806 KAR 12:120 - Suitability in annuity transactions
RELATES TO: KRS 304.1-040, 304.5-030, 304.9-020(1), 304.9-025, 304.9-040, 304.9-390, 304.12-010, 304.12-030(1)(a), 304.99-020, 26 U.S.C. 401, 403, 408, 414, 457, 29 U.S.C. 1001-1461
NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110(1) authorizes the Commissioner of Insurance to promulgate administrative regulations necessary for or as an aid to the effectuation of any provision of the Kentucky Insurance Code, KRS Chapter 304. This administrative regulation requires licensees to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.
Section 1. Definitions.
(1) "Agent" is defined by
KRS
304.9-020(1).
(2) "Annuity" is defined by
KRS
304.5-030.
(3) "Cash Compensation" means any discount,
concession, fee, service fee, commission, sales charge, loan, override, or cash
benefit received by a producer in connection with the recommendation or sale of
an annuity from an insurer, intermediary, or directly from the
consumer.
(4) "Commissioner" is
defined by
KRS
304.1-050(1).
(5) "Comparable standards" means:
(a) With respect to broker-dealer and
registered representatives of broker-dealers, applicable SEC and FINRA rules
pertaining to best interest obligations and supervision of annuity
recommendations and sales, including Regulation Best Interest and any
amendments or successor regulations thereto;
(b) With respect to investment advisers
registered under federal and state securities laws or investment adviser
representatives, the fiduciary duties, and all other requirements imposed on
investment advisers or investment adviser representatives by contract or under
the Investment Advisers Act of 1940, including the Form ADV and
interpretations; and
(c) With
respect to plan fiduciaries or fiduciaries, means the duties, obligations,
prohibitions, and all other requirements attendant to such status under the
Employee Retirement Security Act of 1974 (ERISA) or the Internal Revenue Code
(IRC) and any amendments or successor statutes thereto.
(6) "Consultant" is defined by
KRS
304.9-040.
(7) "Financial professional" means a licensee
that is regulated and acting as:
(a) A
broker-dealer registered under federal and state securities laws or a
registered representative of a broker-dealer;
(b) An investment adviser registered under
federal and state securities laws or an investment adviser representative
associated with the federal and state registered investment adviser;
or
(c) A plan fiduciary under
Section 3(21) of the ERISA or fiduciary under Section 4975 (e)(3) of the IRC or
any amendments or successor statutes thereto.
(8) "FINRA" means the Financial Industry
Regulatory Authority or a succeeding agency.
(9) "Insurance producer" is defined by
KRS
304.9-020(10).
(10) "Insurer" is defined by
KRS
304.1-040.
(11) "Intermediary" means an entity
contracted directly with an insurer or with another entity contracted with an
insurer to facilitate the sale of the insurer's annuities by
producers.
(12) "Licensee" means
agent, or an insurer if an agent is not involved, and consultant.
(13) "Material conflict of interest" means a
financial interest of the producer in the sale of an annuity that a reasonable
person would expect to influence the impartiality of a recommendation but does
not include cash compensation or non-cash compensation.
(14) "Non-cash compensation" means any form
of compensation that is not cash compensation.
(15) "Nonguaranteed elements" means the
premium, credited interest rates including bonus, benefits, values, dividends,
non-interest based credits, charges, or elements of formulas used to determine
any of these, that are subject to company discretion and are not guaranteed at
issue. An element shall be considered nonguaranteed if any of the underlying
nonguaranteed elements are used in its calculation.
(16)
(a)
"Recommendation" means advice provided by a licensee to an individual consumer
that results in a purchase, exchange, or replacement of an annuity in
accordance with that advice.
(b)
Recommendation shall not include general communication to the public,
generalized customer services assistance or administrative support, general
educational information and tools, prospectuses, or other product and sales
material.
(17)
"Replacement" is defined by
KRS
304.12-030(1)(a).
(18) "SEC" means the United States Securities
and Exchange Commission.
Section
2. Exemptions. This administrative regulation shall not apply to
recommendations involving:
(1) Direct response
solicitations without a recommendation based on information collected from the
consumer pursuant to this administrative regulation; or
(2) Contracts used to fund:
(a) An employee pension or welfare benefit
plan covered by the Employee Retirement and Income Security Act (ERISA),
codified as
29 U.S.C.
1001 to
1461;
(b) A plan described by
26 U.S.C.
401(a),
401(k),
403(b),
408(k),
or
408(p),
as amended, if established or maintained by an employer;
(c) A governmental or church plan defined in
26 U.S.C.
414, a government or church welfare benefit
plan, or a deferred compensation plan of a state or local government or tax
exempt organization under
26
U.S.C. 457;
(d) A nonqualified deferred compensation
arrangement established or maintained by an employer or plan sponsor;
(e) Settlements of or assumptions of
liabilities associated with personal injury litigation or any dispute or claim
resolution process; or
(f) Prepaid
funeral contracts.
Section
3. Duties of Insurers and Licensees.
(1) Obligations. A licensee, when making a
recommendation of an annuity, shall act in the best interest of the consumer
under the circumstances known at the time the recommendation is made, without
placing the licensee's or the insurer's financial interest ahead of the
consumer's interest and does so by satisfying the following obligations
regarding care, disclosure, conflict of interest and documentation.
(a)
1. Care
obligation. The licensee, in making a recommendation, shall exercise reasonable
diligence, care, and skill to:
a. Know the
consumer's financial situation, insurance needs, and financial
objectives;
b. Understand the
available recommendation options after making a reasonable inquiry into options
available to the licensee;
c. Have
a reasonable basis to believe the recommended option effectively addresses the
consumer's financial situation, insurance needs, and financial objectives over
the life of the product, as evaluated in light of the consumer profile
information; and
d. Communicate the
basis or bases of the recommendation.
2.
a. The
requirements under subparagraph 1. of this paragraph shall include at a
minimum, the following information to determine whether a recommendation
addresses the consumer's financial situation, insurance needs, and financial
objectives making reasonable efforts to obtain consumer profile information
from the consumer prior to the recommendation of an annuity.
b. Consumer profile information shall
include:
(i) Age;
(ii) Annual Income;
(iii) Financial situation and needs,
including debts and other obligations;
(iv) Financial experience;
(v) Insurance needs;
(vi) Financial objectives;
(vii) Intended use of the annuity;
(viii) Financial time horizon;
(ix) Existing assets or financial products,
including investment, annuity, and insurance holdings;
(x) Liquidity needs;
(xi) Liquid net worth;
(xii) Risk tolerance, including willingness
to accept nonguaranteed elements in the annuity;
(xiii) Financial resources used to fund the
annuity; and
(xiv) Tax
status.
3.
a. The requirements under subparagraph 1. of
this paragraph shall require a licensee to consider the types of products the
licensee is authorized and licensed to recommend or sell that address the
consumer's financial situation, insurance needs, and financial
objectives.
b. The requirements
under subparagraph 1. of this paragraph shall not require analysis or
consideration of any products outside the authority and license of the licensee
or other possible alternative products or strategies available in the market at
the time of the recommendations.
4. The requirements under paragraph (a) of
this subsection shall not create a fiduciary obligation or relationship and
shall only create a regulatory obligation as established in this administration
regulation.
5.
a. Factors relevant in making a determination
whether an annuity effectively addresses the consumer's financial situation,
insurance needs, and financial objectives shall include:
(i) Consumer profile information;
(ii) Characteristics of the insurer;
and
(iii) Product costs, rates,
benefits, and features.
b. The level of importance of each factor
under the care obligation of this paragraph may vary depending on the facts and
circumstances of a particular case;
c. Factors shall not be considered in
isolation.
6. The
requirements under paragraph (a) of this subsection shall include having a
reasonable basis to believe the consumer would benefit from certain features of
the annuity, such as annuitization, death or living benefit, or other
insurance-related features.
7. The
requirements under paragraph (a) of this subsection shall apply to the
particular annuity as a whole and the underlying subaccount to which funds are
allocated at the time of purchase or exchange of an annuity, and riders and
similar product enhancements, if any.
8. The requirements under paragraph (a) of
this subsection shall not mean the annuity with the lowest one-time or multiple
occurrence compensation structure shall necessarily be recommended.
9. The requirements under paragraph (a) of
this subsection shall not mean the licensee has ongoing monitoring obligations.
An obligation may be separately owed under the terms of a fiduciary,
consulting, investment advising, or financial planning agreement between the
consumer and the licensee.
10. In
the case of an exchange or replacement of an annuity, the licensee shall
consider the whole transaction, which shall include taking into consideration
whether:
a. The consumer 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. The replacing product would substantially
benefit the consumer in comparison to the replaced product over the life of the
product; and
c. The consumer had
another annuity exchange or replacement and, in particular, an exchange or
replacement within the preceding sixty (60) months.
11. If the licensee does not give advice or
provide services that are otherwise subject to securities laws or engage in any
other activity requiring other professional licenses, this administrative
regulation shall not be construed to require a licensee to obtain any license
other than a license with the appropriate line of authority to sell, solicit,
or negotiate insurance in this state, including any securities license, in
order to fulfill the duties and obligations contained in this administrative
regulation.
(b)
Disclosure obligation.
1. Prior to the
recommendation or sale of an annuity, the licensee shall prominently disclose
to the consumer on a form substantially similar to "Insurance Agent (Producer)
Disclosure For Annuities":
a. A description of
the scope and terms of the relationship with the consumer and the role of the
licensee in the transaction;
b. An
affirmative statement on whether the licensee is licensed and authorized to
sell the following products:
(i) Fixed
annuities;
(ii) Fixed indexed
annuities;
(iii) Variable
annuities;
(iv) Life
insurance;
(v) Mutual
funds;
(vi) Stocks and bonds;
and
(vii) Certificates of
deposit;
c. An
affirmative statement describing the insurers for which the licensee is
authorized, contracted or appointed, or otherwise able to sell insurance
products using the following descriptions:
(i)
From one (1) insurer;
(ii) From two
(2) or more insurers; or
(iii) From
two (2) or more insurers although primarily contracted with one (1)
insurer.
d. A
description of the sources and types of cash compensation and non-cash
compensation to be received by the licensee, including whether the licensee is
to be compensated for the sale of a recommended annuity by commission as part
of premium or other remuneration received from the insurer, intermediary, or
other licensee, or by fee as a result of a contract for advice or consulting
services; and
e. A notice of the
consumer's right to request additional information regarding cash compensation
described in subparagraph 2. of this paragraph;
2. Upon request of the consumer or the
consumer's designated representative, the licensee shall disclose:
a. A reasonable estimate of the amount of
cash compensation to be received by the licensee, which may be stated as a
range of amounts or percentages; and
b. Whether the cash compensation is a
one-time or multiple occurrence amount, and if a multiple occurrence amount,
the frequency and amount of the occurrence, which may be stated as a range of
amounts or percentages.
3. Prior to or at the time of the
recommendation or sale of an annuity, the licensee shall have a reasonable
basis to believe:
a. The consumer has been
informed of various features of the annuity, including:
(i) The potential surrender period and
surrender charge;
(ii) Potential
tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the
annuity;
(iii) Mortality and
expense fees;
(iv) Investment
advisory fees;
(v) Potential
charges for and features of riders or other options of the annuity;
(vi) Limitations on interest returns,
potential changes in nonguaranteed elements of the annuity, insurance, and
investment components;
(vii) Market
risk; and
(viii) Annual
fees.
(c) Conflict of interest obligation. A
licensee shall identify and avoid or reasonably manage and disclose material
conflicts of interest, including material conflicts of interest related to an
ownership interest.
(d)
Documentation obligation. A licensee shall at the time of recommendation or
sale:
1. Make a written record of any
recommendation and the basis for the recommendation subject to this
regulation;
2. Obtain a consumer
signed statement on a form substantially similar to "Consumer Refusal To
Provide Information" documenting:
a. A
consumer's refusal to provide the consumer profile information, if any;
and
b. A consumer's understanding
of the ramifications of not providing his or her consumer profile information
or providing insufficient consumer profile information; and
3. Obtain a consumer signed
statement on a form substantially similar to "Consumer Decision To Purchase An
Annuity NOT Based On A Recommendation" acknowledging the annuity transaction is
not recommended if a consumer decides to enter into an annuity transaction that
is not based on the licensee's recommendation.
(e)
1.
Application of the best interest obligation. A requirement applicable to a
licensee under this subsection shall apply to every licensee who has exercised
material control or influence in the making of a recommendation and has
received direct compensation as a result of the recommendation or sale,
regardless of whether the licensee has had any direct contact with the
consumer.
2. Activities providing
or delivering marketing or educational materials, product wholesaling or other
back office product support, and general supervision of a licensee shall not
constitute material control or influence.
(2) Transactions not based on a
recommendation.
(a) Except as provided under
paragraph (b) of this subsection, the licensee shall not have an obligation to
a consumer under this subsection or subsection (1)(a) of this section related
to an annuity transaction if:
1. A consumer
refuses to provide relevant consumer profile information requested by the
licensee and the annuity transaction is not recommended;
2. A consumer decides to enter into an
annuity transaction not based on a recommendation of the licensee;
3. A recommendation was made and was later
found to have been prepared based on materially inaccurate information provided
by the consumer; or
4. No
recommendation is made.
(b) An insurer's issuance of an annuity
subject to paragraph
(c) of this
subsection shall be reasonable under all the circumstances actually known to
the insurer at the time the annuity is issued.
(3)
(a)
Except as permitted under subsection (2) of this section, an insurer shall not
issue an annuity recommended to a consumer unless there is a reasonable basis
to believe the annuity would effectively address the particular consumer's
financial situation, insurance needs, and financial objectives based on the
consumer's consumer profile information.
(b) An insurer shall establish and maintain a
system that is reasonably designed to achieve a licensee's compliance with this
administrative regulation, including the following:
1. The insurer shall establish and maintain
reasonable procedures to inform its licensees of the requirements of this
administrative regulation and shall incorporate the requirements of this
administrative regulation into relevant licensee training manuals.
2. The insurer shall establish and maintain
standards for licensee product training and shall establish and maintain
reasonable procedures to require its licensees to comply with the requirements
of Section 4 of this administrative regulation.
3. The insurer shall provide product-specific
training and training materials that explain all material features of its
annuity products to its licensees.
4. The insurer shall establish and maintain
procedures for the review of each recommendation, prior to issuance of an
annuity, that are designed to ensure there is a reasonable basis to determine
that the recommended annuity would effectively address the particular
consumer's financial situation, insurance needs, and financial objectives.
a. The review procedures may apply a
screening system for the purpose of identifying selected transactions for
additional review and may be accomplished electronically or through other means
including physical review.
b. The
electronic or other system for review procedures may be designed to require
additional review only of those transactions identified for additional review
by the selection criteria.
5. The insurer shall establish and maintain
reasonable procedures to detect recommendations that are not in compliance with
subsections (1), (2), (4), and (5) of this section.. This may include
confirmation of the consumer's consumer profile information, systematic
customer surveys, licensee and consumer interviews, confirmation letters,
licensee statements or attestations, and programs of internal monitoring. An
insurer may comply with this subparagraph by applying sampling procedures, or
by confirming the consumer profile information or other required information
under this section after issuance or delivery of the annuity.
6. The insurer shall establish and maintain
reasonable procedures to assess, prior to or upon issuance or delivery of an
annuity, if a licensee has provided to the consumer the information required to
be provided under this section.
7.
The insurer shall establish and maintain reasonable procedures to identify and
address suspicious consumer refusals to provide consumer profile
information.
8. The insurer shall
establish and maintain reasonable procedures to identify and eliminate any
sales contests, sales quotas, bonuses, and non-cash compensation that are based
on the sales of specific annuities within a limited period of time. The
requirements of this subparagraph shall not prohibit the receipt of health
insurance, office rent, office support, retirement benefits, or other employee
benefits by employees as long as those benefits are not based upon the volume
of sales of a specific annuity within a limited period of time.
9. The insurer shall annually provide a
written report to senior management, including to the senior manager
responsible for audit functions, which details a review, with appropriate
testing, reasonably designed to determine the effectiveness of the supervision
system, the exceptions found, and corrective action taken or recommended, if
any.
(c)
1. An insurer may contract for performance of
a function, including maintenance of procedures, required under subsection (3)
of this subsection.
2. An insurer's
supervision system under this subsection shall include supervision of
contractual performance under this subsection. This shall include the
following:
a. Monitoring and, as appropriate,
conducting audits to assure that the contracted function is properly performed;
and
b. Annually obtaining a
certification from a senior manager who has responsibility for the contracted
function that the manager represents, that the function is properly performed;
and
3. If an insurer
contracts for performance of a function and supervises the performance of the
contract in accordance with subparagraph (c)2. of this section, the insurer
shall remain responsible for taking appropriate corrective action and may be
subject to sanctions and penalties pursuant to Section 5 of this administrative
regulation.
(d)
1. An insurer shall not be required to
include in its system of supervision a licensee's recommendations to consumers
of products other than the annuities offered by the insurer; or
2. Include consideration of or comparison to
options available to the licensee or compensation relating to those options
other than annuities or other products offered by the insurer.
(4) Prohibited
practices. A licensee or an insurer shall not attempt to influence a consumer
from:
(a) Truthfully responding to an
insurer's request for confirmation of the consumer profile
information;
(b) Filing a
complaint; or
(c) Cooperating with
the investigation of a complaint.
(5)
(a)
1. Safe Harbor. Recommendations and sales of
annuities made in compliance with comparable standards shall satisfy the
requirements under this administrative regulation.
2. This subsection shall apply to all
recommendations and sales of annuities made by financial professionals in
compliance with business rules, controls, and procedures that satisfy a
comparable standard even if the standard would not otherwise apply to the
product or recommendation at issue
3. This subsection shall not limit the
commissioner's ability to investigate and enforce the provisions of this
administrative regulation.
(b) Nothing in paragraph (a) of this
subsection shall limit the insurer's obligation to comply with subsection
(3)(a) of this section, although the insurer may base its analysis on
information received from either the financial professional or the entity
supervising the financial professional.
(c) For paragraph (a) of this subsection to
apply, an insurer shall:
1. Monitor the
relevant conduct of the financial professional seeking to rely on paragraph (a)
of this subsection or the entity responsible for supervising the licensee, such
as the licensee's broker-dealer or investment adviser registered under federal
securities laws using information collected in the normal course of an
insurer's business; and
2. Provide
to the entity responsible for supervising the licensee seeking to rely on
paragraph (a) of this subsection, such as the financial professionals
broker-dealer or investment adviser registered under federal securities laws,
information and reports that are reasonably appropriate to assist the entity to
maintain its supervision system.
(6) The requirements of this section are
intended to supplement and not replace the disclosure requirements in
806 KAR
12:150.
Section 4. Licensee Training.
(1) An agent shall not sell, solicit, or
negotiate an annuity product unless the agent has adequate knowledge of the
product to recommend the annuity and completed training in accordance with
806 KAR 9:025
(2) A consultant shall not advise
an individual regarding an annuity unless the consultant has adequate knowledge
of the product to recommend the annuity and completed the training in
accordance with
806 KAR
9:025.
(3)
A licensee shall maintain records documenting compliance with the training
requirements in subsection (1) and (2) of this section, which shall be
available:
(a) To the department, if
requested; and
(b) For a period not
less than five (5) years.
(4) An insurer shall verify that an agent has
completed the annuity training course required under this subsection before
allowing the agent to sell an annuity product for that insurer.
Section 5. Mitigation of
Responsibility.
(1) An insurer shall be
responsible for compliance with this administrative regulation. If a violation
occurs, due to the action or inaction of the insurer or its licensee, the
commissioner may require:
(a) An insurer to
take appropriate corrective action for any consumer harmed by a failure to
comply with this regulation by the insurer, an entity contracted to perform the
insurer's supervisory duties, or by its licensees ;
(b) A licensee a to take appropriate
corrective action for any consumer harmed by the licensee's violation of this
administrative regulation; or
(c) A
supervising licensee that employs or contracts with another licensee to sell,
or solicit the sale, of annuities to consumers, to take appropriate corrective
action for any consumer harmed by the licensee's violation of this
administrative regulation;
(2) The commissioner may require a consultant
to take appropriate corrective action for any consumer harmed by the
consultant's violation of this administrative regulation.
(3) Any applicable penalty under
KRS 304.99-020
for a violation of this administrative regulation may be reduced or eliminated,
if corrective action for the consumer is taken promptly after a violation is
discovered.
Section 6.
Recordkeeping. Licensees shall maintain records of the information collected
from the consumer, disclosure made to the consumer, including summaries of oral
disclosures, and other information used in making the recommendations that were
the basis for insurance transactions in accordance with
KRS
304.9-390 and
806 KAR
2:070. An insurer may maintain documentation on behalf
of a licensee.
Section 7. Effective
Date. The requirements of this administrative regulation shall not be
implemented or enforced prior to the effective date, determined pursuant to
KRS
13A.330, or January 1, 2022, whichever is
later.
Section 8. Scope. This
administrative regulation shall not create or imply a private cause of action
for violation of this administrative regulation.
Section 9. Material Incorporated by
Reference.
(1) The following material is
incorporate by reference:
(a) "Insurance
Agents (Producer) Disclosure For Annuities", (7/2020);
(b) "Consumer Refusal To Provide
Information", (7/2020); and
(c)
Consumer Decisions To Purchase An Annuity NOT Based on A Recommendation",
(7/2020).
(2) This
material may be inspected, copied, or obtained, subject to applicable copyright
law, at the Kentucky Department of Insurance, Mayo-Underwood Building, 500 Mero
Street Frankfort, Kentucky 40601, Monday through Friday, 8 a.m. to 4:30
p.m.
Notes
STATUTORY AUTHORITY: KRS 304.2-110
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