PRINTER'S NO. 3566
THE GENERAL ASSEMBLY OF PENNSYLVANIA
HOUSE BILL
No.
2434
Session of
2018
INTRODUCED BY DeLUCA, PICKETT, JAMES, J. McNEILL, MILLARD,
CALTAGIRONE, DAVIS, FRANKEL, DERMODY, HANNA, MATZIE, THOMAS,
D. COSTA, BIZZARRO, PETRARCA, MULLERY, KAVULICH, FLYNN,
SCHWEYER, NEILSON, GOODMAN, BURNS, DALEY, COMITTA, CARROLL,
BARBIN, DRISCOLL AND WARREN, MAY 23, 2018
REFERRED TO COMMITTEE ON INSURANCE, MAY 23, 2018
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," in suitability of annuity
transactions, further providing for definitions, for
applicability and scope of article and for duties of insurers
and insurance producers, providing for insurance producer
training, further providing for mitigation of responsibility
and for recordkeeping and providing for regulations.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Sections 401-B, 402-B and 403-B of the act of May
17, 1921 (P.L.682, No.284), known as The Insurance Company Law
of 1921, are amended to read:
Section 401-B. Definitions.
The following words and phrases when used in this article
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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] An
annuity that is an insurance product and is individually
solicited, whether the insurance product is classified as an
individual or group annuity.
"Commissioner." The Insurance Commissioner of the
Commonwealth.
"Continuing education credit." One continuing education
credit under section 608-A of the act of May 17, 1921 (P.L.789,
No.285), known as The Insurance Department Act of 1921.
"Continuing education provider." An individual or entity
approved to offer continuing education courses under section
608-A of The Insurance Department Act of 1921.
"Department." The Insurance Department of the Commonwealth.
"FINRA." The Financial Industry Regulatory Authority or a
succeeding agency.
"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,
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or an insurer where no producer is involved, to an individual
consumer that results in a purchase or [exchange] replacement of
an annuity in accordance with that advice.
"Replace" or "replacement." The purchase of a new policy or
contract where it is known or should be known to the proposing
producer, or to the proposing insurer if there is no insurance
producer, that by reason of the transaction, an existing policy
or contract has been or will be:
(1) lapsed, forfeited, surrendered or partially
surrendered or assigned to the replacing insurer or otherwise
terminated;
(2) converted to reduced paid-up insurance, continued as
extended term insurance, or otherwise reduced in value by the
use of nonforfeiture benefits or other policy values;
(3) amended so as to effect a reduction in benefits or
in the term for which coverage would otherwise remain in
force or for which benefits would be paid;
(4) reissued with a reduction in cash value; or
(5) used in a financed purchase.
"Suitability information." Information relating to an
annuity that is appropriate to determine the suitability of a
recommendation, including:
(1) Age.
(2) Annual income.
(3) Financial situation and needs, including the
financial resources used for the funding of the annuity.
(4) Financial experience.
(5) Financial objectives.
(6) Intended use of the annuity.
(7) Financial time horizon.
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(8) Existing assets, including investment and life
insurance holdings.
(9) Liquidity needs.
(10) Liquid net worth.
(11) Risk tolerance.
(12) Tax status.
Section 402-B. Applicability and scope of article.
(a) General rule.--This article shall apply to any
recommendation to purchase or [exchange] replace 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]
replacement 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] 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
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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] Prior to making a recommendation
to a consumer for the purchase or replacement 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]:
(1) 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.] the
consumer's suitability information.
(2) The consumer has been reasonably informed of various
features of the annuity, including the potential surrender
period and surrender charge, potential tax penalty if the
consumer sells, replaces, surrenders or annuitizes the
annuity, mortality and expense fees, investment advisory
fees, potential charges for and features of riders,
limitations on interest returns, insurance and investment
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components and market risk.
(3) The consumer would benefit from certain features of
the annuity, including tax-deferred growth, annuitization or
death or living benefit.
(4) The particular annuity as a whole, the underlying
subaccounts to which funds are allocated at the time of
purchase or replacement of the annuity, and riders and
similar product enhancements, if any, are suitable and, in
the case of a replacement, the transaction as a whole is
suitable for the consumer based on the consumer's suitability
information.
(5) In the case of a replacement of an annuity, the
replacement is suitable and shall take into consideration
whether:
(i) The consumer will incur a surrender charge, be
subject to the commencement of a new surrender period,
lose existing benefits, including death, living or other
contractual benefits, or be subject to increased fees,
investment advisory fees or charges for riders and
similar product enhancements.
(ii) The consumer would benefit from product
enhancements and improvements.
(iii) The consumer has had another annuity
replacement, including a replacement within the preceding
36 months.
(b) Consumer information.--Prior to the execution of a
purchase or [exchange] replacement 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:
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(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.] the consumer's suitability information.
(b.1) Reasonable basis.--Except as permitted under
subsection (c), an insurer may not issue an annuity recommended
to a consumer unless there is a reasonable basis to believe the
annuity is suitable based on the consumer's suitability
information.
(c) Obligation limits.--
(1) [Neither] Except as provided under paragraph (2),
neither an insurance producer nor an insurer where no
insurance producer is involved shall have any obligation to a
consumer under subsection (a) or (b.1) 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.] annuity transaction if:
(i) No recommendation is made.
(ii) A recommendation was made and was later found
to have been prepared based on materially inaccurate
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information provided by the consumer.
(iii) A consumer refuses to provide relevant
suitability information and the annuity transaction is
not recommended.
(iv) A consumer decides to enter into an annuity
transaction that is not based on a recommendation of the
insurer or the insurance producer.
(2) An insurer's issuance of an annuity subject to
paragraph (1) shall be reasonable under all the circumstances
actually known to the insurer at the time the annuity is
issued.
(c.1) Documentation.--An insurance producer, or the
responsible insurer representative if no insurance producer is
involved, shall at the time of sale of an annuity:
(1) Make a record of each recommendation subject to
subsection (a).
(2) Obtain a customer-signed statement documenting a
customer's refusal to provide suitability information, if
any.
(3) Obtain a customer-signed statement acknowledging
that an annuity transaction is not recommended if the
customer decides to enter into an annuity transaction that is
not based on the insurance producer's or insurer's
recommendation.
(d) Supervision of recommendations.--
(1) An insurer shall [assure that a system to supervise
recommendations] establish a supervision system that is
reasonably designed to achieve the insurer's and its
insurance producer's compliance with this article [is
established and maintained by complying with paragraphs (3)
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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:
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(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.
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(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.], including, but not limited to, the
following:
(i) The insurer shall maintain reasonable procedures
to inform its insurance producers of the requirements of
this article and shall incorporate the requirements of
this article into relevant insurance producer training
manuals.
(ii) The insurer shall establish standards for
insurance producer product training and maintain
reasonable procedures to require its insurance producers
to comply with the requirements of section 403.1-B.
(iii) The insurer shall provide product-specific
training and training materials that explain all material
features of its annuity products to its insurance
producers.
(iv) The insurer shall maintain procedures for
review of each recommendation before issuance of an
annuity that are designed to ensure that there is a
reasonable basis to determine that a recommendation is
suitable. 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, but not limited to, physical review. The
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electronic or other system may be designed to require
additional review only for those transactions identified
for additional review by the selection criteria.
(v) The insurer shall maintain reasonable procedures
to detect recommendations that are not suitable,
including, but not limited to, confirmation of consumer
suitability information, systematic customer surveys,
interviews, confirmation letters and programs of internal
monitoring. Nothing in this subparagraph shall prevent an
insurer from complying with this subparagraph by applying
sampling procedures or by confirming suitability
information after issuance or delivery of the annuity.
(vi) The insurer shall annually provide a report
detailing its supervision system to senior management,
including to the senior manager responsible for audit
functions. The report shall include a description of the
testing designed to determine the effectiveness of the
supervision system, the exceptions found and corrective
action taken or recommended, if any.
(2) Nothing in this subsection shall restrict an insurer
from contracting for performance of a function, including
maintenance of procedures, required under paragraph (1). An
insurer is responsible for taking appropriate corrective
action and may be subject to sanctions and penalties under
section 406-B regardless of whether the insurer contracts for
performance of a function and regardless of the insurer's
compliance with paragraph (3).
(3) An insurer's supervision system under paragraph (1)
shall include supervision of contractual performance under
paragraph (2), including, but not limited to, the following:
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(i) Monitoring and, as appropriate, conducting
audits to assure that the contracted function is properly
performed.
(ii) Annually obtaining a certification from a
senior manager who has responsibility for the contracted
function that the senior manager has a reasonable basis
to represent, and does represent, that the function is
properly performed.
(4) An insurer is not required to include in its system
of supervision an insurance producer's recommendations to
consumers for products other than the annuities offered by
the insurer.
(d.1) Dissuasion.--An insurance producer may not dissuade,
or attempt to dissuade, a consumer from:
(1) Truthfully responding to an insurer's request for
confirmation of suitability information.
(2) Filing a complaint.
(3) Cooperating with the investigation of a complaint.
(e) Compliance with other rules.--Sales made by [an
insurance producer subject to and in compliance with the
Financial Industry Regulatory Authority Conduct Rules pertaining
to suitability shall satisfy the requirements under this section
for the recommendation of annuities. Nothing in this subsection
shall limit the commissioner's ability to enforce the provisions
of this article.] and in compliance with FINRA requirements
pertaining to suitability and supervision of annuity
transactions shall satisfy the requirements under this section.
This subsection applies to FINRA broker-dealer sales of
annuities if the suitability and supervision is similar to those
applied to variable annuity sales. However, nothing in this
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subsection shall limit the commissioner's ability to enforce or
investigate the provisions of this article. For this subsection
to apply, an insurer shall:
(1) Monitor the FINRA member broker-dealer using
information collected in the normal course of an insurer's
business.
(2) Provide to the FINRA member broker-dealer
information and reports which are reasonably appropriate to
assist the FINRA member broker-dealer to maintain its
supervision system.
(f) Internal audit and compliance procedures.--Nothing in
this article shall exempt an insurer from the internal audit and
compliance procedure requirements under section 405-A.
Section 2. The act is amended by adding a section to read:
Section 403.1-B. Insurance producer training.
(a) Continuing education credits.--An insurance producer who
has the authority to sell annuities shall complete at least four
continuing education credits in an annuity training course or
courses covering the following topics:
(1) The types of annuities and various classifications
of annuities.
(2) Identification of the parties to an annuity.
(3) How product specific annuity contract features
affect consumers.
(4) The application of income taxation of qualified and
nonqualified annuities.
(5) The primary uses of annuities.
(6) Appropriate sales practices, replacement and
disclosure requirements.
(b) Compliance.--The continuing education credit requirement
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under subsection (a) shall be met on or before the end of the
insurance producer's next complete license period occurring
after the effective date of this section. For individuals
licensed on or after the effective date of this section, the
requirement shall be met on or before the end of the insurance
producer's first license period.
(c) Course requirements.--For a course to comply with the
requirements of this subsection, it shall cover all topics
listed under subsection (a) and may not contain any marketing
information, provide training on sales techniques or provide
specific information about a particular insurer's products.
Additional topics may be offered in conjunction with and in
addition to those required.
(d) Provider registration.--A provider of an annuity
training course intended to comply with this subsection shall
register as a continuing education provider in this Commonwealth
and comply with the rules and guidelines applicable to insurance
producer continuing education courses.
(e) Course method.--Annuity training courses may be
conducted and completed by classroom or self-study methods.
(f) Reporting requirements.--A continuing education provider
of annuity training shall comply with reporting requirements and
shall issue certificates of completion.
(g) Satisfaction in other states.--The satisfaction of the
training requirements of another state that are substantially
similar to the provisions of this subsection shall be deemed to
satisfy the training requirements of this subsection for
resident and nonresident producers.
(h) Verification.--An insurer shall verify that an insurance
producer has completed the annuity training course required
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under this subsection within the time period specified under
subsection (b). An insurer may satisfy its responsibility under
this subsection by obtaining certificates of completion of the
training course or obtaining reports provided by the
commissioner-sponsored database systems or vendors or from a
reasonably reliable commercial database vendor that has a
reporting arrangement with approved insurance education
providers.
Section 3. Sections 404-B and 405-B of the act are amended
to read:
Section 404-B. Mitigation of responsibility.
(a) Corrective actions.--[The commissioner may order:] An
insurer is responsible for compliance with this article. If a
violation occurs, either because of the action or inaction of an
insurer or its insurance producer, 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] An exclusive general
agent or the insurance producer to take reasonably
appropriate corrective action for any consumer harmed by the
[insurance producer's] licensee's violation of this article.
(4) Penalties and remedies under section 406-B.
(b) Reduction of penalty.--Any applicable penalty permitted
under section 406-B for a violation of this article may be
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reduced or eliminated if corrective action for the consumer was
taken promptly after a violation was discovered or the violation
was not part of a pattern or practice.
Section 405-B. Recordkeeping.
(a) General rule.--An insurer, exclusive 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 the
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.
(b) Form of records.--Records required to be maintained
under this article may be maintained in paper, photographic,
microprocess, magnetic, mechanical or electronic media or by any
process that accurately reproduces the actual document.
Section 4. The act is amended by adding a section to read:
Section 408-B. Regulations.
The department may promulgate rules and regulations necessary
for the administration of this article.
Section 5. This act shall take effect in 180 days.
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