NASD Pushing New Oversight Requirements For Variable Annuities

By

Washington

Deferred variable annuities would come under a new set of suitability, disclosure and principal review requirements under a rule proposed by the National Association of Securities Dealers.

The proposed rule is specifically designed for deferred VAs, codifying and mandating best practice guidelines previously issued by NASD, says NASD Chairman Robert Glauber.

“Because of our concerns about unsuitable recommendations and inadequate supervision, variable annuity sales have been the focus of increased NASD-wide attention for the last 2 years and the subject of more than 80 disciplinary actions during that time,” Glauber says.

“We believe this rule proposal represents an appropriate approach to ensuring adequate protection for investors considering or purchasing deferred variable annuities,” he says.

But the American Council of Life Insurers, Washington, questions the need for the proposal.

“NASD already has authority to address any problems it perceives in this market,” says ACLI spokesman Jack Dolan.

The proposal, he says, could create burdens on sellers and companies while not addressing the perceived problems. “This appears to be a solution in search of a problem,” Dolan adds.

Under the proposal, before recommending a deferred VA, a registered representative would have to determine that the customer has been informed about the unique features of the product, that the customer has a long-term investment strategy, and that the annuity and its subaccounts are suitable with regard to risk and liquidity.

The registered representative would have to document these determinations.

As for disclosure, the representative would have to provide the customer with a current prospectus and a separate plain English risk disclosure document focusing on the main features of the specific product.

This disclosure would cover liquidity, sales charges, fees, federal tax treatment, state and local premium taxes and market risk. The disclosure would also have to inform the customer about whether a “free look” period applies.

The proposal also requires a registered principal to review and approve deferred VA transactions.

The principal would have to review and approve the suitability analysis documents and any separate exchange or replacement documents if the transaction involves an exchange or replacement.

Registered firms would have to establish and maintain specific, written supervisory procedures reasonably designed to achieve compliance with the rules standards. Registered firms also would have to develop and document specific training policies or programs aimed at assuring compliance.


Reproduced from National Underwriter Edition, May 7, 2004. Copyright 2004 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.