank Act (2010) permanently classified most equity indexed annuities (EIAs) as fixed annuities subject to state regulation only
• Florida’s Seibel Act of 2008 strengthened the state’s senior consumer protection rules by requiring an “objectively reasonable basis” for recommending annuities to seniors
• The Safeguard Our Seniors Act of 2010 expanded penalties, limited surrender charges (10 years/10%), and extended free-look periods (21 days) for senior annuity purchasers
• Agents must complete a detailed suitability questionnaire Form DFS-H1-1980 and forward a copy to the issuing company within 10 days
• For replacement transactions, agents must complete a comparison form Form DFS-H1-1981 and disclose potential tax consequences
• Issuing companies and third-party marketers must maintain supervisory systems and retain records for at least five years
• FINRA-affiliated agents should apply FINRA rules to variable annuities and comply with state suitability requirements for fixed annuities sold to senior consumers
• The NAIC has drafted model suitability laws covering all ages; Florida currently applies suitability requirements only to senior consumers (age 65 and older)

Annuities at their most basic level are a simple concept to grasp — but as the old saying goes: the devil is in the details. Each contract has its own unique set of provisions, which complicates the advisor’s task of recommending suitable contracts for his or her client’s unique situation. As a result, many clients have been sold annuity contracts that do not meet their needs.

Over the years, the annuity industry has developed new, more complicated types of contracts — such as equity indexed annuities — and introduced new benefits that are not easily understood, such as enhanced living and death benefits. While these new products can offer prospects a greater range of options to meet their financial needs, they often confuse clients and agents alike. Government regulators at the state and federal level have noted this evolution of product design and its adverse impact on clients. As a result, they have imposed additional regulations on the sale of annuities.

This chapter explores two key amendments to Florida’s Senior Consumer Law: the Seibel Act, passed in 2008, and the Safeguard Our Seniors Act, signed by the governor in 2010. There is an exemption in this law for transactions governed by FINRA — but ethical advisors will want to follow the general principles of these regulations regardless of whether the strict language of the rules applies to a particular situation.

Before exploring these two regulations, a brief review of the regulatory framework governing annuities is in order:

• Fixed annuities (including equity indexed annuities) fall under the purview of state insurance authorities.
• Variable contracts fall under both state and federal jurisdiction — state insurance commissioners regulate the variable contract itself; the SEC claims jurisdiction over the separate sub-accounts as investment products. The SEC delegates oversight of variable annuity sales to FINRA.
• As a result, state laws govern the sale of all annuities; FINRA governs the sale of variable annuities only.

In 2008, the SEC proposed Rule 151A, which would have treated equity indexed annuities as variable contracts. That proposal met significant opposition. In June 2010, a federal court found the SEC’s analysis flawed, and shortly thereafter Congress passed the Dodd-Frank Act, which permanently classified most EIAs as fixed annuities subject to state regulation only.

In the late 1990s, state regulators began addressing the sale of fixed annuities to “senior consumers.” Florida enacted initial consumer protections in 2004 based on the NAIC’s Senior Protection in Annuity Transactions Model Law. Analysis by the Department of Financial Services found that due to vague wording this law was ineffective.

In 2008, the Florida legislature strengthened its language in response to instances where elderly clients were sold unsuitable annuities — particularly highly illiquid contracts. One elderly couple from Venice, both in their eighties, were sold $600,000 in annuities with surrender charge periods that lasted longer than their life expectancies. The updated state law, known as the “John and Patricia Seibel Act,” is named for them.

The primary focus of the Seibel Act is to strengthen protections for elderly annuity purchasers. The new standard now requires an insurer or agent who recommends the purchase or exchange of an annuity to a senior consumer to have “an objectively reasonable basis for believing the recommendation is suitable.”

In the waning days of its 2010 session, the Florida Legislature passed the Safeguard Our Seniors Act, signed by the governor in May 2010, with provisions effective January 1, 2011. The provisions resulted from hundreds of town hall meetings conducted statewide by the Department of Financial Services.

The Safeguard Our Seniors Act:

• Increases the financial penalty for willful twisting or churning of an annuity to a maximum of $75,000
• Limits the surrender charge period for annuities sold to senior consumers (age 65+) to 10 years and limits the surrender charge to 10%
• Extends the free-look period for senior consumers from 14 to 21 days
• Authorizes the DFS to require an agent to make monetary restitution to a senior consumer harmed by a violation of the insurance code
• Includes third-party marketers that aid and abet agents in violations as affiliated parties subject to DFS regulatory authority
• Gives DFS authority to take license disciplinary action against an agent disciplined under a securities broker-dealer license
• Prohibits issuance of a license to a former licensee whose license was revoked from solicitation or sale of insurance to a senior consumer
• Extends the prohibition on agents being beneficiaries to include the agent’s family members, and prohibits agents from serving as guardian, trustee, or holding power of attorney over the insured
• Requires insurers to provide a cover sheet with new annuity policies informing purchasers of the free-look period and contact information for the insurer and DFS
• Allows use of video depositions in administrative hearings involving senior consumers

The Seibel Act replaced the prior subjective standard with a more objective one. The prior law required clear and convincing evidence not that a transaction was suitable, but whether the agent reasonably believed it was. The new law requires an “objectively reasonable basis for believing the recommendation is suitable.”

Disclosure Requirements

The Seibel Act specifies the minimum information agents must obtain from a senior consumer, using Form DFS-H1-1980. At a minimum, agents must ascertain the client’s:

• Age and gender of the purchaser(s)
• Number and age of any dependents
• Investment objectives
• Risk tolerance
• Existing assets
• Annual income
• Tax status
• Liquid net worth
• Future financial concerns and needs (medical expenses, long-term care, bequests, projected retirement age, etc.)
• Intended use for the annuity
• Source of funds to be invested in the annuity

The agent must forward a copy of the completed questionnaire to the issuing company within 10 days, and provide a copy to the client no later than delivery of the contract documents.

If the client currently holds one or more annuity contracts, the agent must also determine the type, issue date(s), maturity dates, fund allocation (for variable annuities), surrender charges, riders, and liquidity within the existing contracts.

For replacement transactions, agents must complete a comparison form (Form DFS-H1-1981) comparing benefits, terms, limitations, fees, and charges between the existing and proposed contracts, including a statement describing the basis for recommending the exchange. Agents must also disclose that the transaction may have tax consequences and recommend the client consult a tax advisor.

Supervision

Agents, insurance agencies, and issuing companies must maintain systems to assure agents make suitable recommendations. At a minimum this requires written procedures and periodic audits. Issuers may contract with third parties to implement supervisory systems on their behalf, but must make adequate inquiries into those third parties’ compliance efforts.

The law mandates that records be retained for at least five years. All three parties — agents, companies, and third parties — are responsible for retaining supporting documentation.

Mitigation

One important amendment gives the Department of Financial Services and the Office of Insurance Regulation the power to correct (“mitigate”) unsuitable annuity purchases. The Office of Insurance Regulation can force an issuing company to rescind inappropriate contracts — refunding the greater of the client’s investment or the accumulated value. The law also allows regulators to waive penalties for companies and agents that take prompt corrective action.

This law does not give clients the right to sue privately for violations, although clients may pursue other claims such as breach of fiduciary trust or negligence in private civil proceedings.

Scope and Exemptions

The disclosure requirements apply to the sale of annuities to individual senior consumers (age 65 or older). The following transactions are specifically exempt:

• Sales resulting from direct mail solicitation where no recommendation is made by the agent
• Contracts sold to qualified retirement plans (ERISA, 401(k), 403(b), 457 plans)
• Sales to employer-provided non-qualified deferred compensation plans

Florida’s updated law contains an exemption for agents affiliated with FINRA broker-dealers. The prior law exempted NASD-affiliated agents selling variable annuities; the 2008 update extended this exception to cover any annuity sold by a FINRA-affiliated agent. However, FINRA has no jurisdiction over fixed annuities (including indexed annuities), creating a potential loophole.

The key statutory phrase is: “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.”

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 recommending fixed annuities (including EIAs) to senior consumers.

The National Association of Insurance Commissioners (NAIC) works to promote standardized state regulations by drafting model laws. The NAIC’s first annuity suitability model, the Senior Protection in Annuity Transactions Model Regulation, was adopted in 2003 and covers sales to consumers aged 65 and older. Florida’s initial 2004 suitability legislation was based on that model.

In 2006, the NAIC approved a new model law — Suitability in Annuity Transactions Model Regulation — that extends protections to consumers of all ages. When Florida updated its law in 2008, it chose to continue applying requirements only to senior consumers. 

Florida adopted updated annuity suitability standards for all consumers (regardless of age) through legislation that took effect in 2013 (CS/CS/SB 166). These rules were further enhanced by the Florida Department of Financial Services to align with the NAIC's Best Interest standard, with updated compliance requirements starting on January 1, 2024  (HB 1185/CS/CS/SB 166).