Chapter 6 — Disclosure & Agent Responsibilities (continued)

Agents, insurance agencies, and issuing companies must put in place systems to assure agents make compliant recommendations under the Best Interest standard. At a minimum, this requires written procedures and periodic audits to assure compliance. Often, issuing companies will contract with third parties — such as managing agents or insurance agencies — to market their annuity products. Issuers can also rely on these third parties to implement appropriate supervisory systems on their behalf to assure that agents under the third party’s control follow the law when selling the issuer’s products.

When issuing companies rely on third parties to fulfill this compliance role, the issuing company must make adequate inquiries into the third party’s supervisory efforts and take whatever actions are necessary to assure that the third party is adequately meeting its compliance function. Issuing companies may meet this obligation by:

• Periodically auditing third parties who represent the company
• Obtaining an annual written statement from the senior manager of the third party confirming the third party is continuing to fulfill its supervisory role

When requested by the issuing company, managers of third parties must promptly provide a certification of continued compliance (or a statement of non-compliance, if that is the case). Industry groups have formed voluntary certification systems for third-party supervisors.

Issuing companies and managing agents are only required to monitor agent compliance with the Best Interest requirements for products offered by that company or agency — they have no supervisory responsibility for products offered by other companies or agencies.

The law also includes a specific provision to protect issuing companies from liability for the unauthorized acts of independent agents:

Florida law mandates that certain documents be retained for at least five years. Issuing companies, agents, and third parties must all retain records of the information collected from the consumer and other information used in making recommendations. This includes:

• Annuity applications
• Consumer Profile Information questionnaires and suitability forms
• Product illustrations
• Customer correspondence
• Account review documents
• Account statements
• Replacement/exchange comparison forms (DFS-H1-1981)
• Disclosure forms (Appendices A, B, and C)

The responsibility for retaining supporting documentation falls on all three parties — agents, issuing companies, and third parties. The annuity company may offer (but is not required) to maintain these records on behalf of its agents. Original records may be retained, or records can be kept in any other media (photographic, digital, etc.) so long as a legible reproduction of the original is maintained.

One particularly important feature of Florida’s suitability law gives the Department of Financial Services (which regulates agents) and the Office of Insurance Regulation (which regulates insurers) the power to correct, or “mitigate,” unsuitable annuity purchases.

The Office of Insurance Regulation can force an issuing company to rescind an inappropriate contract — in effect, canceling the contract and refunding the client’s money. The amount of the refund is the greater of the client’s investment or the accumulated value in the contract. The Department of Financial Services may take “any reasonably appropriate corrective action” to undo harm caused by an agent’s unsuitable recommendation.

The law also allows regulators to waive penalties for companies and agents that take prompt action to correct harm caused by violations. This waiver provision is an incentive to get companies and agents to “do the right thing” and make the client whole.

This power to rescind annuity contracts is quite broad. While other Florida regulators must pursue contract rescissions through the court system, the OIR’s unilateral authority to rescind annuity contracts is an unusual and powerful regulatory tool.

Agents or insurers who fail to meet the requirements of this law are subject to penalties and enforcement action by the Department of Financial Services or Office of Insurance Regulation. This law does not create a private right of action — clients may not sue directly for violations of these rules under this statute. However, clients may pursue other claims such as breach of fiduciary duty or negligence in private civil legal proceedings.

Under the current Best Interest standard (effective January 1, 2024), Florida’s annuity suitability requirements apply to any sale or recommendation of an annuity — to consumers of any age. This is a significant expansion from the prior Seibel Act framework, which applied only to individual senior consumers age 65 or older.

The law specifically exempts the following transactions from its requirements:

• Direct-response solicitations in which no recommendation is made by an agent (e.g., sales resulting solely from direct mail or internet solicitation)
• Employer-sponsored qualified retirement plans covered by ERISA, including 401(k) plans
• Tax-sheltered annuities sold to non-profit organizations and church plans (403(b) plans)
• Government-provided retirement plans (457 plans)
• Employer-provided non-qualified deferred compensation plans

Florida’s annuity suitability law contains an exception for registered representatives affiliated with FINRA member broker-dealers. Under F.S. §627.4554, agents who are registered with a FINRA member and who make and document a suitability determination are deemed to satisfy the state’s requirements for the recommendation of annuities:

The key phrase is “who is required to make a suitability determination.” This provision operates differently depending on the type of annuity being sold:

Variable annuities: FINRA has clear jurisdiction over variable annuity sales. Registered representatives selling variable annuities are subject to FINRA Rule 2330 and SEC Regulation Best Interest — both of which impose documented suitability and best interest determinations. The FINRA exception clearly applies to variable annuity sales by FINRA-affiliated agents, who can satisfy state requirements by complying with applicable FINRA and SEC rules.

Fixed and indexed annuities: FINRA has no jurisdiction over fixed or fixed indexed annuity sales. Because FINRA does not require a suitability determination for these products, the exception technically does not apply to them — leaving fixed and indexed annuity sales by FINRA-affiliated agents subject to Florida’s Best Interest standard. Cautious agents affiliated with FINRA broker-dealers should follow this conservative interpretation: apply FINRA rules to variable annuity sales and comply with Florida’s full Best Interest requirements when recommending fixed and indexed annuities.