Variable annuity sales would come under tougher suitability and disclosure requirements under a new rule proposed by the National Association of Securities Dealers.
The proposal comes following release of a joint Securities and Exchange Commission-NASD staff report on broker-dealer sales of variable products.
The report says the SEC, NASD and other regulators receive large numbers of complaints from individual investors over variable insurance products.
The complaints indicate, the report says, that customers were sold a variable product without fully understanding it, giving rise to concerns that the product was not appropriate for them, 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 R. 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, he says.
SEC Chairman William H. 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, he says.
Frank Keating, president of the American Council of Life Insurers, Washington, says life insurers welcome the scrutiny of variable product sales and support full compliance with comprehensive supervision and suitability standards. But he adds that the life insurance industry encourages equally thorough examinations and reports by the NASD and SEC regarding other financial products.
In that way, Keating says, regulatory resources will be allocated fully and equitably to protect consumers and prevent abuse in the marketplace.
Keating notes that the report on variable products does not quantify the incidence of broker-dealer deficiencies.
If the report had provided that information, he says, broker-dealers could better fulfill the risk-based approach to compliance encouraged by the NASD and SEC that focuses resources on the most frequent sources of wrongdoing.
The report cites instances of brokers making unsuitable recommendations to senior citizens and to individuals who could not afford the product without mortgaging their homes.
In addition, the report says 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 VA, the registered representative would have to determine that the customer has been informed of the unique features of the product, 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 whether a free look period applies.
All transaction 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 involves exchange or replacement, the registered representative would also have to approve that in writing.
Finally, all broker-dealers would have to establish and maintain specific written supervisory procedures and training policies.
Michael Kerley, senior vice president of federal affairs for the National Association of Insurance and Financial Advisors, says the proposed rule is probably redundant given the current SEC rules relating to suitability.
However, he says, it will not change the way a good life insurance agent would operate in the sale of variable products.
Good agents, Kerley says, already do the things the NASD would require and wont have any problems complying with a new regulation.
Reproduced from National Underwriter Edition, June 11, 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.