In the early days of variable annuities (the late 1970s and early 1980s), nontraditional salespeople began selling products previously thought to be in the exclusive purview of traditional insurance agents. The ensuing chain of events has now led to a development that has the life insurance industry confused.
The nontraditional VA sellers were primarily stockbrokers and banks. They were required to use entities new to the traditional life insurance business–broker-dealers. While many insurers already had B-Ds in their corporate families, these B-Ds were exclusively for the companies’ “captive” agents, operating merely as an adjunct to traditional agency operations. In fact, in those days, many insurers were, themselves, registered broker-dealers.
As nontraditional entities began selling variable life insurance policies, it was logical to assume the people and corporate entities involved would merely acquire state life insurance licenses and adapt life insurance sales practices to the regulatory requirements applicable to sales of “securities.” But almost immediately, jurisdictional problems arose. A number of states prohibited corporations from possessing life insurance licenses. Others prohibited B-Ds from being insurance licensed or prohibited insurance agencies from being B-Ds. In addition, the New York Stock Exchange prohibited its members from possessing insurance licenses.
In recent years, a number of these restrictions have been lifted, but they still apply in a handful of states. The NYSE also no longer prohibits its members from having insurance licenses. However, the procedures put into place to resolve these problems back then still exist today.
The industry’s leaders in those days came up with a simple solution: obtain “no-action” letters from the SEC staff that, in effect, permitted a life insurance agency or individual agent to receive compensation on variable insurance product sales without being a registered B-D.
These no-action letters were subject to the condition that the B-D principals had to be able to supervise the activities of persons selling the “securities” products and that the operational, financial and consumer-protection safeguards applicable to B-Ds had to be maintained. In addition, the arrangement had to be required as a result of inability to comply with the nuances of state insurance laws or regulations applicable to corporations or entities such as broker-dealers with respect to obtaining insurance agency licenses or as a result of the prohibitions of the NYSE against members having insurance licenses.
As a result of these no-action letters, it has been standard practice for over a quarter century for many B-Ds to use a procedure whereby all commission payments on variable insurance product sales are paid directly to an affiliated insurance agency or insurance agent, and then for the funds to be reallocated in accordance with normal business practices.