A financial services company is not supposed to replace all of the variable annuities held by customers of a rep who comes over from a competitor just because the rep will have trouble getting trailing commissions from the competitor.
Officials at the National Association of Securities Dealers, Washington, have given that advice to member companies in NASD Notice to Members 07-06 – February 2007.
The notice applies to supervision of newly associated registered representatives who want to replace customers’ mutual funds, variable annuities and variable insurance policies.
The reps and the reps’ new companies may want to replace the old mutual funds and variable products, in part because of concerns about the difficulty of servicing products administered by competitors, and in part because of concerns about the reps’ compensation, NASD officials write in the notice.
“Any recommendation by the firm or its associated persons to sell a product and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer and determining that the transaction is in the customer’s best interests in view of all considerations,” officials write. “Member firms and their associated persons may not reach any suitability determination or make any recommendation on the basis that the purchase of a security or sale and replacement of a security will yield greater remuneration for them.”
Whether the new firm has a dealer or servicing agreement with the old firm is a valid consideration, but “the suitability analysis must also include other considerations,” officials write.
The new firm should consider whether the customer’s mutual fund or variable product is subject to a contingent deferred sales charge or a surrender period, or has other features that materially affect its value or liquidity, and the fees and expenses associated with the new product being recommended, officials write.
“For a reasonable period following the association of a new representative,” the new firm should make sure the replacements the new rep is recommending are suitable for the customers involved, officials write.
A copy of the NASD notice is on the Web at Document Link