The Suitability Requirement In The Sale And Regulation Of VAs
Variable annuities currently constitute more than $1 trillion in assets and are the fastest growing product in the insurance industry. Generally, variable annuities are sold to people of modest means as retirement savings vehicles.
In June 2004, the Securities and Exchange Commission and the National Association of Securities Dealers issued a joint report regarding broker-dealer sales of variable insurance products. The report was undertaken in response to a large number of investor complaints. As a result of the examination and findings, the NASD and SEC are recommending that regulators focus upon the suitability of variable product sales.
The proposed rules essentially track the ideas and language of antifraud provisions of federal securities laws and rules from other self-regulatory organizations, which obligate a registered representative to recommend only securities that are “suitable” to any particular customer. That “obligation of fair dealing” means that registered representatives must have reasonable bases for believing that their securities recommendations are suitable for and appropriate to certain customers in light of the customers financial needs, objectives and circumstances.
Among the proposed rules is that a broker-dealer would be required to develop and document training programs for its registered representatives and principals to ensure compliance with the rules requirements and that they understood the features of deferred variable annuities. Further, a registered representative would be required to determine whether a VA is suitable to a customers needs, financial status, investment objectives and other relevant information by asking questions, such as:
Has the customer been informed of the unique features of the variable annuity?
Does the customer have a long-term investment objective?
Is the deferred variable annuity, as a whole and its underlying subaccounts, suitable for the customer, particularly with regard to risk liquidity?