Insurance and securities are increasingly intersecting, and the National Association of Securities Dealers is making moves to expand its regulatory response accordingly, panelists here at the Retirement Industry Conference indicated.
In recent times, for instance, the NASD has been applying regulatory tools like rules, regulations and Notices To Members (NTMs) to life settlements and index annuities, said Paul V. Bruce, principal of Waterside Enterprises LLC, Maple Grove, Minn.
That is in addition to oversight over broker-dealer sales of known “insurance security” products such as variable annuities and variable life insurance, he told the conference, which was co-sponsored by LOMA, Atlanta; LIMRA International, Windsor, Conn.; and the Society of Actuaries, Schaumburg, Ill.
Bruce and co-panelist Eric L. Marhoun, a counsel with Lord, Bissell & Brook LLP, Atlanta, reviewed some of the recent NASD actions and noted similarities in some.
Regarding life settlements and index annuities, for instance, the NASD wants its member broker-dealer firms to realize that life settlements involving variable products are securities transactions, said Bruce.
NTM 06-38 made that clear, he indicated, but the NTM also “foreshadows potential issues with transactions in the life settlements secondary market.” The notice does not come out and say that life settlements of non-variable policies are securities, but it does say that such settlements are subject to “outside business activity” requirements, he observed. Such activities are within the NASD’s jurisdiction, he indicated.
The message to broker-dealers? “Supervise it [life settlements] in the firm,” he said, adding that this applies to variable life policy settlements and “maybe all life settlements.”
Another NTM, NTM 05-50, takes a similar approach to index annuities. The document’s “strong language” effectively tells broker-dealers, “Don’t treat them [index annuities] as a non-security,” Bruce said.
NTM 05-50 cites uncertainty regarding the securities status of non-registered index annuities as well as general sales practice concerns as reasons for its comments.
B-Ds that do treat index annuity sales as a non-security “do so at their own risk,” Bruce said.
“Most people take the word ‘could’ [in the NTM] as ‘should,’” he commented.
In looking at settlements, the NASD is concerned about secondary sales of non-variable policies, Bruce said. Where index annuities are concerned, the NASD’s focus is on ancillary transactions, often those in which the client liquidates securities in order to have funds to use to purchase the index annuity.
With a settlement, the implication for B-Ds is that “you have best execution responsibilities.” If the settlement involves a VUL, a written agreement is mandated because of books and records; the Duty of Fair Dealing comes into play; and there will be outside business activity considerations or Private Securities Transactions.
Bruce said the developments raise “fundamental concerns” about the growth of the life settlement industry through the broker-dealer channel.