COMMENTARY FROM COUNSEL

Under current law, insurance agents selling annuities must reasonably believe the product is suitable for the buyer, based on a host of factors. Wisconsin’s suitability requirements, coupled with ever-evolving and often complex annuity products, have led to countless complaints, investigations and administrative actions. Now, thanks to a new bill signed into law by Governor Tony Evers on April 15, 2022, Wisconsin’s suitability requirement is giving way to a more expansive “best interest of consumer” framework. While unlikely to diminish the amount of regulatory and enforcement activity around annuity sales, the new standard does raise the bar higher than the current suitability standard.

The new law, based on a model act developed by the National Association of Insurance Commissioners (NAIC) adopted in some form in over 20 states, unanimously passed both chambers of the legislature and requires agents to act in the best interests of the consumer, without placing the financial interest of the agent or insurer ahead of the consumer's interest. To ensure agents comply with this directive, the law sets out obligations for agents in four categories: care, disclosure, conflict of interest, and documentation.

To satisfy the law’s care obligation, agents must exercise reasonable diligence and skill in making a recommendation. Per the statute, acting with care, diligence, and skill includes learning about the customer’s financial station, insurance needs, and financial objectives and adequately communicating the basis of the recommendation to the customer. The law also requires the agent have a reasonable basis to believe the annuity’s features will benefit the customer, considering all the annuity products the agent is licensed or authorized to recommend or sell.

The law’s disclosure obligation requires agents, prior to any recommendation or sale, to prominently disclose to the customer an explanation of the agent’s relationship with the customer and role in the transaction. Agents must also issue several statements to their customers in advance of an annuity transaction: (1) a statement on whether the agent is licensed and authorized to sell annuities; (2) a statement listing the insurers for which the agent is authorized to sell products; (3) a statement on the cash and noncash compensation to be received by the agent; and (4) a notice of the customer’s right to request more details on cash compensation. Finally, the law requires agents to have a reasonable basis to believe that the customer has been informed of the features of the annuity prior to a recommendation or sale taking place.

The law’s conflict of interest obligation is simple: an agent must identify and avoid or reasonably manage and disclose conflicts of interest, including those conflicts related to an ownership interest.

Obtaining proper documentation at the time of sale or recommendation of an annuity is also required by the new law. If an annuity is recommended, the agent must make a written record of the basis for that recommendation. If an annuity is not recommended, the agent must obtain a signed statement from the customer acknowledging an annuity transaction is not recommended and, if the customer decides to enter the annuity transaction anyway, that decision is not based on the agent’s recommendation. Finally, if the customer refuses to provide relevant profile information, the agent must obtain a signed statement from the customer documenting the refusal and the customer’s knowledge of the ramifications of providing insufficient profile information.

While the new regulations are undoubtedly more burdensome on agents, the general consensus is that the new provisions enhance consumer protection. Additionally, market experts estimate consumers in “best interest” states will see considerable savings when compared to jurisdictions with “fiduciary-only” regulatory schemes. The recently signed law does not take effect until October, but if your agency sells annuities covered by the new best interests law, it is time to start preparing and rolling out compliant practices. To ensure you understand all the requirements of the new statutes, including those not described here, be sure to stay in close contact with legal counsel.