SB-0467, As Passed Senate, December 13, 2012

SUBSTITUTE FOR

SENATE BILL NO. 467

     A bill to amend 1956 PA 218, entitled

"The insurance code of 1956,"

by amending sections 4151, 4153, 4155, and 4165 (MCL 500.4151,

500.4153, 500.4155, and 500.4165), as added by 2006 PA 399, and by

adding sections 4158, 4159, 4160, and 4161; and to repeal acts and

parts of acts.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

     Sec. 4151. As used in this chapter:

     (a) "Annuity" means a fixed annuity or variable an annuity

that is an insurance product under state law that is individually

solicited, whether the product is classified as an individual or

group annuity.

     (b) "Insurance producer" or "producer" means insurance

producer as defined in section 1201 and includes a business entity

described in section 1205(2) that is licensed as an insurance

producer under this act.

     (c) "Recommendation" means advice provided by an insurance

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

individual consumer that results in a purchase, or exchange, or

replacement of an annuity in accordance with that advice.

     (d) "Replacement" or "replace" means a transaction in which a

new policy or contract is to be purchased, and it is known or

should be known to the proposing producer, or to the proposing

insurer if there is no producer, that by reason of the transaction,

an existing policy or contract has been or is to be 1 of the

following:

     (i) Lapsed, forfeited, surrendered or partially surrendered,

assigned to the replacing insurer, or otherwise terminated.

     (ii) 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.

     (iii) Amended so as to effect either a reduction in benefits or

in the term for which coverage would otherwise remain in force or

for which benefits would be paid.

     (iv) Reissued with any reduction in cash value.

     (v) Used in a financed purchase.

     (e) "Suitability information" means information that is

reasonably appropriate to determine the suitability of a

recommendation, including all of the following:

     (i) Age.

     (ii) Annual income.

     (iii) Financial situation and needs, including the financial

resources used for the funding of the annuity.

     (iv) Financial experience.

     (v) Financial objectives.

     (vi) Intended use of the annuity.

     (vii) Financial time horizon.

     (viii) Existing assets, including investment and life insurance

holdings.

     (ix) Liquidity needs.

     (x) Liquid net worth.

     (xi) Risk tolerance.

     (xii) Tax status.

     Sec. 4153. (1) This chapter applies to any recommendation to

purchase, or exchange, or replace an annuity made to a consumer by

an insurance producer, or by an insurer where if no producer is

involved, that results in the purchase, or exchange, or replacement

recommended.

     (2) This chapter does not apply to any recommendation to

purchase, or exchange, or replace an annuity involving any of the

following:

     (a) Direct response solicitations where if there is no

recommendation based on information collected from the consumer.

     (b) Contracts used to fund any of the following:

     (i) An employee pension or welfare benefit plan that is covered

by the employee retirement and income security act of 1974, Public

Law 93-406.

     (ii) A plan described by 26 USC 401(a), 26 USC 401(k), 26 USC

403(b), 26 USC 408(k), or 26 USC 408(p), if established or

maintained by an employer.

     (iii) A government governmental or church plan defined in 26 USC

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 USC 457.

     (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.

     Sec. 4155. (1) 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 the insurer where 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:

     (a) 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.

     (b) The consumer would benefit from certain features of the

annuity, such as tax-deferred growth, annuitization, or death or

living benefit.

     (c) 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, for an exchange or

replacement, the transaction as a whole is suitable, for the

particular consumer based on his or her suitability information.

     (d) For an exchange or replacement of an annuity, the exchange

or replacement is suitable including taking into consideration all

of the following:

     (i) 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.

     (ii) Whether the consumer would benefit from product

enhancements and improvements.

     (iii) Whether the consumer has had another annuity exchange or

replacement and, in particular, an exchange or replacement within

the preceding 36 months.

     (2) Prior to Before the execution of a purchase, or exchange,

or replacement of an annuity resulting from a recommendation, an

insurance producer, or an insurer where if no producer is involved,

shall make reasonable efforts to obtain all of the following

information: the consumer's suitability information.

     (a) The consumer's financial status.

     (b) The consumer's tax status.

     (c) The consumer's investment objectives.

     (d) Such other information used or considered to be reasonable

by the insurance producer, or the insurer where no producer is

involved, in making recommendations to the consumer.

     (3) Except as provided under subsection (4), neither an

insurance producer, nor an insurer where no producer is involved,

shall have any obligation to a consumer under subsection (1)

related to any recommendation if a consumer does any of the

following:

     (a) Refuses to provide relevant information requested by the

insurer or insurance producer.

     (b) Decides to enter into an insurance transaction that is not

based on a recommendation of the insurer or insurance producer.

     (c) Fails to provide complete or accurate information.

     (4) An insurer or insurance producer's recommendation subject

to subsection (1) shall be reasonable under all the circumstances

actually known to the insurer or insurance producer at the time of

the recommendation.

     (3) Except as permitted under subsection (4), an insurer shall

not issue an annuity recommended to a consumer unless there is a

reasonable basis to believe that the annuity is suitable based on

the consumer's suitability information.

     (4) An insurer's issuance of an annuity shall be reasonable

under all of the circumstances actually known to the insurer at the

time the annuity is issued. However, neither a producer nor an

insurer has any obligation to a consumer under subsection (1) or

(3) related to any annuity transaction if any of the following

apply:

     (a) A recommendation is not 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.

     (5) A producer or, if no producer is involved, the responsible

insurer representative, shall at the time of sale do all of the

following:

     (a) Make a record of any recommendation subject to subsection

(1).

     (b) Obtain a customer-signed statement documenting a

customer's refusal to provide suitability information, if any.

     (c) Obtain a customer-signed statement acknowledging that an

annuity transaction is not recommended if a customer decides to

enter into an annuity transaction that is not based on the

producer's or insurer's recommendation.

     Sec. 4158. (1) An insurer shall establish a supervision system

that is reasonably designed to achieve the insurer's and its

producers' compliance with this chapter, including, but not limited

to, all of the following:

     (a) Maintain reasonable procedures to inform its producers of

the requirements of this chapter and incorporate the requirements

of this chapter into relevant producer training manuals.

     (b) Establish standards for producer product training and

maintain reasonable procedures to require its producers to comply

with section 4160.

     (c) Provide product-specific training and training materials

that explain all material features of its annuity products to its

producers.

     (d) 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. 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) 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. This subdivision does not prevent an insurer

from complying with this subdivision by applying sampling

procedures or by confirming suitability information after issuance

or delivery of the annuity.

     (f) Annually provide a report to senior management, including

to the senior manager responsible for audit functions, that 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) This section does not restrict an insurer from contracting

for performance of a function, including maintenance of procedures,

required under subsection (1). An insurer shall take appropriate

corrective action and may be subject to sanctions and penalties

under this act regardless of whether the insurer contracts for

performance of a function and regardless of the insurer's

compliance with subsection (3).

     (3) An insurer's supervision system under this section shall

include supervision of contractual performance. This includes, but

is not limited to, the following:

     (a) Monitoring and, as appropriate, conducting audits to

assure that the contracted function is properly performed.

     (b) 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.

     (4) An insurer is not required to include in its system of

supervision a producer's recommendations to consumers of products

other than the annuities offered by the insurer.

     Sec. 4159. A producer shall not dissuade, or attempt to

dissuade, a consumer from any of the following:

     (a) Truthfully responding to an insurer's request for

confirmation of suitability information.

     (b) Filing a complaint.

     (c) Cooperating with the investigation of a complaint.

     Sec. 4160. (1) A producer shall not solicit the sale of an

annuity unless the producer has adequate knowledge of the product

to recommend the annuity and the producer is in compliance with the

insurer's standards for product training. A producer may rely on

insurer-provided product-specific training standards and materials

to comply with this subsection.

     (2) A producer who engages in the sale of annuities shall

complete a 1-time 4-credit training course approved by the

commissioner and provided by an insurance producer program of study

registered under chapter 12. Insurance producers who hold a life

insurance line of authority on the effective date of the amendatory

act that added this section and who desire to sell annuities shall

complete the requirements of this subsection within 6 months after

the effective date of the amendatory act that added this section.

Individuals who obtain a life insurance line of authority on or

after the effective date of the amendatory act that added this

section shall not engage in the sale of annuities until the annuity

training course required under this subsection has been completed.

     (3) The minimum length of the training required under

subsection (2) shall be not less than 4 hours, as defined in

section 1204c, and may be longer.

     (4) The training required under subsection (2) shall include

information on all of the following:

     (a) The types of annuities and various classifications of

annuities.

     (b) Identification of the parties to an annuity.

     (c) How fixed, variable, and indexed annuity contract

provisions affect consumers.

     (d) The income taxation of qualified and nonqualified

annuities.

     (e) The primary uses of annuities.

     (f) Appropriate sales practices and replacement and disclosure

requirements.

     (5) Registered insurance producer programs of study shall

cover all topics under subsection (4) and shall not present any

marketing information or 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 the topics under subsection (4).

     (6) A provider of an annuity training course intended to

comply with this section shall register with the commissioner as a

continuing education provider in this state and comply with any

requirements of the commissioner applicable to insurance producer

continuing education.

     (7) Annuity training courses may be conducted and completed by

classroom or self–study methods in accordance with requirements of

the commissioner.

     (8) Providers of annuity training shall comply with any

reporting requirements imposed by the commissioner and shall issue

certificates of completion in accordance with any requirements of

the commissioner.

     (9) The satisfaction of the training requirements of another

state that the commissioner determines to be substantially similar

to this section satisfies the training requirements of this

section.

     (10) An insurer shall verify that an insurance producer has

completed the annuity training course required under this section

before allowing the producer to sell an annuity for that insurer.

An insurer may satisfy its responsibility under this section by

obtaining certificates of completion of the training course or

obtaining reports provided by commissioner-sponsored database

systems or vendors or from a reasonably reliable commercial

database vendor that has a reporting arrangement with a registered

insurance producer program of study.

     Sec. 4161. For a consumer purchasing an individual annuity,

the consumer shall be given a copy of the annuity policy within a

reasonable time after the annuity is accepted and issued.

     Sec. 4165. (1) An insurer or insurance producer that complies

with the national association of securities dealers rules "NASD

Manual, Conduct Rules section 2310 (CCH, 1966)" or rules at least

as stringent as section 2310 pertaining to suitability satisfies

this chapter's requirements for the recommendation of variable

annuities. Subject to subsection (2), a sale made in compliance

with financial industry regulatory authority requirements

pertaining to suitability and supervision of annuity transactions

Senate Bill No. 467 as amended December 11, 2012

satisfies the requirements of this chapter. This subsection applies

to a financial industry regulatory authority broker-dealer sale of

a variable annuity or fixed annuity if the suitability and

supervision are similar to those applied to variable annuity sales.

However, this subsection does not limit the commissioner's ability

to enforce and investigate this chapter.

     (2) Subsection (1) applies if the insurer does both of the

following:

     (a) Monitors the financial industry regulatory authority

member broker-dealer using information collected in the normal

course of the insurer's business.

     (b) Provides to the financial industry regulatory authority

member broker-dealer information and reports that are reasonably

appropriate to assist the financial industry regulatory authority

member broker-dealer to maintain its supervision system.

     Enacting section 1. Section 4157 of the insurance code of

1956, 1956 PA 218, MCL 500.4157, is repealed.

[Enacting section 2. This amendatory act takes effect June 1,

 2013.]