26.1-34.2-03. Duties of insurers and insurance producers
1. A producer, if 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. A producer has acted in the best interest of the consumer if the
producer has satisfied the following obligations regarding care, disclosure, conflict of
interest, and documentation:
a. (1) The producer, in making a recommendation, shall 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) The requirements under this subdivision include making reasonable efforts
to obtain consumer profile information from the consumer before the
recommendation of an annuity.
(3) The requirements under this subdivision require a producer to consider the
types of products the producer is authorized and licensed to recommend or
sell which 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. A producer must be held to standards applicable to
producers with similar authority and licensure.
(4) The requirements under this subdivision do not create a fiduciary obligation
or relationship and only create a regulatory obligation as established in this
chapter.
(5) 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
paragraph may vary depending on the facts and circumstances of a
particular case. However, each factor may not be considered in isolation.
(6) The requirements under this subdivision 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.
(7) The requirements under this subdivision 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 producer
enhancements, if any.
(8) The requirements under this subdivision do not mean the annuity with the
lowest one-time or multiple occurrence compensation structure necessarily
must be recommended.
(9) The requirements under this subdivision do not mean the producer has
ongoing monitoring obligations under the care obligation under this
paragraph, although such an obligation may be owed separately under the
terms of a fiduciary, consulting, investment advising, or financial planning
agreement between the consumer and the producer.
(10) In the case of an exchange or replacement of an annuity, the producer shall
consider the whole transaction, which includes 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 benefit the consumer substantially in
comparison to the replaced product over the life of the product; and
(c) The consumer has had another annuity exchange or replacement and,
in particular, an exchange or replacement within the preceding sixty
months.
(11) This chapter may not be construed to require a producer to obtain a license
other than a producer license with the appropriate line of authority to sell,
solicit, or negotiate insurance in this state, including a securities license, in
order to fulfill the duties and obligations contained in this chapter; provided
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.
b. (1) Before the recommendation or sale of an annuity, the producer prominently
shall disclose to the consumer on a form substantially similar to a model
form designed by the insurance department:
(a) A description of the scope and terms of the relationship with the
consumer and the role of the producer in the transaction;
(b) An affirmative statement on whether the producer is licensed and
authorized to sell the following products:
[1] Fixed annuities;
[2] Fixed indexed annuities;
[3] Variable annuities;
[4] Life insurance;
[5] Mutual funds;
[6] Stocks and bonds; and
[7] Certificates of deposit;
(c) An affirmative statement describing the insurers the producer is
authorized, contracted, or appointed, or otherwise able to sell
insurance products for, using the following descriptions:
[1] One insurer;
[2] From two or more insurers; or
[3] From two or more insurers although primarily contracted with one
insurer;
(d) 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 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; and
(e) A notice of the consumer's right to request additional information
regarding cash compensation described in subparagraph d.
(2) Upon request of the consumer or the consumer's designated representative,
the producer shall disclose:
(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; and
(b) 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.
(3) Before or at the time of the recommendation or sale of an annuity, the
producer must 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; annual fees; potential charges for and
features of riders or other options of the annuity; limitations on interest
returns; potential changes in nonguaranteed elements of the annuity;
insurance and investment components; and market risk.
c. A producer shall identify and avoid or reasonably manage and disclose material
conflicts of interest, including material conflicts of interest related to an ownership
interest.
d. At the time of recommendation or sale the producer shall:
(1) Make a written record of any recommendation and the basis for the
recommendation subject to this chapter;
(2) Obtain a consumer-signed statement on a form substantially similar to a
model form established by the insurance department:
(a) A customer's refusal to provide the consumer profile information, if
any; and
(b) A customer's understanding of the ramifications of not providing the
customer's consumer profile information or providing insufficient
consumer profile information; and
(3) Obtain a consumer-signed statement on a form substantially similar to a
model form established by the insurance department acknowledging the
annuity transaction is not recommended if a customer decides to enter an
annuity transaction that is not based on the producer's recommendation.
e. A requirement applicable to a producer under this subsection 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 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.
2. a. Except as provided under subdivision b, a producer does not have an obligation
to a consumer under subsection 1 or 3 related to any annuity transaction if:
(1) A recommendation was not made;
(2) A recommendation was made and was later found to have been prepared
based on materially inaccurate information provided by the consumer;
(3) A consumer refuses to provide relevant consumer profile information and
the annuity transaction is not recommended; or
(4) A consumer decides to enter an annuity transaction that is not based on a
recommendation of the producer.
b. An insurer's issuance of an annuity subject to subdivision a must be reasonable
under all the circumstances actually known to the insurer at the time the annuity
is issued.
3. a. Except as permitted under subdivision b, 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.
b. An insurer shall establish and maintain a supervision system that is reasonably
designed to achieve the insurer's and the insurer's producers' compliance with
this chapter, including the following:
(1) The insurer shall establish and maintain reasonable procedures to inform
the insurer's producers of the requirements of this chapter and shall
incorporate the requirements of this chapter into relevant producer training
manuals.
(2) The insurer shall establish and maintain standards for insurance producer
product training and shall maintain reasonable procedures to require the
insurer's producers to comply with the requirements of section
26.1-34.2-03.1.
(3) The insurer shall provide product-specific training and training materials that
explain all material features of the insurer's annuity products to the insurer's
producers.
(4) The insurer shall establish and maintain procedures for the review of each
recommendation before issuance of an annuity which are designed to
ensure there is a reasonable basis to determine that the recommended
annuity effectively would 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.
(5) The insurer shall establish and maintain reasonable procedures to detect
recommendations that are not in compliance with this paragraph and
paragraphs 1, 2, and 4. This may include confirmation of the 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 issuance or delivery of the annuity.
(6) The insurer shall establish and maintain reasonable procedures to assess,
before or upon issuance or delivery of an annuity, whether a producer has
provided to the customer the information required to be provided under this
section.
(7) The insurer shall establish and maintain reasonable procedures to identify
and address suspicious consumer refusals to provide consumer profile
information.
(8) The insurer shall establish and maintain 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. 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 on the volume of sales of a specific annuity
within a limited period of time.
(9) Annually, the insurer shall 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.
c. (1) This subsection does not restrict an insurer from contracting for
performance of a function, including maintenance of procedures, required
under this subdivision. An insurer is responsible for taking appropriate
corrective action and may be subject to sanctions and penalties pursuant to
section 26.1-34.2-04, regardless of whether the insurer contracts for
performance of a function and regardless of the insurer's compliance with
paragraph 2.
(2) An insurer's supervision system under this subsection must include
supervision of contractual performance under this subsection. This includes
the following:
(a) Monitoring and, as appropriate, conducting audits to assure that the
contracted function is properly performed; and
(b) 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.
d. An insurer is not required to include in the insurer's system of supervision:
(1) A producer's recommendations to consumers of products other than the
annuities offered by the insurer; or
(2) Include 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.
4. A producer or an insurer may not dissuade, or attempt to dissuade, a consumer from:
a. Responding truthfully to an insurer's request for confirmation of the consumer
profile information;
b. Filing a complaint; or
c. Cooperating with the investigation of a complaint.
5. a. Recommendations and sales of annuities made in compliance with comparable
standards must satisfy the requirements under this chapter. This subsection
applies to recommendations and sales of annuities made by financial
professionals in compliance with business rules, controls, and procedures that
satisfy a comparable standard even if the standard would not otherwise apply to
the product or recommendation at issue. However, this subsection does not limit
the insurance commissioner's ability to enforce, including investigate, this
chapter. This subdivision does not limit the insurer's obligation to comply with
subdivision a of subsection 3 although the insurer may base the insurer's analysis
on information received from either the financial professional or the entity
supervising the financial professional.
b. For subdivision a to apply, an insurer shall:
(1) Monitor relevant conduct of the financial professional seeking to rely upon
subdivision a or the entity responsible for supervising the financial
professional, such as the financial professional's broker-dealer or an
investment advisor registered under federal or state securities laws using
information collected in the normal course of an insurer's business; and
(2) Provide to the entity responsible for supervising the financial professional
seeking to rely on subdivision a, such as the financial professional's broker-
dealer or investment advisor registered under federal or state securities
laws, information and reports that are reasonably appropriate to assist the
entity to maintain its supervision system.
