PRIOR PRINTER'S NO. 1831 PRINTER'S NO. 2375
No. 1307 Session of 2008
INTRODUCED BY CORMAN, STACK, C. WILLIAMS, RAFFERTY, O'PAKE,
COSTA, BAKER, GORDNER, BROWNE, EARLL, A. WILLIAMS AND
RHOADES, MARCH 13, 2008
SENATOR D. WHITE, BANKING AND INSURANCE, AS AMENDED,
SEPTEMBER 17, 2008
AN ACT
1 Amending the act of May 17, 1921 (P.L.682, No.284), entitled "An
2 act relating to insurance; amending, revising, and
3 consolidating the law providing for the incorporation of
4 insurance companies, and the regulation, supervision, and
5 protection of home and foreign insurance companies, Lloyds
6 associations, reciprocal and inter-insurance exchanges, and
7 fire insurance rating bureaus, and the regulation and
8 supervision of insurance carried by such companies,
9 associations, and exchanges, including insurance carried by
10 the State Workmen's Insurance Fund; providing penalties; and
11 repealing existing laws," providing for suitability of
12 annuity transactions.
13 The General Assembly of the Commonwealth of Pennsylvania
14 hereby enacts as follows:
15 Section 1. The act of May 17, 1921 (P.L.682, No.284), known
16 as The Insurance Company Law of 1921, is amended by adding an
17 article to read:
18 ARTICLE IV-B
19 SUITABILITY OF ANNUITY TRANSACTIONS
20 Section 401-B. Definitions.
21 The following words and phrases when used in this article
1 shall have the meanings given to them in this section unless the
2 context clearly indicates otherwise:
3 "Annuity." A fixed annuity or variable annuity that is
4 individually solicited, whether the product is classified as an
5 individual or group annuity.
6 "Commissioner." The Insurance Commissioner of the
7 Commonwealth.
8 "General agent." An insurance producer that provides
9 supervision on behalf of an insurer to an insurer's sales force
10 in a particular geographic region or territory.
11 "Independent agency." A producer entity that does not
12 exclusively represent one insurance company.
13 "Insurance producer." A person who sells, solicits or
14 negotiates contracts of insurance as defined in section 601-A of
15 the act of May 17, 1921 (P.L.789, No.285), known as The
16 Insurance Department Act of 1921.
17 "Insurer." A life insurance company licensed or required to
18 be licensed under section 202 or a fraternal benefit society as
19 defined in section 2403.
20 "Recommendation." Advice provided by an insurance producer,
21 or an insurer where no producer is involved, to an individual
22 consumer that results in a purchase or exchange of an annuity in
23 accordance with that advice.
24 Section 402-B. Applicability and scope.
25 (a) General rule.--This article shall apply to any
26 recommendation to purchase or exchange an annuity made to a
27 consumer by an insurance producer, or an insurer where no
28 producer is involved, that results in the purchase or exchange
29 recommended.
30 (b) Exclusions.--Unless otherwise specifically included,
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1 this article shall not apply to recommendations involving the
2 following:
3 (1) Direct response solicitations where there is no
4 recommendation based on information collected from the
5 consumer pursuant to this article.
6 (2) Annuity contracts used to fund:
7 (i) An employee pension or welfare benefit plan that
8 is covered by the Employee Retirement Income Security Act
9 of 1974 (Public Law 93-406, 88 Stat. 829).
10 (ii) A plan described by sections 401(a) or (k),
11 403(b), 408(k) or (p) of the Internal Revenue Code of
12 1986 (Public Law 99-514, 26 U.S.C. §§ 401(a) or (k),
13 403(b), 408(k) or (p)), when the plan, for purposes of
14 the Employee Retirement and Income Security Act of 1974,
15 is established or maintained by an employer.
16 (iii) A governmental or church plan defined in
17 section 414 of the Internal Revenue Code of 1986 or a
18 deferred compensation plan of a State or local government
19 or tax exempt organization under section 457 of the
20 Internal Revenue Code of 1986.
21 (iv) A nonqualified deferred compensation
22 arrangement established or maintained by an employer or
23 plan sponsor.
24 (v) Settlements of or assumptions of liabilities
25 associated with personal injury litigation or any dispute
26 or claim resolution process.
27 (vi) Formal prepaid funeral contracts.
28 Section 403-B. Duties of insurers and insurance producers.
29 (a) General duties.--In making a recommendation to a
30 consumer for the purchase of an annuity or the exchange of an
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1 annuity that results in another insurance transaction or series
2 of insurance transactions, the insurance producer, or the
3 insurer where no insurance producer is involved, shall have
4 reasonable grounds for believing that the recommendation is
5 suitable for the consumer on the basis of the facts disclosed by
6 the consumer as to the consumer's investments and other
7 insurance products and as to the consumer's financial situation
8 and needs.
9 (b) Consumer information.--Prior to the execution of a
10 purchase or exchange of an annuity resulting from a
11 recommendation, an insurance producer, or an insurer where no
12 insurance producer is involved, shall make reasonable efforts to
13 obtain information concerning all of the following:
14 (1) The consumer's financial status.
15 (2) The consumer's tax status.
16 (3) The consumer's investment objectives.
17 (4) Other information used or considered to be
18 reasonable by the insurance producer, or the insurer where no
19 insurance producer is involved, in making recommendations to
20 the consumer.
21 (c) Obligation limits.--
22 (1) Neither an insurance producer nor an insurer where
23 no insurance producer is involved shall have any obligation
24 to a consumer under subsection (a) related to any
25 recommendation that is reasonable under all the circumstances
26 actually known to the insurer or insurance producer at the
27 time of the recommendation when a consumer:
28 (i) Refuses to provide relevant information
29 requested by the insurer or insurance producer.
30 (ii) Decides to enter into an insurance transaction
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1 that is not based on a recommendation of the insurer or
2 insurance producer.
3 (iii) Fails to provide complete or accurate
4 information.
5 (d) Supervision of recommendations.--
6 (1) An insurer shall assure that a system to supervise
7 recommendations that is reasonably designed to achieve
8 compliance with this article is established and maintained by
9 complying with paragraphs (3) and (4), or shall establish and
10 maintain such a system that includes at least the following:
11 (i) Maintaining written procedures.
12 (ii) Conducting periodic reviews of its records that
13 are reasonably designed to assist in detecting and
14 preventing violations of this article.
15 (2) A general agent or independent agency shall adopt a
16 system established by an insurer to supervise recommendations
17 of its insurance producers that is reasonably designed to
18 achieve compliance with this article, or shall establish and
19 maintain a system that is reasonably designed to achieve
20 compliance with this article. The system must include at
21 least the following:
22 (i) Maintaining written procedures.
23 (ii) Conducting periodic reviews of records that are
24 reasonably designed to assist in detecting and preventing
25 violations of this article.
26 (3) An insurer may contract with a third party,
27 including a general agent or independent agency, to establish
28 and maintain a system of supervision as required by paragraph
29 (1) with respect to insurance producers under contract with
30 or employed by the third party.
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1 (4) An insurer shall make reasonable inquiry to assure
2 that the third party contracting under paragraph (3) is
3 performing the functions required under paragraph (1) and
4 shall take such action as is reasonable under the
5 circumstances to enforce the contractual obligation to
6 perform the functions. An insurer may comply with its
7 obligation to make reasonable inquiry by doing both of the
8 following:
9 (i) The insurer annually obtains, ELECTRONICALLY OR <--
10 OTHERWISE, a certification from a third party senior
11 manager who has responsibility for the delegated
12 functions that the manager has a reasonable basis to
13 represent, and does represent, that the third party is
14 performing the required functions.
15 (ii) The insurer, based on reasonable selection
16 criteria, periodically selects third parties contracting
17 under paragraph (3) for a review to determine whether the
18 third parties are performing the required functions. The
19 insurer shall perform procedures to conduct the review
20 that are reasonable under the circumstances.
21 (5) An insurer that contracts with a third party under
22 paragraph (3) and that complies with the requirements to
23 supervise under paragraph (4) shall have fulfilled its
24 responsibilities under paragraph (1).
25 (6) An insurer, general agent or independent agency is
26 not required to do either of the following:
27 (i) Review or provide for review of all insurance
28 producer-solicited transactions.
29 (ii) Include in its system of supervision an
30 insurance producer's recommendations to consumers of
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1 products other than the annuities offered by the insurer,
2 general agent or independent agency.
3 (7) A general agent or independent agency contracting
4 with an insurer pursuant to paragraph (3) shall promptly,
5 when requested by the insurer pursuant to paragraph (4), give
6 a certification as described in paragraph (4) or give a clear
7 statement that it is unable to meet the certification
8 criteria.
9 (8) No person may provide a certification under
10 paragraph (4)(i) unless both the following conditions are
11 met:
12 (i) The person is a senior manager with
13 responsibility for the delegated functions.
14 (ii) The person has a reasonable basis for making
15 the certification.
16 (e) Compliance with other rules.--Compliance with the
17 Financial Industry Regulatory Authority Conduct Rules pertaining
18 to suitability shall satisfy the requirements under this section
19 for the recommendation of variable annuities. Nothing in this
20 subsection shall limit the commissioner's ability to enforce the
21 provisions of this article.
22 (f) Internal audit and compliance procedures.--Nothing in
23 this article shall exonerate an insurer from the internal audit
24 and compliance procedure requirements under section 405-A.
25 Section 404-B. Mitigation of responsibility.
26 (a) Corrective actions.--The commissioner may order:
27 (1) An insurer to take reasonably appropriate corrective
28 action for any consumer harmed by the insurer's or by its
29 insurance producer's violation of this article.
30 (2) An insurance producer to take reasonably appropriate
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1 corrective action for any consumer harmed by the insurance
2 producer's violation of this article.
3 (3) A general agent or independent agency that employs
4 or contracts with an insurance producer to sell or solicit
5 the sale of annuities to consumers, to take reasonably
6 appropriate corrective action for any consumer harmed by the
7 insurance producer's violation of this article.
8 (b) Reduction of penalty.--Any applicable penalty permitted
9 under section 406-B may be reduced or eliminated if corrective
10 action for the consumer was taken promptly after a violation was
11 discovered.
12 Section 405-B. Recordkeeping.
13 An insurer, general agent, independent agency and insurance
14 producer shall maintain or be able to make available to the
15 commissioner records of the information collected from the
16 consumer and other information used in making the
17 recommendations that were the basis for insurance transactions
18 for five years after the insurance transaction is completed by
19 the insurer. An insurer is permitted but shall not be required
20 to maintain documentation on behalf of an insurance producer.
21 Section 406-B. Enforcement.
22 (a) Penalties and remedies.--Upon a determination by hearing
23 that this article has been violated, the commissioner may pursue
24 one or more of the following courses of action:
25 (1) Issue an order requiring the person in violation to
26 cease and desist from engaging in the violation.
27 (2) Suspend or revoke or refuse to issue or renew the
28 certificate or license of the person in violation.
29 (3) Impose a civil penalty of not more than $5,000 for
30 each violation.
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1 (4) Impose any other penalty or remedy deemed
2 appropriate by the commissioner, including restitution.
3 (b) Other remedies.--The enforcement remedies imposed under
4 this section are in addition to any other remedies or penalties
5 that may be imposed by any other applicable statute, including
6 the act of July 22, 1974 (P.L.589, No.205), known as the Unfair
7 Insurance Practices Act. Violations of this article are deemed
8 and defined by the commissioner to be an unfair method of
9 competition and an unfair or deceptive act or practice pursuant
10 to the Unfair Insurance Practices Act.
11 Section 407-B. Private cause of action.
12 Nothing in this article shall be construed to create or imply
13 a private cause of action for a violation of this article.
14 Section 2. This act shall take effect in 180 days.
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