New suitability guidance for deferred variable annuities requires registered representatives to make a “reasonable effort” to obtain the information need to gauge the suitability of the proposed transaction and to ensure the transaction will benefit the consumer.
The new guidance was published as Regulatory Notice 07-53 by the Financial Industry Regulatory Authority and is the culmination of a multi-year effort to set the process under which such transactions should take place.
Scheduled to take effect on May 5, 2008, Rule 2821, also requires registered reps to ensure that the consumer is aware of the features of the product involved. The Securities and Exchange Commission, which must give its approval to new rules proposed by FINRA, announced that it had done so for Rule 2821 in September.
The new rule also establishes the procedure for principal review of proposed deferred variable annuity transactions, mandating that such reviews take place prior to an application being submitted to the insurer, but within 7 business days of the customer signing that application. It also requires firms to establish and maintain written supervisory procedures to ensure compliance, and to create a training program for registered principals who would be involved in such transactions.
Michael DeGeorge, general counsel for the National Association for Variable Annuities, said the rule “has been around in different forms” for roughly 3 years prior to the adoption by FINRA and had been subject to a number of changes as regulators at FINRA and its predecessor, the National Association of Securities Dealers, worked out problems in the rule identified by industry participants.
One such issue, DeGeorge noted, involved a provision in early drafts of the rule that sought to ensure suitability by requiring representative to compare the deferred variable annuity with other types of investments. However, DeGeorge said, the wording of that provision effectively “suggested that the agent would have to do a detailed comparison with almost any other type of investment in the world,” and was taken out after complaints that it would prove unworkable.
In the final rule, DeGeorge said the biggest change would be regarding principal review. Principal review already applies in general to securities, but DeGeorge noted that “what is new is the timing” of how those reviews should take place. The timing has been an issue during the course of the rulemaking process, he said, with debates centering on whether the review could take place before or after an application is submitted to the insurer, how many days should be allowed for review, and how the process would be affected by rule governing how long a representative can hold a client’s money. Brokers-dealers are required in general to “transmit promptly” any funds from their client to the insurer, FINRA noted in the final rule, but it said it created “an important exception” for deferred variable annuities allowing the broker-dealer to hold onto a client’s check during the 7 days for principal review.
DeGeorge said that given the amount of time spent debating the new rule, “companies have seen it coming down the road,” and have been able to varying degrees to prepare for it. “For some companies there will not have to be significant changes,” said, while others may be affected more greatly.
Carl Wilkerson, vice president and chief counsel for securities and litigation for the American Council of Life Insurers, said insurers are “devoting significant resources to satisfy the rule’s requirements” and will continue to work with regulators to iron out any wrinkles as May 5, 2008 draws closer. “The final rule reflects the constructive and deliberative process” that took place through the development of the rule, he said.