21.0473.02000
Sixty-seventh
Legislative Assembly HOUSE BILL NO. 1160
of North Dakota
Introduced by
Representative Keiser
Senator Klein
1 A BILL for an Act to amend and reenact sections 26.1-34.2-01.1, 26.1-34.2-02, 26.1-34.2-03,
2 26.1-34.2-03.1, 26.1-34.2-04, and 26.1-34.2-05 of the North Dakota Century Code, relating to
3 annuity transaction practices; and to provide a penalty.
4 BE IT ENACTED BY THE LEGISLATIVE ASSEMBLY OF NORTH DAKOTA:
5 SECTION 1. AMENDMENT. Section 26.1-34.2-01.1 of the North Dakota Century Code is
6 amended and reenacted as follows:
7 26.1-34.2-01.1. Scope.
8 This chapter applies to anya sale or recommendation to purchase, exchange, or replaceof
9 an annuity made to a consumer by an insurance producer, or an insurer when no producer is
10 involved, that results in the purchase, exchange, or replacement recommended. This chapter
11 may not be construed to create or imply a private cause of action for a violation of this chapter
12 or to subject a producer to civil liability under the best interest standard of care outlined in
13 section 26.1-34.2-03 or under standards governing the conduct of a fiduciary or a fiduciary
14 relationship.
15 SECTION 2. AMENDMENT. Section 26.1-34.2-02 of the North Dakota Century Code is
16 amended and reenacted as follows:
17 26.1-34.2-02. Definitions.
18 1. "Annuity" means an annuity that is an insurance product under state law which is
19 individually solicited, whether the product is classified as an individual or group
20 annuity.
21 2. "Insurance producer" means a person required to be licensed under the laws of this
22 state to sell, solicit, or negotiate insurance, including annuities.
23 3. "Cash compensation" means a discount, concession, fee, service fee, commission,
24 sales charge, loan, override, or cash benefit received by a producer in connection with
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1 the recommendation or sale of an annuity from an insurer or intermediary or directly
2 from the consumer.
3 3. "Comparable standards":
4 a. With respect to a broker-dealer and registered representative of a broker-dealer,
5 applicable federal securities and exchange commission and financial industry
6 regulatory authority rules pertaining to best interest obligations and supervision of
7 annuity recommendations and sales, including Regulation Best Interest
8 [17 CFR 240];
9 b. With respect to an investment adviser registered under federal or state securities
10 laws or an investment adviser representative, the fiduciary duties and all other
11 requirements imposed on such investment advisers or investment adviser
12 representatives by contract or under the federal Investment Advisers Act of 1940
13 [15 U.S.C. 80b-1 et seq.] or applicable state securities law, including, the form
14 ADV and interpretations; and
15 c. With respect to plan fiduciaries or fiduciaries, the duties, obligations, prohibitions,
16 and all other requirements attendant to such status under the federal Employee
17 Retirement Income Security Act of 1974 [29 U.S.C. 1001 et seq.] or the federal
18 Internal Revenue Code as amended.
19 4. "Consumer profile information" means information that is reasonably appropriate to
20 determine whether a recommendation addresses the consumer's financial situation,
21 insurance needs, and financial objectives, including, at a minimum, the following:
22 a. Age;
23 b. Annual income;
24 c. Financial situation and needs, including debts and other obligations;
25 d. Financial experience;
26 e. Insurance needs;
27 f. Financial objectives;
28 g. Intended use of the annuity;
29 h. Financial time horizon;
30 i. Existing assets or financial products, including investment, annuity, and insurance
31 holdings;
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1 j. Liquidity needs;
2 k. Liquid net worth;
3 l. Risk tolerance, including willingness to accept nonguaranteed elements in the
4 annuity;
5 m. Financial resources used to fund the annuity; and
6 n. Tax status.
7 5. "Continuing education credit" means one continuing education credit as provided for
8 under section 26.1-26-31.1.
9 6. "Continuing education provider" means an individual or entity approved to offer
10 continuing education courses pursuant to section 26.1-26-31.1.
11 7. "Financial professional" means a producer that is regulated and acting as:
12 a. A broker-dealer registered under federal or state securities laws or a registered
13 representative of a broker-dealer;
14 b. An investment adviser registered under federal or state securities laws or an
15 investment adviser representative associated with the federal or state registered
16 investment adviser; or
17 c. A plan fiduciary under section 3(21) of the federal Employee Retirement Income
18 Security Act of 1974 [29 CFR 2510.3-21] or fiduciary under section 4975(e)(3) of
19 the Internal Revenue Code [26 U.S.C. 4975(e)(3)] as amended.
20 8. "Insurer" means a company required to be licensed under the laws of this state to
21 provide insurance products, including annuities.
22 4.9. "Intermediary" means an entity contracted directly with an insurer or with another
23 entity contracted with an insurer to facilitate the sale of the insurer's annuities by
24 producers.
25 10. "Material conflict of interest" means a financial interest of the producer in the sale of an
26 annuity which a reasonable person would expect to influence the impartiality of a
27 recommendation. The term does not include cash compensation or noncash
28 compensation.
29 11. "Noncash compensation" means any form of compensation that is not cash
30 compensation, including health insurance, office rent, office support, and retirement
31 benefits.
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1 12. "Nonguaranteed elements" means the premiums, credited interest rates, including a
2 bonus, benefits, values, dividends, noninterest based credits, charges, or elements of
3 formulas used to determine any of these which are subject to company discretion and
4 are not guaranteed at issue. An element is considered nonguaranteed if any of the
5 underlying nonguaranteed elements are used in the element's calculation.
6 13. "Producer" means an individual or entity required to be licensed under the laws of this
7 state to sell, solicit, or negotiate insurance, including annuities. The term includes an
8 insurer if no producer is involved.
9 14. "Recommendation" means advice provided by an insurance producer, or an insurer
10 when no producer is involved, to an individual consumer which results in a purchase,
11 replacement, or exchange of an annuity in accordance with that advicea producer to
12 an individual consumer which was intended to result or results in a purchase, a
13 replacement, or an exchange of an annuity in accordance with that advice. The term
14 does not include general communication to the public, generalized customer services
15 assistance or administrative support, general educational information and tools,
16 prospectuses, or other product and sales material.
17 5.15. "Replacement" means a transaction in which a new policy or contractannuity is to be
18 purchased, and it is known or should be known to the proposing producer, or to the
19 proposing insurer if there is nowhether or not a producer is involved, that by reason of
20 the transaction, an existing annuity or other insurance policy or contract has been or is
21 to be any of the following:
22 a. Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing
23 insurer, or otherwise terminated;
24 b. Converted to reduced paid-up insurance, continued as extended term insurance,
25 or otherwise reduced in value by the use of nonforfeiture benefits or other policy
26 values;
27 c. Amended so as to effect either a reduction in benefits or in the term for which
28 coverage would otherwise remain in force or for which benefits would be paid;
29 d. Reissued with any reduction in cash value; or
30 e. Used in a financed purchase.
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1 6. "Suitability information" means information that is reasonably appropriate to determine
2 the suitability of a recommendation, including the following:
3 a. Age;
4 b. Annual income;
5 c. Financial situation and needs, including the financial resources used for the
6 funding of the annuity;
7 d. Financial experience;
8 e. Financial objectives;
9 f. Intended use of the annuity;
10 g. Financial time horizon;
11 h. Existing assets, including investment and life insurance holdings;
12 i. Liquidity needs;
13 j. Liquid net worth;
14 k. Risk tolerance; and
15 l. Tax status.
16 SECTION 3. AMENDMENT. Section 26.1-34.2-03 of the North Dakota Century Code is
17 amended and reenacted as follows:
18 26.1-34.2-03. Duties of insurers and insurance producers.
19 1. In recommending to a consumer the purchase of an annuity or the exchange of an
20 annuity that results in another insurance transaction or series of insurance
21 transactions, the insurance producer, or the insurer when no producer is involved,
22 must have reasonable grounds for believing that the recommendation is suitable for
23 the consumer on the basis of the facts disclosed by the consumer as to the
24 consumer's investments and other insurance products and as to the consumer's
25 financial situation and needs, including the consumer's suitability information, and that
26 there is a reasonable basis to believe all of the following:
27 a. TheA producer, if making a recommendation of an annuity, shall act in the best
28 interest of the consumer under the circumstances known at the time the
29 recommendation is made, without placing the producer's or the insurer's financial
30 interest ahead of the consumer's interest. A producer has acted in the best
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1 interest of the consumer if the producer has satisfied the following obligations
2 regarding care, disclosure, conflict of interest, and documentation:
3 a. (1) The producer, in making a recommendation, shall exercise reasonable
4 diligence, care, and skill to:
5 (a) Know the consumer's financial situation, insurance needs, and
6 financial objectives;
7 (b) Understand the available recommendation options after making a
8 reasonable inquiry into options available to the producer;
9 (c) Have a reasonable basis to believe the recommended option
10 effectively addresses the consumer's financial situation, insurance
11 needs, and financial objectives over the life of the product, as
12 evaluated in light of the consumer profile information; and
13 (d) Communicate the basis or bases of the recommendation.
14 (2) The requirements under this subdivision include making reasonable efforts
15 to obtain consumer profile information from the consumer before the
16 recommendation of an annuity.
17 (3) The requirements under this subdivision require a producer to consider the
18 types of products the producer is authorized and licensed to recommend or
19 sell which address the consumer's financial situation, insurance needs, and
20 financial objectives. This does not require analysis or consideration of any
21 products outside the authority and license of the producer or other possible
22 alternative products or strategies available in the market at the time of the
23 recommendation. A producer must be held to standards applicable to
24 producers with similar authority and licensure.
25 (4) The requirements under this subdivision do not create a fiduciary obligation
26 or relationship and only create a regulatory obligation as established in this
27 chapter.
28 (5) The consumer profile information, characteristics of the insurer, and product
29 costs, rates, benefits, and features are those factors generally relevant in
30 making a determination whether an annuity effectively addresses the
31 consumer's financial situation, insurance needs, and financial objectives,
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1 but the level of importance of each factor under the care obligation of this
2 paragraph may vary depending on the facts and circumstances of a
3 particular case. However, each factor may not be considered in isolation.
4 (6) The requirements under this subdivision include having a reasonable basis
5 to believe the consumer would benefit from certain features of the annuity,
6 such as annuitization, death or living benefit, or other insurance-related
7 features.
8 (7) The requirements under this subdivision apply to the particular annuity as a
9 whole and the underlying subaccounts to which funds are allocated at the
10 time of purchase or exchange of an annuity, and riders and similar producer
11 enhancements, if any.
12 (8) The requirements under this subdivision do not mean the annuity with the
13 lowest one-time or multiple occurrence compensation structure necessarily
14 must be recommended.
15 (9) The requirements under this subdivision do not mean the producer has
16 ongoing monitoring obligations under the care obligation under this
17 paragraph, although such an obligation may be owed separately under the
18 terms of a fiduciary, consulting, investment advising, or financial planning
19 agreement between the consumer and the producer.
20 (10) In the case of an exchange or replacement of an annuity, the producer shall
21 consider the whole transaction, which includes taking into consideration
22 whether:
23 (a) The consumer will incur a surrender charge, be subject to the
24 commencement of a new surrender period; lose existing benefits,
25 such as death, living, or other contractual benefits; or be subject to
26 increased fees, investment advisory fees, or charges for riders; and
27 similar product enhancements;
28 (b) The replacing product would benefit the consumer substantially in
29 comparison to the replaced product over the life of the product; and
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1 (c) The consumer has had another annuity exchange or replacement
2 and, in particular, an exchange or replacement within the preceding
3 sixty months.
4 (11) This chapter may not be construed to require a producer to obtain a license
5 other than a producer license with the appropriate line of authority to sell,
6 solicit, or negotiate insurance in this state, including a securities license, in
7 order to fulfill the duties and obligations contained in this chapter; provided
8 the producer does not give advice or provide services that are otherwise
9 subject to securities laws or engage in any other activity requiring other
10 professional licenses.
11 b