14 Va. Admin. Code § 5-45-40

Current through Register Vol. 40, No. 19, May 6, 2024

Section 14VAC5-45-40 - Duties of insurers and agents

A. Best interest obligations. An agent, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the agent's or the insurer's financial interest ahead of the consumer's interest. An agent has acted in the best interest of the consumer if the agent has satisfied the following obligations regarding care, disclosure, conflict of interest, and documentation:

1. Care Obligation.

a. The agent, in making a recommendation shall exercise reasonable diligence, care, and skill to:

(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 agent;

(3) Have a reasonable basis to believe 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; and

(4) Communicate the basis of the recommendation.

b. The requirements under subdivision 1 a of this subsection include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.

c. The requirements under subdivision 1 a of this subsection require an agent to consider the types of products the agent is authorized and licensed to recommend or sell that address the consumer's financial situation, insurance needs, and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the agent or other possible alternative products or strategies available in the market at the time of the recommendation. Agents shall be held to standards applicable to agents with similar authority and licensure.

d. The requirements under this subdivision 1 of this subsection do not create a fiduciary obligation or relationship.

e. 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 of this subdivision 1 may vary depending on the facts and circumstances of a particular case. However, each factor may not be considered in isolation.

f. The requirements under subdivision 1 a of this subsection include having a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit, or other insurance-related features.

g. The requirements under subdivision 1 a of this subsection 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 agent enhancements, if any.

h. The requirements under subdivision 1 a of this subsection do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be recommended.

i. The requirements under subdivision 1 a of this subsection do not mean the agent has ongoing monitoring obligations under the care obligation under subdivision 1 a of this subsection, 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 agent.

j. In the case of an exchange or replacement of an annuity, the agent shall consider the whole transaction, which includes taking into consideration whether:

(1) 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;

(2) The replacing product would substantially benefit the consumer in comparison to the replaced product over the life of the product; and

(3) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.

k. Nothing in this chapter should be construed to require an agent to obtain any license other than an agent license with the appropriate line of authority to sell, solicit, or negotiate insurance in this Commonwealth, including any securities license, in order to fulfill the duties and obligations contained in this chapter; provided the agent does not give advice or provide services that are otherwise subject to securities laws or engage in any other activity requiring other professional licenses.

2. Disclosure obligation.

a. Prior to the recommendation or sale of an annuity, the agent shall prominently disclose to the consumer on the commission's Insurance Agent (Producer) Disclosure for Annuities form:

(1) A description of the scope and terms of the relationship with the consumer and the role of the agent in the transaction;

(2) An affirmative statement on whether the agent 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) Any securities as defined in the Virginia Securities Act; and

(g) Certificates of deposit;

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

(a) From one insurer;

(b) From two or more insurers; or

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

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

(5) A notice of the consumer's right to request additional information regarding cash compensation described in subdivision 2 b of this subsection;

b. Upon request of the consumer or the consumer's designated representative, the agent shall disclose:

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

(2) Whether the cash compensation is a one-time 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; and

c. Prior to or at the time of the recommendation or sale of an annuity, the agent 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 of other options of the annuity; limitations on interest returns; potential changes in nonguaranteed elements of the annuity; insurance and investment components; and market risk.

3. Conflict of interest obligation. An agent shall identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.

4. Documentation obligation. An agent shall at the time of recommendation or sale:

a. Make a written record of any recommendation and the basis for the recommendation subject to this chapter;

b. Obtain a consumer signed statement on the commission's Consumer Refusal to Provide Information form documenting:

(1) A customer's refusal to provide the consumer profile information, if any; and

(2) A customer's understanding of the ramifications of not providing their consumer profile information or providing insufficient consumer profile information; and

c. Obtain a consumer signed statement on the commission's Consumer Decision to Purchase an Annuity Not Based on a Recommendation form acknowledging the annuity transaction is not recommended if a customer decides to enter into an annuity transaction that is not based on the agent's recommendation.

5. Application of the best interest obligation. Any requirement applicable to an agent under this subsection shall apply to every agent 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 agent has had any direct contact with the consumer. Activities such as providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of an agent do not, in and of themselves, constitute material control or influence.

B. Transactions not based on a recommendation.

1. Except as provided in subdivision 2 of this subsection, an agent shall have no obligation to a consumer under subdivision A 1 of this section related to any annuity transaction if any of the following occurs:

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 consumer profile information requested by the insurer or agent 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 agent; or

e. A consumer fails to provide complete or accurate information.

2. An insurer or agent's recommendation subject to subdivision 1 of this subsection shall be reasonable under all the circumstances actually known to the insurer or agent at the time of the recommendation.

C. Supervision system.

1. Except as permitted under subsection B of this section, 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.

2. An insurer either shall assure that a system to supervise recommendations that is reasonably designed to achieve compliance with this chapter is established and maintained by complying with subdivisions 4 and 5 of this subsection or shall establish and maintain such a system, including the following:

a. The insurer shall establish and maintain reasonable procedures to inform its agents of the requirements of this chapter and shall incorporate the requirements of this chapter into relevant agent training manuals;

b. The insurer shall establish and maintain standards for agent product training and shall establish and maintain reasonable procedures to require its agents to comply with the requirements of 14VAC5-45-45;

c. The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its agents;

d. The insurer shall establish and maintain procedures for the review of each recommendation prior to issuance of 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. Such 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. Such 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 establish and maintain reasonable procedures to detect recommendations that are not in compliance with subsections A, B, D, and E of this section. This may include confirmation of the consumer's consumer profile information, systematic customer surveys, agent and consumer interviews, confirmation letters, agent statements or attestations, and programs of internal monitoring. Nothing in this subdivision prevents an insurer from complying with this subdivision by applying sampling procedures, or by confirming the consumer profile information or other required information under this section after issuance or delivery of the annuity;

f. The insurer shall establish and maintain reasonable procedures to assess, prior to or upon issuance or delivery of an annuity, whether an agent has provided to the consumer the information required to be provided under this section;

g. The insurer shall establish and maintain reasonable procedures to identify and address suspicious consumer refusals to provide consumer profile information;

h. The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time. The requirements of this subdivision are not intended to prohibit the receipt of health insurance, office rent, office support, retirement benefits, or other employee benefits by employees as long as those benefits are not based upon the volume of sales of a specific annuity within a limited period of time; and

i. The insurer shall annually provide a written report to 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.

3. An agent either shall adopt a system established by an insurer to supervise recommendations of its agents that is reasonably designed to achieve compliance with this chapter or shall establish and maintain such a system, including:

a. Maintaining written procedures; and

b. Conducting periodic reviews of records that are reasonably designed to assist in detecting and preventing violations of this chapter.

4. An insurer may contract with a third party, including an agent , to establish and maintain a system of supervision as required by subdivision 2 of this subsection with respect to agents under contract with or employed by the third party.

5. An insurer shall make reasonable inquiry to assure that the third party contracting under subdivision 4 of this subsection is performing the functions required under subdivision 2 of this subsection and shall take action that is reasonable under the circumstances to enforce the contractual obligation to perform the functions. An insurer may comply with its obligation to make reasonable inquiry by doing all of the following:

a. The insurer annually obtains a certification from a third party senior manager who has responsibility for the delegated functions that the manager has a reasonable basis to represent, and does represent, that the third party is performing the required functions; and

b. The insurer, based on reasonable selection criteria, periodically selects third parties contracting under subdivision 4 of this subsection for a review to determine whether the third parties are performing the required functions. The insurer shall perform those procedures to conduct the review that are reasonable under the circumstances.

6. An insurer that contracts with a third party pursuant to subdivision 4 of this subsection and that complies with the requirements to supervise in subdivision 5 of this subsection shall have fulfilled its responsibilities under subdivision 2 of this subsection.

7. An insurer or agent is not required by subdivision 2 or 3 of this subsection to:

a. Review, or provide for review of, all agent-solicited transactions;

b. Include in its system of supervision an agent's recommendations to consumers of products other than the annuities offered by the insurer or agent; or

c. Consider or compare options available to the agent or compensation relating to those options other than annuities or other products offered by the insurer.

8. An agent contracting with an insurer pursuant to subdivision 4 of this subsection, when requested by the insurer pursuant to subdivision 5 of this subsection, shall promptly give a certification as described in subdivision 5 or give a clear statement that it is unable to meet the certification criteria.

9. No person may provide a certification under subdivision 5 a of this subsection unless:

a. The person is a senior manager with responsibility for the delegated functions; and

b. The person has a reasonable basis for making the certification.

D. An agent or insurer shall 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; or

3. Cooperating with the investigation of a complaint.

E. Safe harbor. Recommendations and sales of annuities made in compliance with comparable standards shall satisfy the requirements under this chapter:

1. 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 standard would not otherwise apply to the product or recommendation at issue. However, nothing in this subsection shall limit the commission's ability to investigate and enforce the provisions of this chapter.

2. Nothing in subdivision 1 of this subsection shall limit the insurer's obligation to comply with subdivision C 1 of this section, although the insurer may base its analysis on information received from either the financial professional or the entity supervising the financial professional.

3. For subdivision 1 of this subsection to apply, an insurer shall:

a. Monitor the relevant conduct of the financial professional seeking to rely on subdivision 1 of 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 securities laws or the Virginia Securities Act using information collected in the normal course of an insurer's business; and

b. Provide to the entity responsible for supervising the financial professional seeking to rely on subdivision 1 of this subsection, such as the financial professional's broker-dealer or investment adviser registered under federal securities laws or the Virginia Securities Act, information and reports that are reasonably appropriate to assist such entity to maintain its supervision system.

4. For purposes of this subsection, "financial professional" means an agent that is regulated and acting as:

a. A broker-dealer registered under federal securities laws or the Virginia Securities Act or a registered representative of a broker-dealer;

b. An investment adviser registered under federal securities laws or the Virginia Securities Act or an investment adviser representative associated with the federal or Virginia registered investment adviser; or

c. A plan fiduciary under § 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA) or fiduciary under § 4975(e)(3) of the Internal Revenue Code (IRC) or any amendments or successor statutes thereto.

5. For purposes of this subsection, "comparable standards" means:

a. With respect to broker-dealers and registered representatives of broker-dealers, applicable SEC and FINRA rules pertaining to best interest obligations and supervision of annuity recommendations and sales, including Regulation Best Interest (17 CFR Part 240.15l1) and any amendments or successor regulations thereto;

b. With respect to investment advisers registered under federal securities laws or the Virginia Securities Act or investment adviser representatives, the fiduciary duties and all other requirements imposed on such investment advisers or investment adviser representatives by contract or under the Investment Advisers Act of 1940 (15 USC § 80a-1 et seq.) or the Virginia Securities Act, including the Form ADV (https://www.sec.gov/divisions/investment/iard/ia-forms.shtml) and interpretations; and

c. With respect to plan fiduciaries or fiduciaries, means the duties, obligations, prohibitions and all other requirements attendant to such status under ERISA or the IRC and any amendments or successor statutes thereto.

F. Compliance with FINRA Rule 2111 (https://www.finra.org/rules-guidance/rulebooks/finra-rules/2111) pertaining to suitability shall satisfy the requirements under this section for the recommendation of variable annuities. However, nothing in this subsection shall limit the commission's ability to enforce the provisions of this chapter.

14 Va. Admin. Code § 5-45-40

Derived from Virginia Register Volume 23, Issue 9, eff. April 1, 2007; Amended, Virginia Register Volume 33, Issue 15, eff. 4/1/2017; Amended, Virginia Register Volume 37, Issue 04, eff. 10/12/2020; Amended, Virginia Register Volume 37, Issue 23, eff. 9/1/2021.

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.