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Financial Planning > Tax Planning

VA Suitability Rule 2821: What To Do Now

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After 3 years of debate, the Financial Industry Regulatory Authority’s new variable annuity suitability rule is now a reality. This immediately raises the question, what is the meaning for financial advisors and their broker-dealers?

First, some background. On Sept. 7, 2007 the Securities and Exchange Commission approved Rule 2821, announcing it publicly during the Second Annual Senior Summit on Sept. 10, 2007. The effective date will be 180 days after FINRA issues a regulatory notice to its members announcing the rule.

Rule 2821 creates recommendation requirements (including a heightened suitability obligation), expanded principal review and approval requirements, and supervisory and training requirements for VA transactions. The provisions will require broker-dealers and their financial advisors who are selling VAs to scrutinize carefully, and possibly revise, their processing of VA business.

The recommendation requirements: Financial advisors selling VAs will be required to determine and document various considerations regarding the transaction. In particular, there must be a reasonable basis to believe that:

o The customer has been informed, in general terms, of various VA features.

o The customer would benefit from certain VA features, such as tax deferred growth, annuitization, or a death or living benefit.

o The following are suitable for the customer: The particular VA as a whole; the underlying subaccounts; the riders and similar enhancements; and, in the case of an exchange, the transaction as a whole.

In the case of exchanges, there must also be consideration regarding whether:

o The customer would incur a surrender charge, be subject to start of a new surrender period, lose existing benefits, or be subject to increased fees or charges.

o The customer would benefit from product enhancements and improvements.

o The customer’s account had had another deferred VA exchange within the preceding 36 months.

The financial advisor recommending the transaction will be required to document these considerations and sign this documentation. The Rule will also require the advisor or firm to obtain certain specified pieces of customer information, such as age, annual income, etc.

Principal review and approval: Rule 2821 requires that a registered principal review a transaction and determine whether he or she approves of it prior to transmitting the customer’s application to the issuing insurer for processing, but no later than 7 business days after the customer signs the application. The registered principal may approve the transaction only if he or she has determined there is a reasonable basis to believe the transaction would be suitable based on all of the factors noted above.

The registered principal reviewing the transaction must document and sign the determinations, as required by the Rule. He or she must complete this documentation regardless of whether he or she approves, rejects, or authorizes the transaction.

Supervisory procedures and training: Rule 2821 requires firms to develop and maintain supervisory procedures that are reasonably designed to achieve compliance with the proposed rule.

Firms will be required to implement surveillance procedures to determine if financial advisors “have rates of effecting deferred variable annuity exchanges that raise for review whether such rates of exchanges evidence conduct inconsistent with the applicable provisions of [t]he Rule, other applicable NASD rules, or the federal securities laws.”

Firms will also be required to have policies and procedures reasonably designed to implement corrective measures to address inappropriate exchanges and the conduct of associated persons who engage in inappropriate exchanges. Furthermore, they will be required to develop and implement training programs tailored to educate registered representatives and registered principals on material features of VAs and the Rule’s requirements.

For financial advisors, here are 10 steps they should take right now:

1. Know the “ins and outs” of the VAs you sell.

2. Speak to your clients about annuities and annuity riders in Plain English.

3. Review the type of information that you will be required to obtain from clients.

4. Conduct an individualized assessment of the customer’s retirement income, accumulation, and death benefit needs.

5. Conduct a multi-faceted suitability review of such factors as the annuity contract itself, the riders, the funds, etc.

6. In the case of exchanges, also assess the benefit to the client of the new product as well impact of new or higher charges.

7. Document why you believe the transaction is suitable.

8. Transmit the application to your principal promptly (within the 7 business day principal review deadline).

9. Be prepared to analyze and assess carefully the investment and income needs of elderly clients.

10. Be very cautious of “client insist” situations. Regulators view a transaction that is deemed unsuitable but which is processed because of insistence with significant skepticism.

Clifford E. Kirsch is a partner in the law firm of Sutherland, Asbill & Brennan LLP, in the New York office. His e-mail address is [email protected]


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