2023 California Code › Insurance Code - INS › DIVISION 2 - CLASSES OF INSURANCE › PART 2 - LIFE AND DISABILITY INSURANCE › CHAPTER 5 - General Regulation of Life Insurers › ARTICLE 9 - Suitability Requirements for Annuity Transactions › Section 10509.914.

10509.914. (a) In recommending to a consumer 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 an insurer if no 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 his or her investments and other insurance products and as to his or her financial situation and needs, including the consumer’s suitability information, and that there is a reasonable basis to believe all of the following:
(1) The consumer has been reasonably informed of various features of the annuity, such as the potential surrender period and surrender charge, potential tax penalty if the consumer sells, exchanges, 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 components, and market risk.
(2) The consumer would receive a tangible net benefit from the transaction.
(3) The particular annuity as a whole, the underlying subaccounts to which funds are allocated at the time of purchase or exchange of the annuity, and riders and similar product enhancements, if any, are suitable, and in the case of an exchange or replacement, the transaction as a whole is suitable, for the particular consumer based on his or her suitability information.
(4) In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable, including taking into consideration all of the following:
(A) Whether 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) Whether the consumer would benefit from product enhancements and improvements.
(C) Whether the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.
(b) Prior to the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumer’s suitability information.
(c) Except as permitted under subdivision (d), an insurer shall 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. The preceding sentence and subdivision (d) notwithstanding, neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial financial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.
(d) (1) Except as provided under paragraph (2), neither an insurance producer nor an insurer shall have any obligation to a consumer under subdivision (a) or (c) related to an annuity transaction if any of the following occur:
(A) No recommendation is made.
(B) A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer.
(C) A consumer refuses to provide relevant suitability information and the annuity transaction is not recommended.
(D) 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 which are actually known, or which after reasonable inquiry should be known, to the insurer or the insurance producer at the time the annuity is issued.
(e) An insurance producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale do all of the following:
(1) Make a record of any recommendation subject to subdivision (a).
(2) Obtain a customer-signed statement documenting the 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.
(f) (1) An insurer shall establish a supervision system that is reasonably designed to achieve the insurer’s and its insurance producers’ compliance with this article, including, but not limited to, all of the following:
(A) 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.
(B) The insurer shall establish standards for insurance producer product training and shall maintain reasonable procedures to require its insurance producers to comply with the requirements of Section 10509.915.
(C) The insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers.
(D) The insurer shall maintain procedures for review of each recommendation prior to 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. An electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria.
(E) The insurer shall maintain reasonable procedures to detect recommendations that are not suitable. This may include, but is not limited to, confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters, and programs of internal monitoring. Nothing in this subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures or by confirming suitability information after issuance or delivery of the annuity.
(F) The insurer shall annually provide a report to its 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.
(2) (A) Nothing in this subdivision restricts 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 pursuant to Section 10509.916 regardless of whether the insurer contracts for performance of a function and regardless of the insurer’s compliance with subparagraph (B). An insurer is responsible for the compliance of its insurance producer with the provisions of this article regardless of whether the insurer contracts for performance of a function required under this subdivision and regardless of the insurer’s compliance with subparagraph (B).
(B) An insurer’s supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subdivision. This includes, but is not limited to, both of the following:
(i) Reasonable monitoring and, as appropriate, conducting audits to ensure 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 manager has a reasonable basis to represent, and does represent, that the function is properly performed.
(3) An insurer is not required to include in its system of supervision an insurance producer’s recommendations to consumers of products other than the annuities offered by the insurer.
(g) An insurance producer or insurer shall not dissuade, or attempt to dissuade, a consumer from any of the following:
(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.
(h) (1) This subdivision applies to FINRA broker-dealer sales of variable and fixed annuities.
(2) Sales by FINRA broker-dealers that comply with the suitability and supervision system requirements set forth in FINRA Rule 2330, or any successor rule, shall satisfy the suitability and supervision system requirements of this article, provided that the suitability criteria used also include both of the following:
(A) The consumer’s income.
(B) The intended use of the annuity.
(3) Except as provided in paragraphs (1) and (2), all other provisions of this article remain applicable to these broker-dealer sales.
(4) Nothing in this subdivision shall limit the commissioner’s ability to enforce, including conducting investigations related to, the provisions of this article.
(5) “FINRA” means the Financial Industry Regulatory Authority or a successor agency.
(Added by Stats. 2011, Ch. 295, Sec. 2. (AB 689) Effective January 1, 2012.)