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SEC Approves VA Sales Practices Rule

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The Financial Industry Regulatory Authority is gearing up to impose new regulations on variable annuity sellers.

The U.S. Securities and Exchange approved a FINRA VA sales practices rule on Sept. 7, according to SEC officials.

The new FINRA VA suitability rule will affect broker-dealers that sell deferred variable annuities.

The new rule will allow broker-dealer firms to:

- Make sure that a client actually needs a deferred variable annuity, rather than some other product.

- Set standards for principal review and create a requirement that broker-dealer firm principals review transactions before a customer’s application is forwarded to the issuing insurance company for processing.

- Establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in the proposed rule.

- Develop and document training policies or programs designed to ensure compliance with the requirements of the rule and salespersons’ understanding of the features of deferred variable annuities.

“The new rule applies to sales to all investors and not just to seniors,” SEC officials say.

The SEC has published the order approving the new rules in Release Number 34-56375, which relates to File Number SR-NASD-2004-183.

The SEC also issued an exemptive order to help implement the new FINRA VA suitability rule.

The order will permit FINRA members to hold customer funds for up to 7 days while complying with the new principal review requirements without the firms becoming fully subject to Exchange Act Rule 15c3-3. Firms that hold customer funds longer than 7 days while conducting suitability reviews must maintain higher levels of net capital, officials say.

To qualify for the exemption, a broker-dealer must transmit the customer’s check no later than noon of the business day following the date a registered principal reviews and approves the purchase or exchange of the deferred variable annuity, officials say.

The SEC has published the text of the exemptive order in Release Number 34-56376.

SEC officials received thousands of comments on efforts to come up with new VA sales rules.

Representatives from groups such as the American Council of Life Insurers, Washington, and the National Association of Insurance and Financial Advisors, Falls Church, Va., wrote letters to the SEC suggesting that a new VA suitability rule was unnecessary and that enforcing existing broker-dealer sales practices rules would be the best deterrent to bad market conduct.

Officials at FINRA, which previously operated under the name “NASD,” said they believed the existing informal approach to enforcement had not been effective enough at curbing VA sales abuses.

“Some commenters expressed the view that NASD must wait before instituting rulemaking and show that a ‘demonstrable problem’ exists,” SEC officials write in the order approving the new sales rules.

“While we believe NASD’s examinations and enforcement actions over the years clearly demonstrate an entrenched problem in the sales culture for these products, nothing in the [Securities Exchange Act of 1934] requires NASD to make such a showing,” officials write. “Rather, the act requires the commission to determine that a proposed rule is consistent with the act and consider whether the proposed rule would promote efficiency, competition and capital formation. So long as its proposed rules meet the requirements of the act, NASD can–and indeed should–be proactive in addressing problems in the sale of securities.”


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