ENTITLED An Act to revise annuity sales standards.
Be it enacted by the Legislature of the State of South Dakota:
Section 1. That 58-33A-13 be AMENDED:
58-33A-13. Terms used in 58-33A-14 to 58-33A-27, inclusive, mean:
(1) "Annuity," 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;
(2) "Cash compensation," any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from the consumer;
(3) "Consumer profile information," information that is reasonably appropriate to determine whether a recommendation addresses the consumer s financial situation, insurance needs and financial objectives, including, at a minimum, the following:
(a) Age;
(b) Annual income;
(c) Financial situation and needs, including debts and other obligations;
(d) Financial experience;
(e) Insurance needs;
(f) Financial objectives;
(g) Intended use of the annuity;
(h) Financial objectives;
(i) Existing assets or financial products, including investment, annuity and insurance holdings;
(j) Liquidity needs;
(k) Liquid net worth;
(l) Risk tolerance, including but not limited to, willingness to accept non-guaranteed elements in the annuity;
(m) Financial resources used to fund the annuity; and
(n) Tax status;
(4) "FINRA," the Financial Industry Regulatory Authority or a succeeding agency;
(5) "Intermediary," an entity contracted directly with an insurer or with another entity contracted with an insurer to facilitate the sale of the insurer s annuities by producers;
(6) "Material conflict of interest," a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation. Material conflict of interest does not include cash compensation or non-cash compensation;
(7) "Non-cash compensation," any form of compensation that is not cash compensation including health insurance, office rent, office support, and retirement benefits;
(8) "Non-guaranteed elements," the premiums, credited interest rates including any bonus, benefits, values, dividends, non-interest based credits, charges, or elements of formulas used to determine any of these, that are subject to company discretion and are not guaranteed at issue. An element is considered non-guaranteed if any of the underlying non-guaranteed elements are used in its calculation;
(9) "Producer," a person or entity required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities. This term also includes an insurer where no producer is involved;
(10) "Recommendation," advice provided by a producer to an individual consumer that was intended to result or results in a purchase, replacement, or exchange of an annuity in accordance with that advice. This term does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material;
(11) "Replacement, a transaction in which a new annuity is to be purchased, and it is known or should be known to the proposing producer, or to the proposing insurer whether or not a producer is involved, that by reason of the transaction, an existing annuity or other insurance policy has been or is to be any of the following:
(a) Lapsed, forfeited, surrendered, partially surrendered, assigned to the replacing insurer, or otherwise terminated;
(b) 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;
(c) 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;
(d) Reissued with any reduction in cash value; or
(e) Used in a financed purchase;
(12) "SEC," the United States Securities and Exchange Commission.
Section 2. That 58-33A-14 be AMENDED:
58-33A-14. Sections 58-33A-13 to 58-33A-27, inclusive, apply to any recommendation or sale of an annuity . The purpose of this Act is to require producers, as defined in Section 1 of this Act to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed. Nothing in 58-33A-13 to 58-33A-27, inclusive, creates or implies a private cause of action for a violation of 58-33A-13 to 58-33A-27, inclusive, or subjects a producer to civil liability under the best interest standard of care outlined in 58-33A-16 or under standards governing the conduct of a fiduciary or a fiduciary relationship.
Section 3. That 58-33A-15 be AMENDED:
58-33A-15. Unless otherwise specifically included, 58-33A-13 to 58-33A-27, inclusive, do not apply to any transactions involving:
(1) A direct response solicitation if there is no recommendation based on information collected from the consumer pursuant to 58-33A-13 to 58-33A-27, inclusive; or
(2) Any contract used to fund:
(a) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);
(b) A plan described by sections 401(a), 401(k), 403(b), 408(k), or 408(p) of the Internal Revenue Code (IRC), as of January 1, 2023, if established or maintained by an employer;
(c) A government or church plan defined in section 414 of the IRC as of January 1, 2023, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization under section 457 of the IRC as of January 1, 2023; or
(d) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;
(3) A settlement of or assumption of liabilities associated with personal injury litigation or any dispute or claim resolution process; or
(4) A formal prepaid funeral contract.
The director may, by rules promulgated pursuant to chapter 1-26, adopt revisions of the Internal Revenue Code which are in substantial compliance with the intent of subsections (b) and (c) of this section.
Section 4. That 58-33A-16 be AMENDED:
58-33A-16. A producer, 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 producer s or the insurer s financial interest ahead of the consumer s interest. For purposes of this section, a producer has acted in the best interest of the consumer by satisfying the obligations regarding care in sections 7 to 9 of this Act, inclusive, disclosure in sections 11 to 13 of this Act, inclusive, conflict of interest in section 14 of this Act, and documentation in section 15 of this Act. Any requirement applicable to a producer under 58-33A-13 to 58-33A-27, inclusive, must apply 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 providing or delivering marketing or educational materials, product wholesaling or other back office product support, and general supervision of a producer do not, in and of themselves, constitute material control or influence.
Section 5. That 58-33A-17.1 be REPEALED.
Section 6. That 58-33A-17 be REPEALED.
Section 7. That chapter 58-33A be amended with a NEW SECTION:
Producers must, in making a recommendation:
(1) Exercise reasonable diligence, care, and skill to:
(a) Know the consumer s financial situation, insurance needs, and financial objectives;
(b) Understand the available recommendation options after making a reasonable inquiry into options available to the producer;
(c) 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
(d) Communicate the basis or bases of the recommendation;
(2) Make reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity;
(3) 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. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation. Producers must be held to standards applicable to producers with similar authority and licensure; and
(4) Have 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.
Factors generally relevant in making a determination whether an annuity effectively addresses the consumer s financial situation, insurance needs, and financial objectives include the consumer profile information, characteristics of the insurer, product costs, rates, benefits, and features. The level of importance of each factor in this section may vary depending on the facts and circumstances of a particular case, but each factor may not be considered in isolation.
Section 8. That chapter 58-33A be amended with a NEW SECTION:
The requirements of section 7 of this Act:
(1) Apply to the particular annuity as a whole, the underlying subaccounts to which funds are allocated at the time of purchase or exchange of an annuity, and riders and similar product enhancements;
(2) Create a regulatory obligation but do not create a fiduciary obligation or relationship;
(3) Do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be recommended; and
(4) Do not mean the producer has ongoing monitoring obligations, 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.
Section 9. That chapter 58-33A be amended with a NEW SECTION:
In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which include 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 sixty months.
Section 10. That 58-33A-18 be AMENDED:
58-33A-18. Except as provided pursuant to 58-33A-19, a producer has no obligation to a consumer under 58-33A-17 and sections 7 through 9 of this Act, inclusive, related to any annuity transaction if:
(1) A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended;
(2) A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer;
(3) A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer; or
(4) No recommendation is made.