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Suitability Gets Magnified in June

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, State insurance regulators, insurance companies, insurance marketing organizations, and producers all circled the date June 16, 2013 on their respective calendars. While it may have seemed a long way off at the time, this date is right around the corner.

June 16, 2013 is the date set within the Harkin Amendment for the Dodd-Frank Wall Street Reform and Consumer Protection Act — the Amendment is officially called the Restoring American Financial Stability Conference Amendment.1 This is where States can adopt rules or regulations that substantially meet or exceed the minimum requirements established by the 2010 NAIC Suitability in Annuity Transactions Model Regulation, #275 (the “Model Regulations”), in order for certain annuity contracts 2 to continue to be exempt from regulation under the Federal Securities Law.

There are essentially two ways to satisfy suitability compliance under the Harkin Amendment3, either (A) a State adopts the suitability Model Regulation (here, annuities issued by an insurance company domiciled in such a State would be exempt from securities regulation in all states, regardless of whether a particular State has adopted the Model) or (B) an insurance company adopts and implements nationwide practices that embrace the minimum requirements of the Model Regulation.

As of this writing, thirty States4 and the District of Columbia have adopted suitability rules based upon the 2010 Model Regulation, pursuant to Subsection (A) of the Harkin Amendment. Arguably, some of these States have adopted rules that could be deemed as failing to “substantially meet or exceed the minimum requirements” of the Model Regulation. For instance, several States don’t require their state-licensed insurance producers to complete product specific training before selling annuity products and/or the one-time, four-hour annuity training course, as required by the Model. Others have adopted the producer training requirements, but not other aspects of the suitability standards. Thus, it’s quite possible that the Harkin Safe Harbor, pursuant to Subsection (A), wouldn’t apply in these States if they are deemed to “fail” the test.

In addition to these thirty States5, another three States are currently considering the adoption of new suitability rules. This leaves a remaining seventeen States6 that haven’t yet adopted nor have proposed to adopt rules governing suitability, pursuant to the mandate of the Harkin Amendment. Clearly, in these States as of June 16, 2013, Subsection (A) of Harkin wouldn’t apply until they have done so.

However, even where a State hasn’t adopted the Model Regulation set forth under Subsection (A) (or where the version it adopted may not comply with the Model), under Subsection (B) of the Harkin Amendment, suitability compliance may be satisfied when an insurance company adopts and implements practices on a nationwide basis that substantially meet or exceed the minimum requirements of the Model Regulation, and a number of insurance companies have done just that.

Nevertheless, many open questions remain as we arrive at the June 16, 2013 Harkin Amendment deadline7, and, while the answers to those questions are not necessarily certain or definitive, stakeholders in the fixed annuity industry should think about them.

For Instance:

  • If an insurance company hasn’t adopted nationwide practices but is domiciled in a State that has adopted the Model Regulation, the annuities issued by that company in all States will fall under the Harkin Amendment Safe Harbor and continue to be exempt from securities regulation. However, to the extent that the Company has appointed insurance producers who are licensed in and selling annuities in a State that has not adopted the Model Regulation, what deadline is applied to those producers in terms of their compliance with the producer training requirements? Do they follow the deadlines set forth in the domiciliary State’s rule? Or, are the training requirement deadlines triggered by the Harkin Amendment’s June 16, 2013 general deadline?
  •  If the training requirement deadline is the general June 16, 2013 for non-adopted States, can that same hypothetical Company rely on the six-month “grace period” provided under the Model Regulation for producers who are licensed as of that date, effectively giving existing producers in a non-adopted State until December 16, 2013, to complete the one-time, four-hour annuity training course?
  • What criteria will determine whether a State’s or individual insurance company’s rules or practices “substantially meet[s] or exceed[s] the minimum requirements established by [the Model Regulation]”? If a State has adopted the product-specific training requirements along with the other suitability standards, but hasn’t included the one-time, 4-hour course, will this State be out of compliance under Harkin?
  • Pursuant to all the questions articulated above, what entity or agency is the arbiter of how Harkin is interpreted? By what process will non-compliance be determined, and how would a carrier challenge or appeal an unfavorable ruling?


The only thing that can be stated with any certainty is that the June 16, 2013 implementation of the Harkin Amendment creates at least some uncertainty! For larger insurance carriers domiciled in a State that hasn’t adopted suitability rules that substantially meet or exceed the Model Regulation, the prudent course of action might be to undertake the adoption of nationwide practices that would satisfy Harkin. For the smaller carriers that find a national rollout logistically or economically challenging, perhaps the most prudent approach for them — whether or not they are domiciled in an State that has adopted the Model Regulation — would be to adhere to the June 16, 2013 “hard” deadline for suitability compliance for annuity sales in States that haven’t adopted the Model, including all producer training requirements. In any case, it’s very important that they carefully review these issues with their legal counsel and determine the best course of action.

A final word of caution: The Harkin Amendment requires States and/or insurance companies to adopt all successor modifications to the 2010 NAIC Suitability in Annuity Transactions Model Regulation–for States, they must do this within five years of the NAIC’s adoption of any revisions to the Model Regulation; no adoption deadline is explicitly stated for insurance company adoption of successor Model Regulations.



The Harkin Amendment was added to the Dodd-Frank bill, H.R. 4173, as Sec. 989G, and is codified as a Note to 15 U.S.C. §77c(a)(8).

The annuities that are subject to the exemption and to which the Harkin Amendment applies are those described in 15 U.S.C. §77c(a)(8): “Any insurance or endowment policy or annuity contract … issued by a corporation subject to the supervision of the insurance commissioner … or agency or officer performing like functions of any State or Territory of the United States or the District of Columbia.”

In addition to suitability rule adoption, Harkin requires (1) that the value of the annuity contract doesn’t vary according to the performance of a separate account [i.e., it is fixed]; and (2) that the annuity contract satisfies standard nonforfeiture laws.  This article addresses Harkin compliance, as it relates to Harkin’s third requirement: (3) adoption of rules relating to suitability in annuity transactions pursuant to the minimum requirements set forth in the Model Regulation.

States that have adopted new suitability rules, post Harkin, include Alaska, California, Colorado, Connecticut, Hawaii, Idaho Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Nebraska, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Washington, West Virginia, and Wisconsin.

Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Washington, West Virginia, and Wisconsin.

States with proposed legislature or regulations currently include Florida, Minnesota, and Tennessee.  New York has proposed legislation to adopt the full model, but NY is considered an “adopted” state because it’s operating under Emergency Rule 187, which adopts the suitability standards but doesn’t require producer training.  If NY adopts AB 634, it will supersede the Emergency Rule and is scheduled to take effect January 1, 2015.

The “non-adopted” States are Alabama, Arizona, Arkansas, Delaware, Georgia, Maine, Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, Pennsylvania, Vermont, Virginia, and Wyoming.

Although the initial deadline set forth in the Harkin Amendment is June 16, 2013, the language of the amendment–i.e., “on and after June 16, 2013”(emphasis added) — allows for later adoption of Model Regulation-based suitability rules.  However, after June 16, 2013 and before such date of adoption, the Harkin Amendment securities exemption wouldn’t apply to annuities issued in a non-adoption State or to annuities issued by an insurance company domiciled in a non-adoption State, if that insurance company hasn’t adopted and implemented practices on a nationwide basis that meet or exceed the minimum requirements of the Model Regulation.

NAFA, the National Association for Fixed Annuities, is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities. NAFA is the only association whose sole purpose is advocating for the fixed annuity product.

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