The U.S. Securities and Exchange Commission is calling for reactions to variable annuity sales rule changes proposed by the Financial Industry Regulatory Authority.

FINRA, Washington, filed the proposed changes with the SEC in May, shortly after responding to a deluge of criticism of an earlier version of the changes by agreeing to postpone implementation.

The proposal, which would amend sections of NASD Rule 2821, would require FINRA member firms to have a principal review each transaction involving a deferred variable annuity within 7 days.

The old version of the proposal would have required principals to review all transactions–including those initiated by customers–within 7 days after customers had signed VA applications.

Now, “FINRA is proposing to limit the rule’s application to recommended transactions,” SEC officials write in a description of the changes published in the Federal Register. “When the transaction is truly initiated by the customer and not recommended by the broker, there generally is less of a concern regarding potential or actual conflicts of interest.”

Because brokers recommend most VA purchases, the rule would still end up covering most VA transactions, the FINRA officials told the SEC.

“FINRA emphasizes, moreover, that members must implement reasonable measures to detect and correct circumstances when brokers mischaracterize recommended transactions as non-recommended,” officials write.

FINRA also plans to change the 7-day review requirement.

Many commenters told FINRA that requiring reviews to be completed within 7 days after customers had signed applications was unrealistic.

Now, under the new proposal, “the period would begin to run not from the date of the customer’s signature, but from the date when the firm’s office of supervisory jurisdiction receives a complete and correct copy of the application,” officials write.

The SEC wants members of the public to submit any comments on the proposed changes by July 1.

The American Council of Life Insurers, Washington, expects to submit comments, says ACLI spokesman Steven Brostoff.

“We are very pleased that the SEC decided to circulate the proposed revisions for notice and comment by all interested parties before granting approval,” Brostoff says. “This process will give all interested parties a fair opportunity to outline any concerns and avoid any further delays in the implementation of changes to FINRA Rule 2821.”

Meanwhile, in related news, a top FINRA official has warned the variable annuity industry that FINRA is keeping close tabs on VA sales practices.

“I believe there is a place in the market for these products, to help address longevity risk that new retirees will increasingly face,” Susan Merrill, chief of enforcement at FINRA, Washington, said at a recent conference organized by NAVA, Arlington, Va., according to a written version of the speech posted on the FINRA website. “But I am here to send a very clear message: FINRA is watching very closely how variable annuities are being sold to the public–and for good reasons.”

Sales representatives need to make sure that each annuity that a customer buys is suitable for the customer, Merrill said.

Reps “also need to work closely with the customer to determine how important it may be to keep their investment liquid,” she said.

Merrill described one large bank that was fined $225,000 by FINRA for making unsuitable sales of deferred VAs to 23 customers. Most of the customers were over 70, and most exchanged fixed annuities that paid a minimum rate of 3% and were past the surrender period for variable annuities with fixed options that paid a maximum rate of 3% and had 6-year surrender periods, Merrill said.

“When firms are recommending annuities to any customer, they must act in the customers’ best interests, taking into account all relevant factors–including the customers’ ages and liquidity needs, surrender charges, product expenses and investment features,” Merrill said.

She suggested that product complexity can add to the difficulty of explaining a product to purchasers.

“I’ve looked at the riders in the cases we’ve investigated,” Merrill said. “Frankly, I found it confusing to deal with all the possible bells and whistles, and it was particularly difficult to find clear written disclosure of the costs and benefits of each rider. What’s more, when we asked brokers to explain them, some could not…. A rider’s costs and limitations must be clearly disclosed to customers.”