The industry needs to stand up to the National Association of Securities Dealers in its efforts to regulate equity indexed annuities, according to a speaker at the annual meeting here of the National Association for Variable Annuities.
On Aug. 8, 2005, the NASD released a final version of its Notice to Members 05-50, which discusses the supervision of sales of unregistered EIAs.
The Securities and Exchange Commission has sent out a letter of inquiry to a variety of issuers of equity indexed annuities.
Criticizing the NASD, Joan Boros, a partner with Jorden Burt, Washington, told NAVA attendees, “We need a ‘no regulator left behind’ education initiative.” She added that the NASD has been “beaten back” before and that “it is possible to beat it back” again. Boros said she was offering her own opinion based on experience in the securities industry.
The NASD’s effort far exceeds its jurisdiction and makes incursions into permissible sales material, she said.
Non-registered EIAs are not regulated by the SEC and NASD, she explained, so this means that non-registered EIAs are not subject to the customer suitability, disclosure and sales practice requirements that registered securities are.
In the past, the NASD has tried to regulate group annuities and has been prevented by industry efforts, Boros noted. She said that if it starts looking at fixed annuities with the same vigor that it has variable annuities, then this segment of the industry is “in deep trouble.”
In fact, she cited comments made by Robert Glauber, CEO and chairman of the NASD, in which she said he discussed how investors could be well served. She told attendees that the Sept. 19 remarks included comments that “…to level the playing field, I think we need to look at fixed annuities, variable annuities, and equity indexed products, exchange traded funds and perhaps some other products, such as separately managed accounts, to ensure that investors are as well protected from abuses when they buy those as they are when they buy mutual funds.”
Until the NASD started looking at EIAs, the SEC did not have much impetus to look at the issue.
But now, she said, the SEC will feel more compelled to look at these products.
Indeed, in August 2005, the SEC sent out a letter of inquiry to some EIA issuers.
It is unlikely that the SEC will look at indexed products differently than it did in a 1997 concept release on the topic, Boros said, but it could. That release, Rel. No. 33-7438, File No. S7-22-97, Aug. 20, 1997, known as Rule 151, indicates that the rule is not applicable to indexed products as specified in the SEC Concept Release “Equity Indexed Insurance Products,” according to Boros.
If the SEC does decide to look at the issue, there are several possible paths the SEC could choose, Boros said.
One possibility is that Rule 151, which addresses fixed declared rate annuities, could be amended to cover indexed annuities, as well, she said.
The SEC also could separately promulgate a rule that is unique to insurance products, she continued.
She said that another possibility, should the SEC decide to take action, is a no-action letter, in which a company writes in and asks, “Mother, may I….”
And yet another possibility is that the SEC could bring a “poster child” enforcement action against a company based on the 4 corners of the EIA contract rather on broad issues, Boros noted. “It would be an opportunity to articulate what to live and die by,” she explained. But, if that were to happen, it would have to be a financial product that really would present the SEC with a winning case, she said.
Among the possible transgressions that might encourage an examination are investment risk shifting and too low a secondary guarantee, Boros said.
The NASD has been “beaten back” before and “it is possible to beat it back” again, says Washington attorney Joan Boros.