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SEC And NASD Officials Reiterate VA Oversight And Compliance Warnings

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SEC And NASD Officials Reiterate VA Oversight And Compliance Warnings



Insurance companies should do all they can to instill a culture of compliance in their organizations, says a top Securities and Exchange Commission staffer.

Paul F. Roye, director of the SECs Division of Investment Management, says that effective oversight of investment activities depends on the efforts of insurance companies to ensure compliance with the law.

Roye spoke at the Regulatory Affairs Conference sponsored by the Reston, Va.-based National Association for Variable Annuities.

It is in the industrys own best interest, Roye says, to police practices that are not in the best interest of investors.

“Sales abuse is a high enforcement priority for the Commission,” he adds.

Roye notes that the growth in the variable annuity industry has created a challenge for the SEC. Indeed, he says, the growth in the industry has exceeded the growth in the SECs resources.

There are, he adds, a lot of demands on the SECs resources, and the SEC must figure out how to leverage those resources more effectively. That is why, he says, the SEC hopes to see investment companies establish internal procedures and controls designed to ensure compliance.

He does not believe, he adds, that the SEC will be asking for anything more than what a well-managed company should have in place.

VA companies, Roye says, should have an annual review procedure designed to prevent violations of federal securities laws.

These procedures need not follow a specific set of elements, he says, and can be flexible enough to be tailored to the organization.

But the procedures must be in place and must be reasonably designed to detect violations, he says.

Roye notes that the SEC itself is coming under a great deal of congressional scrutiny. The Commission received two letters from the House Financial Services Committee asking for information on such key issues as mutual fund fees and charges and conflicts of interest, he says.

On fees and charges, Roye says that while sales load information is transparent, ongoing fees and expenses data are less so.

The SEC is examining whether more can be done to help investors understand fees and expenses, Roye says.

In addition, he says, the SEC is looking at the compensation structure for mutual fund portfolio managers.

This includes, Roye says, whether they are compensated based on short-term or long-term results and on a pre-tax or after-tax basis.

Brian Rubin, deputy chief counsel with the Department of Enforcement of the National Association of Securities Dealers, says the NASD currently is involved in a variable products “sweep” by focusing examinations on companies that show a significant increase in sales and generate a relatively large number of complaints.

NASD, he says, is looking at particular types of sales, such as tax-qualified purchases and sales to senior citizens.

Several companies, Rubin notes, have faced disciplinary actions and have agreed to settle the actions by paying fines.

Generally, he says, the primary issues in the disciplinary actions involve inadequate disclosure about the tax benefits of variable annuities, suitability and ineffective supervision.

In one case, Rubin says, a company agreed to pay a $25,000 fine to settle a complaint that its advertising material did not adequately disclose that VA purchases in tax-deferred plans provide no additional tax benefits.

Indeed, he says, some of the ads implied that the tax benefits in tax-deferred plans are available only if annuities are the funding vehicle.

Rubin says this also has suitability implications in that NASD Notice to Members 99-35 says recommendations must be based on features other than the tax deferral.

Regarding suitibility, Rubin notes that NASD Rule 2310 requires VA companies to obtain suitability information, such as investment objectives, net worth and risk tolerance, and have reasonable grounds to make a recommendation to buy an annuity.

One company, Rubin says, faced a disciplinary action for making recommendations without determining if customers had a need for a VA feature, other than the tax deferral, when recommending purchase in a qualified plan.

He adds that for variable life, companies must establish the need for life insurance.

Looking to the future, Rubin says the NASD will be examining sales to senior citizens and fees and costs, especially for replacements.

Regarding seniors, he cited one disciplinary action against a company that sold a VA to a 76-year-old widow.

The sale was regarded as unsuitable because the anticipated holding period was insufficient to produce a benefit, he says.

In addition, he says, the NASD will be looking at advertisements and sales literature that are unbalanced and overemphasize certain features.

The message, Rubin says, is to have procedures in place to catch possible violations of NASD rules. When problems arise, he says, companies should act quickly.

Reaction to a problem, Rubin says, can affect a companys liability and sanctions. “Compliance and supervision must not be an afterthought,” he says.

Companies must also make sure customers understand what they are buying and why they are buying it, he says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 30, 2003. Copyright 2003 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.