The industry feels the NASD’s Notice to Members has several misrepresentations
“You are primarily the producers of the product, not the manufacturer, so it is important how you sell the product. For instance, you can’t take something that is not a security and make it into a security.”
Attorney Joan E. Boros directed those comments to financial advisors here at the annual Producers’ Forum & Expo sponsored by the National Association for Fixed Annuities, Milwaukee, Wis.
Her purpose was to update advisors on current issues concerning fixed index annuities (also called equity indexed annuities because many of the products link excess interest crediting to gains in an equity index).
A partner in the Washington, D.C., law firm of Jorden Burt, Boros stressed repeatedly that advisors need to focus on how they market EIA products.
Her comments came in response to the controversy now circulating over the August 2005 Notice to Members (NTM 05-50) issued by the National Association of Securities Dealers. That notice lays out the NASD’s views on how its broker-dealer member firms should treat the sale of equity indexed annuities. Though the notice does not define EIAs as securities, it says B-Ds should adopt special procedures in handling EIAs, due to uncertainty over whether a particular annuity may be deemed a security (see NU, Aug. 8 and Aug. 15, 2005).
“The character you give the product is what you are going to have to live with,” Boros told the advisors. This, she said, was the message of the 1967 United Benefit decision regarding annuities (SEC v. United Benefit Life Insurance Company 387 U.S. 202) and it still holds today.
Other aspects of marketing are important, too, she said. For instance, avoid the practice of not pointing out the policy’s surrender charges, riders, fees and so on.
Also, she said, “no back-casting!” Back-casting refers to using past performance, as in: “if you held this policy since 1952, you would have X dollars in the policy today.” Such presentations make “prime cases that the courts and the SEC can make against you,” Boros said.
It’s the advertising and the marketing that most concern the federal regulators, she stressed.
As for the industry, it is concerned that the NASD’s notice to members contains several misrepresentations. “We are trying to chip away at these,” she said.
For example, she said the final version of the NTM says there is an “exemption” for insurance products under federal securities law [Section (3)(8)], Boros noted. But that is not the correct word, she said. “The securities law ‘excludes,’ not ‘exempts,’ insurance from being a security….It says you’re not a security and therefore you don’t have to be sold by registered reps.” The word “exclusion” was in the original version of the NTM, but this was changed in the final version, Boros noted.
There are also some “inconsistencies and inaccuracies” in the NTM, the attorney continued. “We won’t get them all off our back, but we do have the ability to moderate some of them.”
For example, the final version of the NTM says “some” EIAs are registered products. The fact is that there only have been three registered EIAs to date, said Boros. To characterize that number as “some” is “a false and misleading statement,” she said.
The NTM refers to Rule 151, the so-called “Safe Harbor” rule, to clarify when certain annuities are exempted under Section 3(a)(8) of the Securities Act. But the Safe Harbor rule is not an all-encompassing definition for all annuities, Boros said. The concern is that the NTM is trying to move it in that direction, suggesting that Rule 151 is “the” standard. If that were so, then “everything flunks,” Boros said.