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SEC's BrokerDealer Record Rule Praised

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Insurance companies and agents are praising the Securities and Exchange Commission for issuing a final rule on broker/dealer record keeping requirements that accommodates limited service broker/dealers affiliated with life insurance companies.

Carl Wilkerson, chief counsel for securities with the American Council of Life Insurers, Washington, says the SEC deserves praise for recognizing that not all broker/dealers are full services firms and for not adopting a “one-size-fits-all” approach.

Wilkerson notes that one ACLI member, which he did not name, estimates that had the SEC adopted a less flexible approach to its record keeping rule, it would have cost that company at least $1.5 million annually in extra costs.

Moreover, Wilkerson says, other companies that have limited service broker/dealers likely would have faced similar costs.

David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, Falls Church, Va., adds that the SEC correctly recognized the differences between brokerage houses and insurance broker/dealers.

Winston especially praises ACLI for its work on this issue.

“ACLI deserves all credit for a very positive outcome in the SEC’s final rules,” Winston says.

Under the SEC rules, broker/dealer offices need not maintain on their premises records needed to assist securities regulators that conduct sales practice examinations.

Instead, the rules state that the broker/dealer be able to produce the records “promptly” upon request of a securities regulator.

The SEC noted in its rule that the term “promptly” is deliberately not defined. For a complex request, SEC says, the firm and the regulator should discuss a mutually agreeable time frame.

This contrasts from an earlier proposed rule, in which the SEC would have required all local offices where two or more associated persons regularly conduct business to maintain the relevant records.

Wilkerson says this would have placed a particular burden on limited service broker/dealers affiliated with life insurers, which are often small and geographically dispersed.

In addition, in its final rule the SEC eased a supervisory requirement that appeared in the proposed rule.

Initially, the SEC wanted a “registered principal” in each office to be responsible for supervising the records.

However, in its final rule, the SEC expanded the definition of “principal” to include anyone who as been designated supervisory responsibility for the firm or its associated persons.

Wilkerson says that one other issue of note is what a broker/dealer is required to do if a customer refuses to provide certain information.

Specifically, under the SEC’s rule, broker/dealers are required to maintain certain customer information, including tax identification number, telephone number, annual income, investment objectives, etc.

However, Wilkerson notes, variable product customers sometimes refuse to disclose certain information.

Under the SEC rules, the broker/dealer is required to make a “good faith” effort to collect the information.

While the broker/dealer is not required to include an explanation of the refusal in the account record, the SEC adds, the broker/dealer bears the burden of explaining why this information is not available.

In other news, efforts to establish a federal role in financing insurance losses caused by acts of terrorism are continuing, although federal lawmakers are struggling to find a formula that would help stimulate the property-casualty market without looking like a bailout of the industry.

The ACLI is asking Congress to include as part of any legislation a provision to establish a commission to study whether a federal backup for life insurance might ever be needed.

As far as p-c insurers go, the Senate and the House are moving down different paths. The Senate is considering a quota-share program that requires p-c insurers to retain the first $10 billion in losses.

The House is considering a loan program following losses that exceed a smaller, but unspecified, retention level that could be calculated on an individual company, rather than an aggregate, basis.

Finally, the American Bankers Insurance Association, Washington, is reporting that more smaller community banks are getting into the insurance business.

A survey released at ABIA’s recent annual meeting here found that 49% of banks are selling what it called “general lines,” that include life insurance.

That is a 5% increase from the previous year.

But the largest increase was among community banks, defined as those with assets of $1 billion or less. The number of community banks selling insurance increased by 8% over the previous year.

Overall, total insurance sales by banks, including annuities, reached $45 billion in the year 2000, up 22 percent from 1999.

Ken Reynolds, managing director of ABIA, attributes the increase to cross-selling, which he says is the “key sales technique” driving bank insurance growth.

“The banks experiencing the most growth have well developed referral management programs that emphasize employee training in cross-selling and are tied to an incentive or rewards program,” Reynolds says. (see a related article on cross-selling on p.17.)

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 5, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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