Chapter 1 — Senior Suitability

Agents, insurance agencies, and issuing companies must put in place systems to assure agents make suitable recommendations and comply with this law. At a minimum, this requires a set of 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, or obtaining an annual statement from the senior manager of the third party that 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 statement of non-compliance, if that is the case). Industry groups, such as the Insurance Marketplace Standards Association (IMSA), have formed voluntary certification systems for third-party supervisors.

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

Record Retention

The 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 senior consumer and other information used in making the recommendations” — this includes annuity applications, questionnaires, illustrations, customer correspondence, account review documents, and account statements.

The prior law was vague as to who — agents, companies, or third parties — must retain supporting documentation. The new law places the responsibility on all three. The annuity company can 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 amendment to the 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 inappropriate contracts — 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 to a senior client caused by an agent’s recommendations.

The law also allows regulators to waive penalties for companies and agents that take prompt action to correct harm caused by unsuitable recommendations. This incentive encourages companies and agents to “do the right thing” and make the client whole as quickly as possible.

This power to rescind annuity contracts is quite broad. Other regulators in the state may pursue rescissions through the court system, but the unilateral power of the OIR to rescind contracts is unprecedented in Florida.

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 give clients or others the right to sue privately for violations of these rules — although clients may pursue other claims such as breach of fiduciary trust or negligence in private, civil legal proceedings.

The updated law also includes a provision protecting issuing companies from actions taken by unrelated, unauthorized parties:

Generally speaking, the disclosure requirements apply to the sale of annuities to individual consumer. The law specifically exempts certain transactions:

• Sales resulting from direct mail solicitation in which no recommendation is made by the agent
• Contracts sold to an employer’s qualified retirement plan (plans covered by ERISA, 401(k) plans, tax-sheltered annuities sold to non-profit organizations and church plans under 403(b), or government-provided retirement plans under 457)
• Sales to employer-provided non-qualified deferred compensation plans

The prior state statute carved out an exception to the suitability rules for sales of variable annuities by agents affiliated with broker-dealers regulated by the NASD (National Association of Securities Dealers). Because all agents selling variable annuities were required to be registered with a NASD-member broker-dealer, this exception effectively placed all variable annuity sales outside the scope of state law. The premise was that the NASD had its own suitability requirements, and the state was deferring to those requirements for variable annuities. In 2007, the NASD merged with the NYSE’s regulatory arm to create the Financial Industry Regulatory Authority (FINRA).

When the Florida Legislature updated the law in 2008, it extended this exception to cover the sale of any annuity (fixed or variable) by a FINRA-affiliated agent. While FINRA has suitability rules for the sale of variable annuities, it has no jurisdiction over fixed annuities (including indexed annuities). This creates a possible loophole for the sale of fixed annuities by FINRA-affiliated agents. The key statutory language is:

The critical phrase is “who is required to make a suitability determination.” FINRA representatives are generally prohibited from making unsuitable recommendations — but whether that general principle is the same as making a formal “suitability determination” is debatable. If FINRA has no jurisdiction over fixed annuities and therefore cannot require a suitability determination for those sales, then this exception applies only to variable annuities and state law still governs fixed annuity sales at FINRA institutions.

It is worth noting that the title of this exception was changed from “Application to Variable Annuities” to “Application to Annuities” — suggesting the Legislature may have intended to broaden the exemption to all annuity types sold by FINRA-affiliated agents.

State regulators jealously guard their jurisdiction. Cautious agents affiliated with FINRA broker-dealers would be wise to follow the original law’s intent — apply FINRA rules to the sales of variable annuities, and comply with state suitability requirements when recommending fixed annuities (including EIAs) to senior consumers.

The National Association of Insurance Commissioners works to promote standardized state regulations nationwide by drafting model laws that can serve as the basis for actual legislation adopted by the states. Much of Florida’s Insurance Code is based, at least in part, on NAIC model laws. Annuity suitability is no exception.

The NAIC’s initial efforts regarding annuity suitability were aimed at protecting older consumers. Its first model law on the topic — the Senior Protection in Annuity Transactions Model Regulation — was adopted in 2003 and covers the sale of annuities to consumers aged 65 and older. Florida’s initial suitability legislation in 2004 was based on that model. Other states extended annuity protections to consumers of all ages, or extended suitability provisions to non-annuity insurance products.

In 2006, the NAIC drafted and approved a new model law — Suitability in Annuity Transactions Model Regulation — that extends suitability protections to the sale of annuities to consumers of all ages. When Florida updated its original suitability law in 2008, it chose to continue applying the suitability requirements only to the sale of annuities to senior consumers.

Florida subsequently adopted updated annuity suitability standards for all consumers regardless of age, effective 2013 (CS/CS/SB 166), and further enhanced those rules to align with the NAIC’s Best Interest standard, with updated compliance requirements starting January 1, 2024 (HB 1185/CS/CS/SB 166).

The disclosure requirements in Florida’s suitability law offer agents a convenient checklist of questions to ask prospects of any age before making a fixed annuity recommendation — even where state law does not strictly require it. FINRA’s requirements make no distinction based on age when it comes to recommendations for variable annuities. FINRA and the NAIC seem to agree that suitability requirements should be “ageless.”