Md. Code Regs. 31.09.12.04

Current through Register Vol. 51, No. 24, December 2, 2024

Section 31.09.12.04 - Best Interest Obligations

A. The requirements under this regulation do not create a fiduciary obligation or relationship and only create a regulatory obligation as established in this chapter.

B. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known by the producer at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interest.

C. A producer is considered to be acting in the best interest of the consumer if the producer satisfies the obligations described in §§D-G of this regulation.

D. Care Obligation.

(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 §D(1) of this regulation include making reasonable efforts to obtain consumer profile information from the consumer prior to the recommendation of an annuity.

(3) The requirements under §D(1) of this regulation require a producer to 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.

(4) The requirements under §D(1) of this regulation do 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.

(5) Producers shall be held to standards applicable to producers with similar authority and licensure.

(6) The factors generally relevant in making a determination whether an annuity effectively addresses the consumer's financial situation, insurance needs, and financial objectives are the consumer profile information, characteristics of the insurer, and product costs, rates, benefits, and features.

(7) The level of importance of each factor described in §D(6) of this regulation may vary depending on the facts and circumstances of a particular case, but each factor may not be considered in isolation.

(8) The requirements under §D(1) of this regulation 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.

(9) The requirements under §D(1) of this regulation 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 product enhancements, if any.

(10) The requirements under §D(1) of this regulation do not mean the annuity with the lowest one-time or multiple occurrence compensation structure shall necessarily be recommended.

(11) The requirements under §D(1) of this regulation do not mean the producer has ongoing monitoring obligations under the care obligation under this section, 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.

(12) 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 substantially benefit the consumer 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 60 months.

(13) Nothing in this chapter shall be construed to require a producer to obtain any license other than a producer license with the appropriate line of authority to sell, solicit, or negotiate insurance in this State, including but not limited to any 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.

E. Disclosure Obligation.

(1) Prior to the recommendation or sale of an annuity, the producer shall prominently disclose the following information to the consumer:

(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:

(i) Fixed annuities;

(ii) Fixed indexed annuities;

(iii) Variable annuities;

(iv) Life insurance;

(v) Mutual funds;

(vi) Stocks and bonds; and

(vii) Certificates of deposit;

(c) An affirmative statement describing the insurer the producer is authorized, contracted, appointed, or otherwise able to sell insurance products for, using the following descriptions:

(i) One insurer;

(ii) From two or more insurers; or

(iii) From two or more insurers although primarily contracted with one insurer;

(d) A description of the sources and types of cash compensation and non-cash 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 §E(3) of this regulation.

(2) The disclosure described in §E(1) of this regulation shall be in a format substantially similar to that specified in Regulation .11 of this chapter.

(3) 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.

(4) Prior to or at the time of the recommendation or sale of an annuity, the producer shall 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, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in non-guaranteed elements of the annuity, insurance and investment components, and market risk.

(5) The disclosure obligation under §E of this regulation is intended to supplement and not replace the disclosure requirements under COMAR 31.15.04.05.

F. Conflict of Interest Obligation. 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.

G. Documentation Obligation.

(1) At the time of recommendation or sale, a producer shall:

(a) Make a written record of any recommendation and the basis for the recommendation subject to this regulation;

(b) Obtain a consumer signed statement documenting:

(i) A consumer's refusal to provide the consumer profile information, if any; and

(ii) A consumer's understanding of the ramifications of not providing the consumer's consumer profile information or of providing insufficient consumer profile information; and

(c) Obtain a consumer signed statement acknowledging the annuity transaction is not recommended if a consumer decides to enter into an annuity transaction that is not based on the producer's recommendation.

(2) The statement described in §G(1)(b) of this regulation shall be in a format substantially similar to that specified in Regulation .12 of this chapter.

(3) The statement described in §G(1)(c) of this regulation shall be in a format substantially similar to that specified in Regulation .13 of this chapter.

H. Application of the Best Interest Obligation.

(1) Any requirement applicable to a producer under this subsection shall 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.

(2) 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.

I. Transactions Not Based on a Recommendation.

(1) Except as provided under §I(2) of this regulation, a producer shall have no obligation to a consumer under §§B-G of this regulation related to any annuity transaction if:

(a) No recommendation is made;

(b) A recommendation is made and is later found to have been prepared based on materially inaccurate information provided by the consumer;

(c) A consumer refuses to provide relevant consumer profile information and the annuity transaction is not recommended; or

(d) A consumer decides to enter into an annuity transaction that is not based on a recommendation of the producer.

(2) An insurer's issuance of an annuity subject to §I(1) of this regulation shall be reasonable under all the circumstances actually known to the insurer at the time the annuity is issued.

Md. Code Regs. 31.09.12.04

Regulation .04 amended effective 49:8 Md. 501, eff. 4/18/2022