Recent years have seen an increase in litigation against insurers and distributors involving sales of various types of annuities. There has also been an increase in regulatory actions involving virtually all types of annuities.
Many of these lawsuits rely on various suitability standards as the basis for the sought-after recoveries. Much of the regulatory action also questions the suitability of the annuities sold to various types of consumers.
We have complained in past articles that some consumers have been treated by regulators and others as needing "special" protections because of age when reality dictates that no annuity should be sold to any person of any age without a valid suitability determination.
This leads us then to question what exactly constitutes a "suitable" sale of an annuity–of any type of annuity.
Variable annuities have long been subject to suitability standards imposed by the self-regulatory organization for the securities distribution industry, the NASD. Today, the NASD operates under a new name, the Financial Industry Regulatory Authority (FINRA), but the suitability rules, at least at the present time, remain the same.
Recently, state insurance regulators have begun imposing suitability requirements on sales of all types of annuities. The National Association of Insurance Commissioners, in June 2006, adopted a set of model regulations characterized as the Suitability in Annuity Transactions Model Regulation. The model regulation is now being adopted on a state-by-state basis.
Meanwhile, various versions of a new proposed NASD Rule ("Proposed Rule 2821) are pending. The goal is to impose more rigorous and enhanced suitability procedures for sales of deferred VAs. (By comparison, the model regulation applies to all annuities, not just deferred VAs.)
While Proposed Rule 2821 and the model regulation are not inconsistent with each other, the fact that Proposed Rule 2821 imposes more rigorous standards will require insurers and distributors that offer both VAs and non-variable annuities to create parallel procedures for each of the two types of products. But it is probable that some insurers and distributors will adopt the stricter standards of Proposed Rule 2821 for all their annuity sales in order to avoid the confusion that could develop from having two different sets of procedures for different types of products.
Plaintiff's lawyers have discovered there are opportunities for instituting various types of litigation, due to suitability standards on sales of annuities.
Such standards, whether imposed by FINRA rules or state insurance regulations, do not by their terms provide for private rights of action by purchasers of annuities.
However, the courts and similar tribunals seem to have adopted suitability as the duty owed by insurers and distributors to their annuity customers; they therefore have no problem granting relief to such customers when suitability standards have not been observed.
