§ 20-1243.03 — Duties of insurers and producers; definitions

Arizona § 20-1243.03

• Jurisdiction: Arizona
• Title 20: Arizona Revised Statutes
• Ch. 6: PARTICULAR TYPES OF INSURANCE
• Art. 1.: Protection in Annuity Transactions

Text

A. When a producer makes a recommendation of an annuity, the producer shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interest. The producer has acted in the best interest of the consumer if the producer has satisfied the obligations regarding care, disclosure, conflict of interest and documentation prescribed in this section.

B. To satisfy the care obligation, in making a recommendation, the producer shall exercise reasonable diligence, care and skill to do all of the following:

1. Know the consumer's financial situation, insurance needs and financial objectives.

2. Understand the available recommendation options after making a reasonable inquiry into options available to the producer.

3. Have a reasonable basis to believe both of the following:

(a) The recommended option effectively addresses the consumer's financial situation, insurance needs and financial objectives over the life of the product, as evaluated in light of the consumer profile information.

(b) The consumer would benefit from certain features of the annuity, such as annuitization, death or living benefits or other insurance-related features.

4. Communicate the basis or bases of the recommendation.

5. Make reasonable efforts to obtain consumer profile information from the consumer before the recommendation of an annuity.

6. Consider the types of products the producer is authorized and licensed to recommend or sell that address the consumer's financial situation, insurance needs and financial objectives. The producer:

(a) Is not required to analyze or consider any product outside the producer's authority and license or other possible alternative products or strategies that are available in the market at the time of recommendation.

(b) Shall be held to standards that apply to producers with similar authority and licensure.

7. In the case of an exchange or replacement of an annuity, consider the whole transaction, including taking into consideration whether:

(a) 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) The replacing product would substantially benefit the consumer in comparison to the replaced product over the life of the product.

(c) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding sixty months.

C. The requirements under the best interest and care obligations under subsections A and B of this section do not create a fiduciary obligation or relationship and only create a regulatory obligation as established in this article.

D. The requirements under the care obligation under subsection B of this section:

1. Apply to the particular annuity as a whole and the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements, if any.

2. Do not mean the annuity with the lowest onetime or multiple occurrence compensation structure shall necessarily be recommended.

3. Do not mean the producer has ongoing monitoring obligations under the care obligation under subsection B of this section, although such an obligation may be separately owed under the terms of a fiduciary, consulting, investment advising or financial planning agreement between the consumer and the producer.

4. Do not require a producer to obtain any license other than a producer license with the appropriate line of authority to sell, solicit or negotiate insurance in this state, including any securities license, in order to fulfill the duties and obligations contained in this article if the producer does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.

E. Under the care obligation under subsection B of this section, the consumer profile information, characteristics of the insurer and product costs, rates, benefits and features are those factors generally relevant in making a determination whether an annuity effectively addresses the consumer's financial situation, insurance needs and financial objectives, but the level of importance of each factor under the care obligation under subsection B of this section may vary depending on the facts and circumstances of a particular case, and each factor may not be considered in isolation.

F. To satisfy the disclosure obligation, before the recommendation or sale of an annuity, the producer shall prominently disclose the following information to the consumer on a form substantially similar to the "insurance agent (producer) disclosure for annuities" form in appendix A of the 2020 national association of insurance commissioners suitability in annuity transactions model regulation:

1. A description of the scope and terms of the relationship with the consumer and the role of the producer in the transaction.

2. An affirmative statement on whether the producer is licensed and authorized to sell the following products:

(a) Fixed annuities.

(b) Fixed indexed annuities.

(c) Variable annuities.

(d) Life insurance.

(e) Mutual funds.

(f) Stocks and bonds.

(g) Certificates of deposit.

3. An affirmative statement describing the insurers for which the producer is authorized, contracted or appointed or otherwise able to sell insurance products, using the following descriptions:

(a) One insurer.

(b) From two or more insurers.

(c) From two or more insurers although primarily contracted with one insurer.

4. A description of the sources and types of cash compensation and noncash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of a premium or other remuneration received from the insurer, intermediary or other producer or by fee as a result of a contract for advice or consulting services.

5. A notice of the consumer's right to request additional information regarding cash compensation. On request of the consumer or the consumer's designated representative, the producer shall disclose both of the following:

(a) A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages.

(b) Whether the cash compensation is a onetime or multiple occurrence amount and, if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages.

G. The disclosure obligation under subsection F of this section requires that before or at the time of the recommendation or sale of an annuity, the producer shall have a reasonable basis to believe the consumer has been 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, any annual fees, potential charges for and features of riders or other options of the annuity, limits on interest returns, potential changes in nonguaranteed elements of the annuity, insurance and investment components and market risk.

H. To satisfy the conflict of interest obligation, the producer shall identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.

I. To satisfy the documentation obligation, the producer at the time of recommendation or sale shall:

1. Make a written record of any recommendation and the basis for the recommendation subject to this article.

2. Obtain a consumer-signed statement on a form substantially similar to the "consumer refusal to provide information" form in appendix B of the 2020 national association of insurance commissioners suitability in annuity transactions model regulation documenting both:

(a) A customer's refusal to provide the consumer profile information, if any.

(b) A customer's understanding of the ramifications of not providing the consumer profile information or providing insufficient consumer profile information.

3. Obtain a consumer-signed statement on a form substantially similar to the "consumer decision to purchase an annuity not based on a recommendation" form in appendix C of the 2020 national association of insurance commissioners suitability in annuity transactions model regulation acknowledging the annuity transaction is not recommended if a customer decides to enter into an annuity transaction that is not based on the producer's recommendation.

J. Any requirement applicable to a producer under subsections A, B, C, D, E, F, G, H and I of this section applies to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer. Activities such as the following do not in and of themselves constitute material control or influence:

1. Providing or delivering marketing or educational material.

2. Product wholesaling or other back-office product support.

3. General supervision of a producer.

K. An insurer's issuance of an annuity subject to this subsection shall be reasonable under all the circumstances actually known to the insurer at the time the annuity is issued. A producer has no other obligation under subsections A, B, C, D and E of this section to a consumer related to an annuity transaction if:

1. No recommendation is made.

2. A recommendation was made that was later found to have been prepared based on materially inaccurate information provided by the consumer.

3. The consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended.

4. The consumer decides to enter into an annuity transaction that is not based on a recommendation by the producer.

L. Except as allowed under this subsection, an insurer may not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumer's financial situation, insurance needs and financial objectives based on the consumer's consumer profile information. Each insurer shall establish and maintain a supervision system that is reasonably designed to achieve the insurer's and its producers' compliance with this article and that includes the following:

1. Reasonable procedures to inform its producers of the requirements of this article, including incorporating the requirements of this article in relevant producer training manuals.

2. Standards for producer product training, including establishing and maintaining reasonable procedures to ensure compliance with section 20-1243.07.

3. Product-specific training and training materials that explain all material features of its annuity products to its producers.

4. Procedures for reviewing each recommendation before issuing an annuity that are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumer's financial situation, insurance needs and financial objectives. 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 physical review. The electronic system or other system may be designed to require additional review of only those transactions that are identified for additional review by the selection criteria.

5. Reasonable procedures to detect recommendations that do not comply with subsections A, B, C, D, E, F, G, H, I, J, K, O and P of this section, including confirmation of the consumer's consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations and programs of internal monitoring. This paragraph does not prevent an insurer from complying with this paragraph by applying sampling procedures or by confirming the consumer profile information or other required information under this section after issuing or delivering the annuity.

6. Reasonable procedures to assess, before or on issuance or delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section.

7. Reasonable procedures to identify and address suspicious consumer refusals to provide consumer profile information.

8. Reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses and noncash compensation that are based on the sales of specific annuities within a limited period of time. This paragraph does not prohibit the receipt of health insurance, office rent, office support, retirement benefits or other employee benefits by employees so long as those benefits are not based on the volume of sales of a specific annuity within a limited period of time.

9. A written annual report to senior management, including to the senior manager responsible for audit functions, that details a review with appropriate testing and that is reasonably designed to determine the effectiveness of the supervision system, the exceptions found and corrective action taken or recommended, if any.

M. An insurer may contract for performance of a function, including maintenance of procedures, required under subsection L of this section but is responsible for taking appropriate corrective action and may be subject to sanctions and penalties pursuant to section 20-1243.05 regardless of whether the insurer contracts for performance of a function and regardless of the insurer's compliance with paragraphs 1 and 2 of this subsection. An insurer's supervision system under this subsection shall include supervision of contractual performance under this subsection by incorporating at least both of the following:

1. Monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed.

2. 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.

N. An insurer is not required to include in its system of supervision:

1. A producer's recommendations to consumers of products other than the annuities offered by the insurer.

2. Consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.

O. A producer or an insurer may not dissuade, or attempt to dissuade, a consumer from:

1. Truthfully responding to an insurer's request for confirmation of the consumer profile information.

2. Filing a complaint.

3. Cooperating with the investigation of a complaint.

P. Recommendations and sales of annuities that comply with comparable standards satisfy the requirements under this article. This subsection applies to all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls and procedures that satisfy a comparable standard even if such a standard would not otherwise apply to the product or recommendation at issue. This subsection does not limit the director's ability to investigate and enforce this article or limit the insurer's obligation to comply with its obligation under subsection L of this section not to issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumer's financial situation, insurance needs and financial objectives based on the consumer's consumer profile information, although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional. An insurer complies with this subsection if the insurer does all of the following:

1. Monitors the relevant conduct of the financial professional seeking to rely on this subsection or the entity responsible for supervising the financial professional, such as the financial professional's broker-dealer or an investment adviser registered under federal or state securities laws using information collected in the normal course of an insurer's business.

2. Provides to the entity responsible for supervising the financial professional seeking to rely on this subsection, such as the financial professional's broker-dealer or investment adviser registered under federal or state securities laws, information and reports that are reasonably appropriate to assist the entity to maintain its supervision system.

Q. For the purposes of this section:

1. "Comparable standards" means:

(a) With respect to broker-dealers and registered representatives of broker-dealers, applicable SEC and FINRA rules relating to best interest obligations and supervision of annuity recommendations and sales, including regulation best interest and any amendments or successor regulations.

(b) With respect to investment advisers registered under federal or state securities law or investment adviser representatives, the fiduciary duties and all other requirements imposed on the investment advisers or investment adviser representatives by contract or under the investment advisers act of 1940, including the form ADV and interpretations.

(c) With respect to plan fiduciaries or other fiduciaries, the fiduciary duties, obligations and prohibitions and all other requirements attendant to such a status under the employee retirement income security act of 1974 or the internal revenue code and any amendments or successor statutes.

2. "Financial professional" means a producer that is regulated and acting as:

(a) A broker-dealer registered under federal or state securities laws or a registered representative of a broker-dealer.

(b) An investment adviser registered under federal or state securities laws or an investment adviser representative associated with the federal or state investment adviser.

(c) A plan fiduciary under section 3(21) of the employee retirement income security act of 1974 or section 4975(e)(3) of the internal revenue code or any amendments or successor statutes.