Previously, the suitability rule imposed an obligation on insurers only with respect to variable annuities. The rule originally was intended to bring more states in line in terms of suitable standards for fixed annuities.
The NAIC's executive committee and plenary committee, however, voted to adopt an updated version of the annuity suitability rule yesterday afternoon at its spring meeting in Denver. The amendments were originally proposed last year.
There are three basic additions to the rule. The first establishes a regulatory framework that is aimed at holding companies responsible for ensuring that all annuity transactions are suitable for clients. Companies have to establish a system to supervise recommendations. The NAIC gave a list of factors going into the consideration for suitability, including the intended use of the annuity and the client’s existing assets, including investment and life insurance holdings.
A second addition to the model regulation is to requirement that producers receive training on the provisions of annuities and the products they sell. The rule’s most recently approved amendment requires annuity producers to take a one-time, four-credit training course approved by an insurance department and provided by an education provider that’s been cleared by the insurance regulator.
Topics in the course include how the provisions of contracts for fixed, variable and indexed annuities affect clients, and the use of appropriate sales practices and disclosure requirements. Producers who are currently insurance licensed and want to sell annuities must complete the course within six months of the effective date of the regulation.
Finally, now the suitability standards — when feasible — need to be consistent with those of the Financial Industry Regulatory Authority.
Broker-dealers selling variable annuities that are already subject to Finra’s suitability rules can cover their state regulatory requirements by adhering to Finra’s suitability requirements. Finra doesn’t have authority over fixed annuities, but broker-dealers that choose to subject fixed annuity sales to Finra standards of suitability and sales compliance would be meeting the NAIC’s requirements as well.