Suitability in variable annuity sales is becoming an increasingly important issue as the “baby boomer” generation approaches its senior years, according to state and federal regulators at the National Association for Variable Annuities compliance and regulatory affairs conference in Washington.
“It’s not debatable, anymore, whether suitability applies to annuities, because it does,” said James Mumford, first deputy commissioner of the Iowa Insurance Division.
He added that while some arguments have been made that suitability rules should only apply to sales of fixed annuities, variable annuity sales are under the suitability umbrella as well.
The National Association of Insurance Commissioners, Kansas City, Mo., has adopted a model rule governing suitability in such sales, he said, which has been passed by “at least 35 states,” with an additional “seven or eight” having passed other suitability laws.
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Ann Furman, an attorney in the Washington office of Jorden Burt, LLP, said suitability has become a “big issue” among regulators of variable annuities. “Part of that has to do with the total assets invested in variable annuities,” which she said amounted to approximately $1.39 trillion as of the first quarter of 2007.
Lawrence Kosciulek, associate director of NASD investment companies regulation, said suitability is covered by a general rule that says there must be “reasonable grounds” for a sale of any financial product.
The term “reasonable grounds,” he said, means the seller of the product should have gathered background information on the would-be purchaser and verified that the sale will provide some benefit to them.
A proposed NASD suitability rule, which was introduced in 2004 and has been amended 4 times since, would apply specifically to variable annuities transactions. The NASD has sent the rule on to the Securities and Exchange Commission, Washington, Mr. Kosciulek said, and is waiting to hear back from the SEC on its fate.
When and if proposed rule 2821 is approved by the SEC, the NASD will issue guidance for implementation after 60 days in a notice to members, he said, and the rule will take effect 180 days after that.