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Industry Spotlight > Broker Dealers

NASD Asks EIA Sellers To Police Their Reps

By Trevor Thomas

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The National Association of Securities Dealers has released a long-awaited discussion about when securities dealers should treat equity indexed annuities as securities rather than as life insurance products.[@@]

The NASD stopped short in the new guidance of defining exactly when an EIA is an insurance product, but it emphasized that broker-dealers must take it on themselves to police sales of EIAs by their own representatives.

EIAs are annuities that guarantee a minimum crediting rate and also give investors the chance to share in the gains in a stock market index or other investment index.

Broker-dealers should supervise the sale of EIAs by their associates to assure that they are marketed correctly, NASD officials write in the new guidance.

“Investors may assume mistakenly that EIAs provide the same returns as an index mutual fund,” NASD officials write.

Moreover, officials write, sales material for EIAs often has failed to fully explain the features and risks of the product.

“NASD is concerned that the unsupervised use of such material could confuse or mislead investors,” the officials write. “If sales pieces containing these statements were deemed to be broker-dealer communications with the public, then they would be subject to the NASD advertising rules and would have to provide a balanced description of the features and risks of the product.”

The NASD is urging member firms to keep a list of acceptable unregistered EIAs and forbidding associates from selling other, unregistered indexed annuities.

The authors of the EIA guidance warn firms that any recommendation by a broker-dealer rep that a customer liquidate or surrender a registered security to buy an unregistered EIA would be subject to the NASD’s rules governing product suitability.

A copy of the guidance is on the Web at //www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_014821.pdf

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