Broker-dealers are reacting to heat from the NASD in different ways
If the National Association of Securities Dealers expected lockstep adherence to its August 2005 advisory notice on broker-dealer sales of index annuities, the self-regulatory agency was wrong.
Anecdotal evidence provided to National Underwriter indicates that while some independent broker-dealers are following the NASD’s Notice to Members 05-50 almost to the letter, others are not.
The lack of uniform response is upsetting insurance distributors and their registered agents and advisors who place business through independent broker-dealers.
For instance, “brokerage general agents are hurting because no one knows what the rules are,” says Ben F. Ward, managing director of The Leaders Council Agency LLC, Memphis, Tenn.
The NTM effectively has “blindsided” the insurance industry, he says.
At dispute is the NTM’s advice that NASD’s member broker-dealers treat index annuities as if they were securities.
Since the large majority of index annuities traditionally have been sold as fixed products, subject to insurance–not securities–regulation, this advice does not square with current practice. The Securities and Exchange Commission has not declared index annuities to be a security, either.
The varied responses of broker-dealers and other marketers has been the inevitable result.
Brian L. Daniels, chief executive officer of Fortune Financial Services Inc., New Brighton, Pa., is one of the independent B-Ds that is following the notice as if it were a regulation. That is, Fortune Financial is requiring its reps to run all index annuity sales through the B-D for supervision and compliance. The firm has roughly 350 reps.
Yes, Daniels allows, “the notice does say it is ‘suggesting’ and ‘recommending,’ not making a ruling.” But index annuities will probably be declared a security before long, he predicts. “That’s what we hear from various attorneys and others in the know.”
Regardless of when or how that happens, he says, his firm is following the terms of NTM 05-50 because of the legal liability issues it creates.
“Now that the NTM is out, the first place any complaints [concerning an index annuity sale by a rep of a B-D] will go is to the broker-dealer,” Daniels explains. “We’re liable for the sale, whether the sale was right, wrong or indifferent, and whether our rep sold it through us or not.”
His firm “cannot provide this level of liability for free,” he continues.
But Larry Schmitt, president of Southwest Insurance Agency, Dallas, says his firm is using the same screening process for index annuities that it uses for variable annuities (a security) except that the independent broker-dealer “does not have to” place index annuity sales through the firm.
Industry pressure may change that, he allows.
Southwest is a subsidiary of SWS Group Inc. It provides insurance services to its affiliated regional and independent B-Ds.
If a rep places an index annuity through the independent B-D, the same procedures apply to that sale as to a VA or another security, Schmitt says. But if the rep for that B-D places an index annuity outside, “we have to know about it as an outside business activity.”
In the case of sales through the regional B-D, “all reps are captive to us and all insurance business has to be placed here or it is considered selling away,” says Schmitt. The screening in this case is comparable to that provided for a VA. “We want to be sure the client understands what it is and how it works,” he says.
Some advisors have told National Underwriter that they are hustling to meet their broker-dealers’ new NTM-inspired index annuity sales procedures–procedures that are often imposed with deadlines measured in days, not weeks.
Others have told NU they are terminating their securities licenses or thinking of doing so, at least the licenses with their existing broker-dealer.
But neither Daniels nor Schmitt report seeing any major changes in licensing so far.
Even so, unsettled feelings are alive and moving amongst index annuity distributors. Why are broker-dealers not responding to the NTM with a united front?