The National Association of Securities Dealers is preparing a notice for members on participation in life settlement transactions.
NASD Vice Chairman Mary Schapiro, who is in line to become chairman of the group in December, talked about life settlements, equity indexed annuities and retirement plan rollovers in Hollywood, Fla., at a conference organized by the compliance and legal division of the Securities Industry Association, Washington.
Life settlement deals give holders of life insurance policies the ability to sell the policies to investors.
“We realize that the ability to sell these assets can be of vital importance to their owners and that in many, if not all cases, the price of the secondary market transaction exceeds the redemption price that would be paid by the contract’s issuer,” Schapiro said, according to a written version of her remarks. “But we believe there are other considerations worth noting, such as alternative sources for income or alternative premium payment sources that might be considered before recommending such a sale.”
Taking a careful approach to life settlements is important because the seller is often in a position of economic distress and feels forced to sell what may be an asset of substantial value below its true discounted value price, Schapiro said.
NASD is hoping its life settlement notice “will offer balanced guidance on how to participate in such transactions from a member perspective,” Schapiro said.
Schapiro also touched on efforts to “harmonize” regulation of equity indexed annuities and variable annuities.
“Variable annuity sales compete with equity-indexed and plain vanilla annuities,” Schapiro said. “Variable annuities are securities, equity-indexed annuities may not be securities, yes the subject of another long and tortuous story, and plain vanilla annuities are not securities. These are complex products in pricing, operation and structure that may be purchased for similar purposes but are subject to disparate levels of regulation and offer dissimilar levels of protection to investors.”
Schapiro noted that the NASD will be hosting a meeting on annuities in May to discuss harmonization of annuity regulations with other regulators.
The NASD is interested in fostering levels of disclosure, suitability and other customer protection requirements comparable to those associated with the recommendation and sales of securities products, Schapiro said.
Another NASD team is working on an “investor alert” to encourage investors to keep 401(k) plan assets in qualified retirement accounts when they leave their employers.
“We are concerned that a recent study showed that 45% of all employees take cash distributions from their 401(k) plans when they leave their company as opposed to rolling the money into another qualified plan or account,” Schapiro said. “This is a trend we are worried will increase as people begin to exhaust their home equity lines of credit.”
CORRECTION: An earlier version of this article described Mary Schapiro’s role as the National Association of Securities Dealers incorrectly. She will not become chairman until December.