NU Online News Service, June 9, 2004, 2:52 p.m. EDT, Washington – Variable annuity sales would come under tougher suitability and disclosure requirements under a new rule proposed by NASD, Washington.[@@]
The proposal comes following release of a joint U.S. Securities and Exchange Commission-NASD staff report on broker-dealer sales of variable products.
The report says that the SEC, NASD and other regulators receive large numbers of complaints from individual investors about variable insurance products.
The complaints indicate, the report says, that customers were sold variable products without fully understanding the products, giving rise to concerns that the products were not appropriate for the customers, given their investment objectives.
“Variable insurance products have always been subject to suitability, disclosure and other requirements that apply to all securities,” says NASD Chairman Robert Glauber.
“But given the examination findings, the large number of enforcement cases over the past couple of years and the complexity of these products, we feel we can best protect investors by establishing stronger, more specific rules that apply specifically to variable annuities,” Glauber says.
SEC Chairman William Donaldson says it is critical that broker-dealers ensure that the securities they sell are appropriate for the individual investor.
“Given the complexity of variable annuities, extra care is required,” Donaldson says.
The report cites instances of brokers making unsuitable recommendations to senior citizens and to individuals who could not afford to pay for the products without mortgaging their homes.
In addition, the report says that there are failures to fully disclose the various fees, risks and tax consequences associated with variable products.
Under the proposed NASD rule, before recommending purchase of a variable annuity, the 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 objective and that the annuity as a whole, including its underlying subaccounts, is suitable for the customer with regard to risk and liquidity.
All these determinations would have to be documented.
In addition, the broker-dealer or its representative would have to provide the customer with a current prospectus and a separate but brief “plain English” risk disclosure document highlighting the main features of the transaction.
These features include liquidity issues, including potential surrender charges and tax penalties, sales charges, fees, federal tax treatment of variable annuities, applicable state and local premium taxes and market risk.
In addition, the disclosure document must inform the customer about whether a “free look” period applies.
All transactions conducted by a registered representative would have to be reviewed and approved by a registered principal.
The registered principal would have to approve, in writing, the suitability analysis. Moreover, if the transaction involved the exchange or replacement of another product, the registered representative also would have to approve that in writing.
Finally, all broker-dealers would have to establish and maintain specific written supervisory procedures and training policies.