THE GENERAL ASSEMBLY OF PENNSYLVANIA

SENATE BILL

INTRODUCED BY CORMAN, BROWNE, STACK, EARLL, RAFFERTY, BAKER, FERLO, GORDNER, O'PAKE, WILLIAMS, WAUGH AND M. WHITE, FEBRUARY 19, 2009

REFERRED TO BANKING AND INSURANCE, FEBRUARY 19, 2009  

AN ACT

Amending the act of May 17, 1921 (P.L.682, No.284), entitled "An

act relating to insurance; amending, revising, and

consolidating the law providing for the incorporation of

insurance companies, and the regulation, supervision, and

protection of home and foreign insurance companies, Lloyds

associations, reciprocal and inter-insurance exchanges, and

fire insurance rating bureaus, and the regulation and

supervision of insurance carried by such companies,

associations, and exchanges, including insurance carried by

the State Workmen's Insurance Fund; providing penalties; and

repealing existing laws," providing for suitability of

annuity transactions.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  The act of May 17, 1921 (P.L.682, No.284), known

as The Insurance Company Law of 1921, is amended by adding an

article to read:

ARTICLE IV-B

SUITABILITY OF ANNUITY TRANSACTIONS

Section 401-B.  Definitions.

The following words and phrases when used in this article

shall have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Annuity."  A fixed annuity or variable annuity that is

individually solicited, whether the product is classified as an

individual or group annuity.

"Commissioner."  The Insurance Commissioner of the

Commonwealth.

"General agent."  An insurance producer that provides

supervision on behalf of an insurer to an insurer's sales force

in a particular geographic region or territory.

"Independent agency."  A producer entity that does not

exclusively represent one insurance company.

"Insurance producer."  A person who sells, solicits or

negotiates contracts of insurance as defined in section 601-A of

the act of May 17, 1921 (P.L.789, No.285), known as The

Insurance Department Act of 1921.

"Insurer."  A life insurance company licensed or required to

be licensed under section 202 or a fraternal benefit society as

defined in section 2403.

"Recommendation."  Advice provided by an insurance producer,

or an insurer where no producer is involved, to an individual

consumer that results in a purchase or exchange of an annuity in

accordance with that advice.

Section 402-B.  Applicability and scope.

(a)  General rule.--This article shall apply to any

recommendation to purchase or exchange an annuity made to a

consumer by an insurance producer, or an insurer where no

producer is involved, that results in the purchase or exchange

recommended.

(b)  Exclusions.--Unless otherwise specifically included,

this article shall not apply to recommendations involving the

following:

(1)  Direct response solicitations where there is no

recommendation based on information collected from the

consumer pursuant to this article.

(2)  Annuity contracts used to fund:

(i)  An employee pension or welfare benefit plan that

is covered by the Employee Retirement Income Security Act

of 1974 (Public Law 93-406, 88 Stat. 829).

(ii)  A plan described by sections 401(a) or (k),

403(b), 408(k) or (p) of the Internal Revenue Code of

1986 (Public Law 99-514, 26 U.S.C. §§ 401(a) or (k),

403(b), 408(k) or (p)), when the plan, for purposes of

the Employee Retirement Income Security Act of 1974, is

established or maintained by an employer.

(iii)  A governmental or church plan defined in

section 414 of the Internal Revenue Code of 1986 or a

deferred compensation plan of a State or local government

or tax exempt organization under section 457 of the

Internal Revenue Code of 1986.

(iv)  A nonqualified deferred compensation

arrangement established or maintained by an employer or

plan sponsor.

(v)  Settlements of or assumptions of liabilities

associated with personal injury litigation or any dispute

or claim resolution process.

(vi)  Formal prepaid funeral contracts.

Section 403-B.  Duties of insurers and insurance producers.

(a)  General duties.--In making a recommendation to a

consumer for the purchase of an annuity or the exchange of an

annuity that results in another insurance transaction or series

of insurance transactions, the insurance producer, or the

insurer where no insurance producer is involved, shall have

reasonable grounds for believing that the recommendation is

suitable for the consumer on the basis of the facts disclosed by

the consumer as to the consumer's investments and other

insurance products and as to the consumer's financial situation

and needs.

(b)  Consumer information.--Prior to the execution of a

purchase or exchange of an annuity resulting from a

recommendation, an insurance producer, or an insurer where no

insurance producer is involved, shall make reasonable efforts to

obtain information concerning all of the following:

(1)  The consumer's financial status.

(2)  The consumer's tax status.

(3)  The consumer's investment objectives.

(4)  Other information used or considered to be

reasonable by the insurance producer, or the insurer where no

insurance producer is involved, in making recommendations to

the consumer.

(c)  Obligation limits.--

(1)  Neither an insurance producer nor an insurer where

no insurance producer is involved shall have any obligation

to a consumer under subsection (a) related to any

recommendation that is reasonable under all the circumstances

actually known to the insurer or insurance producer at the

time of the recommendation when a consumer:

(i)  Refuses to provide relevant information

requested by the insurer or insurance producer.

(ii)  Decides to enter into an insurance transaction

that is not based on a recommendation of the insurer or

insurance producer.

(iii)  Fails to provide complete or accurate

information.

(d)  Supervision of recommendations.--

(1)  An insurer shall assure that a system to supervise

recommendations that is reasonably designed to achieve

compliance with this article is established and maintained by

complying with paragraphs (3) and (4), or shall establish and

maintain such a system that includes at least the following:

(i)  Maintaining written procedures.

(ii)  Conducting periodic reviews of its records that

are reasonably designed to assist in detecting and

preventing violations of this article.

(2)  A general agent or independent agency shall adopt a

system established by an insurer to supervise recommendations

of its insurance producers that is reasonably designed to

achieve compliance with this article, or shall establish and

maintain a system that is reasonably designed to achieve

compliance with this article. The system must include at

least the following:

(i)  Maintaining written procedures.

(ii)  Conducting periodic reviews of records that are

reasonably designed to assist in detecting and preventing

violations of this article.

(3)  An insurer may contract with a third party,

including a general agent or independent agency, to establish

and maintain a system of supervision as required by paragraph

(1) with respect to insurance producers under contract with

or employed by the third party.

(4)  An insurer shall make reasonable inquiry to assure

that the third party contracting under paragraph (3) is

performing the functions required under paragraph (1) and

shall take such action as is reasonable under the

circumstances to enforce the contractual obligation to

perform the functions. An insurer may comply with its

obligation to make reasonable inquiry by doing both of the

following:

(i)  The insurer annually obtains, electronically or

otherwise,a certification from a third party senior

manager who has responsibility for the delegated

functions that the manager has a reasonable basis to

represent, and does represent, that the third party is

performing the required functions.

(ii)  The insurer, based on reasonable selection

criteria, periodically selects third parties contracting

under paragraph (3) for a review to determine whether the

third parties are performing the required functions. The

insurer shall perform procedures to conduct the review

that are reasonable under the circumstances.

(5)  An insurer that contracts with a third party under

paragraph (3) and that complies with the requirements to

supervise under paragraph (4) shall have fulfilled its

responsibilities under paragraph (1).

(6)  An insurer, general agent or independent agency is

not required to do either of the following:

(i)  Review or provide for review of all insurance

producer-solicited transactions.

(ii)  Include in its system of supervision an

insurance producer's recommendations to consumers of

products other than the annuities offered by the insurer,

general agent or independent agency.

(7)  A general agent or independent agency contracting

with an insurer pursuant to paragraph (3) shall promptly,

when requested by the insurer pursuant to paragraph (4), give

a certification as described in paragraph (4) or give a clear

statement that it is unable to meet the certification

criteria.

(8)  No person may provide a certification under

paragraph (4)(i) unless both the following conditions are

met:

(i)  The person is a senior manager with

responsibility for the delegated functions.

(ii)  The person has a reasonable basis for making

the certification.

(e)  Compliance with other rules.--Compliance with the

Financial Industry Regulatory Authority Conduct Rules pertaining

to suitability shall satisfy the requirements under this section

for the recommendation of variable annuities. Nothing in this

subsection shall limit the commissioner's ability to enforce the

provisions of this article.

(f)  Internal audit and compliance procedures.--Nothing in

this article shall exonerate an insurer from the internal audit

and compliance procedure requirements under section 405-A.

Section 404-B.  Mitigation of responsibility.

(a)  Corrective actions.--The commissioner may order:

(1)  An insurer to take reasonably appropriate corrective

action for any consumer harmed by the insurer's or by its

insurance producer's violation of this article.

(2)  An insurance producer to take reasonably appropriate

corrective action for any consumer harmed by the insurance

producer's violation of this article.

(3)  A general agent or independent agency that employs

or contracts with an insurance producer to sell or solicit

the sale of annuities to consumers, to take reasonably

appropriate corrective action for any consumer harmed by the

insurance producer's violation of this article.

(b)  Reduction of penalty.--Any applicable penalty permitted

under section 406-B may be reduced or eliminated if corrective

action for the consumer was taken promptly after a violation was

discovered.

Section 405-B.  Recordkeeping.

An insurer, general agent, independent agency and insurance

producer shall maintain or be able to make available to the

commissioner records of the information collected from the

consumer and other information used in making the

recommendations that were the basis for insurance transactions

for five years after the insurance transaction is completed by

the insurer. An insurer is permitted but shall not be required

to maintain documentation on behalf of an insurance producer.

Section 406-B.  Enforcement.

(a)  Penalties and remedies.--Upon a determination by hearing

that this article has been violated, the commissioner may pursue

one or more of the following courses of action:

(1)  Issue an order requiring the person in violation to

cease and desist from engaging in the violation.

(2)  Suspend or revoke or refuse to issue or renew the

certificate or license of the person in violation.

(3)  Impose a civil penalty of not more than $5,000 for

each violation.

(4)  Impose any other penalty or remedy deemed

appropriate by the commissioner, including restitution.

(b)  Other remedies.--The enforcement remedies imposed under

this section are in addition to any other remedies or penalties

that may be imposed by any other applicable statute, including

the act of July 22, 1974 (P.L.589, No.205), known as the Unfair

Insurance Practices Act. Violations of this article are deemed

and defined by the commissioner to be an unfair method of

competition and an unfair or deceptive act or practice pursuant

to the Unfair Insurance Practices Act.

Section 407-B.  Private cause of action.

Nothing in this article shall be construed to create or imply

a private cause of action for a violation of this article.

Section 2.  This act shall take effect in 180 days.