Menu

Expect Focus Life, Annuity, and Retirement Solutions, April 2021

States Spring Into Action With Best Interest Rules for Annuities

Life, Annuity, and Retirement Solutions   |   Financial Services Regulatory   |   Securities & Investment Companies   |   May 5, 2021
Download Download   
Share Share Page

In February 2020, the NAIC approved revisions to the Suitability in Annuity Transactions Model 275, adopting a four-part best interest obligation, including the following obligations: care, disclosure, conflict of interest, and documentation. The revisions to Model 275 also fertilized the producer training requirements and the insurer supervision system with respect to annuity recommendations to consumers. The status of state adoption of changes to their suitability requirements are as follows:

  • Adopted: Arizona, Arkansas, Delaware, Idaho, Iowa, Michigan, Nebraska, North Dakota, Ohio, Rhode Island
  • Pending: Alabama, Connecticut, Kentucky, Maine, Montana, Nevada,1 Texas, Virginia

Below is a summary of the differences between the state initiatives and the revisions to Model 275.

To graft with the federal securities laws and the Department of Labor, Model 275 adopted a “best interest obligation” standard. Alabama and Kentucky differ from Model 275 because their state initiatives currently do not use the term “best interest,” but the operative provisions of these states’ initiatives contain the same four parts as the Model 275 “best interest obligation.”

As part of the care obligation, Model 275 requires the producer to communicate the basis of the recommendation to the consumer. During its drafting sessions, the NAIC Suitability Working Group opted not to require this to be in writing. However, Montana specifically requires a producer to “communicate the basis or bases of the recommendation to the consumer in writing.”

As part of the disclosure obligation, Model 275 requires the producer to provide the following to the consumer:

  1. Descriptions of (a) the producer-consumer relationship and the producer’s role in the transaction and (b) the sources and types of both cash and non-cash compensation that the producer receives from the transaction.
  2. Affirmative statements regarding (a) the products the producer is licensed and authorized to sell and (b) whether the producer is authorized, contracted, or able to sell insurance products for one insurer, two or more insurers, or two or more insurers although the producer primarily contracts with one insurer.
  3. Notice of a consumer’s right to request other information regarding cash compensation.

Model 275 provides a template for such disclosure in Appendix A and requires the consumer to sign the last page of this disclosure document. However, Maine’s proposed changes require the consumer to sign each page of the producer disclosure.

Further updates to Model 275 address (a) new producer training requirements on the revised standard of care and (b) the ability to satisfy those training requirements with “substantially similar” courses. These updates to Model 275, and state differences, are as follows:

  • Training Requirements for Existing Producers – Under Model 275, existing producers that completed an annuity training course under the prior model will have six months to comply with the new model. Existing producers can come into compliance by completing either (1) a new four-credit annuity training course or (2) a one-credit training course to cultivate an existing producer’s knowledge of the new model requirements.
    • Kentucky and Texas leave out the provisions that permit existing producers who have already taken the four-credit course to take only the additional one-credit course.
    • North Dakota pruned away the six-month delay in the implementation of the revised producer training requirement for existing producers that are already licensed.
  • Substantially Similar Courses – Under the revised Model 275, in addition to having reciprocity of producer training courses between states, producer training requirements can be satisfied by courses that are “substantially similar” to those described in Model 275.
    • Alabama and Kentucky omit the allowance for “substantially similar” courses to satisfy their revised producer training requirements. However, both include reciprocity for courses from another state.
    • Montana weeds out the ability for annuity training courses from other states to satisfy its revised producer training requirements.

* With assistance from Jordan Luczaj, a student at the University of Miami School of Law.

1 Nevada’s current proposal is not based on the 2020 revisions to Model 275; however, Nevada is expected to introduce a substitute proposal that follows Model 275.

 


©2021 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.