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NASD Head Singles Out EIAs In Speech

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A top official at the National Association of Securities Dealers says too many equity-indexed annuity sellers are portraying them as no-risk products.[@@]

Robert Glauber, chairman of the NASD, Washington, complained about the EIA sales process last week in Boca Raton, Fla., at a conference organized by the Securities Industry Association, New York.

Glauber spoke about problems with disclosure about mutual fund “breakpoints,” or discounts available for clients with big accounts, according to a printed version of his remarks posted on the NASD Web site.

Glauber also talked about topics such as the value of the Internet as a mutual fund disclosure and educational tool and the difficulty of combining NASD regulatory functions and market operation functions in the wake of a move that turned Nasdaq into a for-profit company.

Toward the end of the speech, Glauber spoke about the difficulties involved with regulating Section 529 college savings plans.

The government has put regulation of 529 plans under the jurisdiction of the Municipal Securities Regulation Board, but MSRB relies on the NASD to enforce 529 plan regulations.

“Mutual funds and 529s are about as dissimilar as oranges and tangerines, but Congress designated 529s as municipal securities, so the rules governing their sales are different,” Glauber said. “They shouldn’t be… Investors have a right to expect that products that look the same are covered by the same regulatory regime.”

MSRB officials have been helpful with efforts to harmonize the regulations that govern the sale of 529 plans and mutual funds, Glauber said.

“Then there are annuities, which present a more complicated problem than 529s,” Glauber said.

“There are variable annuities, which are subject to NASD regulation, fixed annuities, which are subject to state insurance commissioners’ regulation, and equity-indexed annuities which are subject to utterly ambiguous regulation because it isn’t entirely clear to anyone whether they’re insurance products or securities,” Glauber said. “Yet all these products look pretty much the same to investors. EIAs are particularly complex. They are often marketed as risk-free, which they most certainly are not. And they are marketed disproportionately to elderly people, often without suitability analyses having been made. And sales commissions are as high as 10%.”

The NASD has proposed a set of rules to stop to “this sort of irresponsible behavior in sales of variable annuities,” Glauber said.

The proposal includes requirements for a tailored suitability analysis and approval of any annuity sale by a principal of the selling broker’s firm, Glauber said.

“But we can’t touch all equity-indexed annuities sales, because they aren’t registered as securities and are often sold by non-broker-dealers,” Glauber said. “I think what we need to do here is invite the state insurance regulators to work with us on harmonizing and clarifying the rules for fixed and equity-indexed annuities sales. We’ve had some preliminary discussions with some of them toward that end, but we have a long way to go.”


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