The Financial Industry Regulatory Authority, Washington, D.C., is attempting to expand oversight of the securities marketing industry with an initiative that would require broker-dealers not only to supervise their registered representatives when they sell securities, but to also supervise their reps’ sales of fixed annuities and any investment advisory activities in which they are engaged.
The proposal can be found in FINRA Regulatory Notice 08-24, which was published on May 14, 2008 with a comment period that ended June 13, 2008. (See chart for exact wording.)
This development comes on the heels of FINRA’s recent implementation of a regulation that establishes new, increased scrutiny of all sales of deferred variable annuities (Rule 2821). This increased scrutiny is directed exclusively toward deferred variable annuities and singles them out for greater oversight than for any other type of security, despite well-documented problems in other sectors of the securities business.
It also comes at a time when state insurance regulators are adopting new suitability requirements for the sale of all types of annuities.
FINRA’s latest initiative is causing a considerable stir in the financial services industry. The concern is that the initiative may exceed FINRA’s jurisdictional authority.
It should be noted that the proposed rule requires broker-dealers to supervise the “outside securities” and investment advisory activities of their registered representatives; it does not mention the word “annuities.” But it does not need to mention annuities in order to apply to annuities. That is because all annuities are “securities” within the meaning of the federal securities laws. Traditionally, annuities were exempt from registration and regulation as “securities” because they were specifically exempted from such requirements. Then the United States Supreme Court, in the VALIC decision in 1959, determined that one type of annuity–variable annuities–did not qualify for the exemption.
Concerning the new proposed rule, it is not, by its terms, limited to registered securities. Instead, it applies to all securities transactions, exempt or non-exempt.
Unless later iterations of the rule make a differentiation between exempt and not-exempt securities, it would seem to apply to both. After all, why would FINRA need to require broker-dealer supervision of sales of non-exempt securities when FINRA rules already require that registered representatives sell only those registered securities permitted by the broker-dealer?
With that in mind, insurance regulators, as well as industry executives, are questioning whether FINRA may be overreaching and attempting to regulate in areas far beyond its traditional authority.
FINRA, for its part, has pointed to “abuses” it claims have taken place in the sale of deferred annuities–all types of deferred annuities–by registered reps of broker-dealers, with particular emphasis on claimed abuses with sales to seniors.
If this new FINRA initiative is adopted, the main result is likely to be that insurance agents who possess a FINRA registration will have their entire business subject to supervision by their broker-dealer. This would be the case, even with respect to sale of products that are totally exempt from federal securities laws and whose oversight has traditionally been reserved to other regulatory bodies.