ACLI Tells NASD: Jettison Proposed Rule On VA Sales

A number of financial services industry trade groups are telling the National Association of Securities Dealers that its proposed regulation imposing separate suitability and disclosure requirements for the marketing of variable annuities is overkill and redundant.

In its comment letter, the American Council of Life Insurers stated, “The initiative would impose unwarranted and unreasonable burdens on broker-dealers affiliated with life insurers. It dilutes the value of meaningful disclosure and overloads with redundant information.”

While the ACLI was particularly animated in urging the NASD to rethink the proposal, noting that it should be “jettisoned,” several other trade groups offered an olive branch to the NASD and the Securities and Exchange Commission, which is participating in the rules-making process, by saying that if new requirements are required, they should be formulated only after coordination with the industry.

The Securities Industry Association, for example, said it “welcomed the opportunity to assemble a joint industry advisory group representing a cross-section of firms to assist the NASD staff in exploring any or all of the issues” raised in its 9-page comment letter. And the National Association for Variable Annuities proposed that if a separate document is to be required, “a coordination of effort by the NASD and SEC on various pending proposals is necessary. NAVA would be happy to participate in such a joint undertaking or lend assistance in any way possible.”

However, in their comments, the ACLI, the SIA and NAVA, as well as the National Association of Insurance and Financial Advisors and the Association for Advanced Life Underwriting, all made clear they wanted the strongest possible consumer protection provisions to govern the sale of variable annuities.

As stated by the ACLI, “There is no place for unsuitable variable annuity sales. Life insurers strongly oppose unscrupulous practices in variable annuity distribution. Abusive market conduct should be curtailed through strong enforcement of existing suitability and supervision standards.”
It also dismissed the proposal by stating, “Numerous aspects of the NASD proposal are functionally unworkable.”

In its comment letter, signed by Carl Wilkerson, vice president and chief counsel, securities and litigation, the ACLI added, “Careful evaluation of SRO rule proposals ensures balanced regulation in the public interest and helps preserve competitive fairness in the marketplace.”

Furthermore, the ACLI said in defending the current guidelines rather than rules governing VA sales, “Existing NASD regulatory standards ensure that broker-dealers sell variable contracts suitably. Consistent, strong regulatory enforcement is the most effective prophylactic against marketplace abuse.”

In its comments, the SIA is supportive of the ACLI arguments. “While the SIA commends the NASDs efforts to improve the quality and usefulness of disclosure and sales practices within the context of variable annuity transactions, we believe that other, more workable solutions exist and would be happy to explore those or any others with NASD as it moves forward with this process.” The SIA letter was signed by Ira Hammerman, SIA senior vice president and general counsel.

In their comment letter, NAIFA and AALU argued that unnecessarily singling out VAs would “place variable annuity products, and the individuals who sell them, at a disadvantage to other, comparable investment products and their salespeople.”

Like the ACLI, NAIFA and AALU said the “most effective way to protect consumers from misleading sales practices is through appropriate enforcement of existing rules and through concerted efforts to encourage consumers to carefully read the information currently found in prospectuses.”

Furthermore, requiring a separate disclosure statement “would duplicate existing requirements that already address the contents and
delivery of a variable annuitys prospectus,” NAIFA and AALU said. Variable annuity prospectuses, which are reviewed by the SEC, include the fees, risks and expenses associated with the product, they added. “NASD already has the requirements in place and the tools available to
ensure appropriate and suitable variable annuity products are sold to consumers, and thorough and comprehensive disclosures are made available to consumers,” NAIFA and AALU said.

The regulation on which the trade groups are commenting was proposed June 9 as part of a number of actions the NASD and SEC are taking to deal with what the regulators believe is a trend of inappropriate marketing activities for variable annuities. The agencies noted in their proposal continuing enforcement actions against marketers of VAs. They also released a brochure available to the public that points out what a VA is, and what a consumer should do to ensure that purchase of a variable annuity is appropriate for them.

One of their major concerns is inappropriate exchange of annuities. The summary for the rule says its objective is to “deter improper sales practices and improve investors understanding of the product.”

But, in one comment, the ACLI comment letter stated, “The need for the NASDs suitability initiative has not been adequately substantiated through rigorous analysis. Objective data on NASD disciplinary actions and SEC complaint history do not support the initiatives putative purpose.”

As noted in the comment letters, the proposed rules would establish separate rules for sale of VAs than for other securities products. The rules would address suitability, disclosure, principal review, supervision and training.

In its comment letter, the SIA said it “cannot support the current form of the proposal because we believe it is duplicative, expensive and potentially counterproductive to investors seeking relevant, clear and easy to understand information about the material aspects of an investment in variable annuities. “…We have serious concerns about the proposed separate disclosure document, principal review provision and suitability parameters,” the SIA added, “all of which we respectfully request that NASD reconsider.”

In summing up its concerns, the ACLI said “The proposal should be summarily jettisoned. Requiring broker-dealers and registered representatives to strongly encourage consumers to carefully read the prospectus, ask questions and make comparative evaluations represents a far more effective approach when coupled with current suitability standards.”

Among its specific concerns, the ACLI argues that through the proposed regulation, “The NASD demonstrates a limited understanding of comprehensive state insurance laws and regulations governing variable contracts and protecting consumers.

“The adoption of disparate suitability standards and practices unnecessarily expands the scope of comprehensive SEC, NASD and state insurance laws and regulations,” the ACLI said.

In its comment letter, NAVA also raised issues related to several unique products manufactured and sold by insurance underwriters and agents:

Unregistered variable annuity contracts.
NAVA argues that the proposed rule is silent as to whether it was intended to apply to unregistered deferred VA contracts, noting that securities laws exempts from registration certain VA contracts used to fund pension or profit-sharing plans meeting certain requirements of the IRS code.

Deferred VAs used in ERISA pension plans. NAVA notes that deferred VAs are frequently used as the funding vehicle in pension plans subject to ERISA, and says that the sale of VAs to fund such plans “is structured very differently from sales made to individual investors. These differences make the NASDs proposed rule unnecessary for VAs sold in ERISA defined plans. NAVA therefore recommends that deferred VA contracts used to fund a pension plan defined under ERISA be exempted from the requirements of the proposed rule.

Signature requirements. The proposed rule would require that a suitability determination document be prepared and signed by both the associated person making a recommendation for the purchase, sale or exchange of a deferred VA and by a registered principal. While the proposed rule does not specify what type of signature is required, NAVA suggests that an electronic signature is acceptable.


Reproduced from National Underwriter Edition, August 12, 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.