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Regulation and Compliance > State Regulation

FINRA Chair Comes To NAVA

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Rick Ketchum told annuity industry executives Monday that regulation of all types of annuities should be more uniform.

Ketchum, chairman of the Financial Industry Regulatory Authority, Washington, spoke in Washington at a conference organized by NAVA Inc., Reston, Va.

Ketchum praised the work NAVA has done to promote consumer awareness of annuities and high ethical standards in the annuity industry.

But he said FINRA believes more must be done to eliminate annuity regulatory gaps.

“America’s 90 million investors should receive the same level of protection no matter which financial services or products they select,” Ketchum said, according to a written version of his remarks. “Yet our current system of financial regulation has created an environment in which investors are left without those consistent and effective protections.”

It is not clear why the level of protection should vary depending on the type of product bought, or whether the consumer is working with an investment advisor, a broker-dealer, a banker or an insurance agent, Ketchum said.

“We can debate what the basic protections should be,” Ketchum said. “But I think that a rational starting point would be that every person who provides financial advice and sells a financial product is tested, qualified and licensed; the advertising for financial products and services is not misleading; every product marketed to them is appropriate for recommendation to that investor; and there is full and comprehensive disclosure for the services and products being marketed.”

FINRA reviews variable annuity sales materials for balance and fairness, the sales rep who sells the product must pass a licensing exam and participate in continuing education, and many other disclosure and review requirements apply, Ketchum said.

“In the case of fixed annuities,” he said, “the level of protection will depend upon state regulation. In many states, investors will receive detailed information about fees and expenses. In other states, they may not. Suitability and disclosure requirements also will vary, not withstanding the best efforts of NAVA. And the status of indexed annuities is unclear, pending the outcome of litigation challenging the SEC’s recently adopted Rule 151A and legislative initiatives to preserve state jurisdiction over indexed annuities.”

FINRA is reaching out to talk to state insurance regulators to ensure consistent regulatory requirements across all annuity products, Ketchum said.

“We will continue sharing information, though the real goal is to achieve greater consistency in the regulation of different annuity products, as this will foster more effective regulation and improved investor protection,” Ketchum said.

The differences in the regulatory systems governing broker-dealers and investment advisors also need attention, and another area of concern is the advice given to individuals who inherit money or go through other “wealth events,” Ketchum said.

NAVA and insurers already are trying to explain to VA holders the damage that excessive withdrawals can do to product guarantees, but insurers also should be working to improve excessive withdrawal warnings, Ketchum said.

“We are also concerned about the possible replacement of a variable annuity that has an “‘n the money’ guarantee,” Ketchum said.

To prevent customers from losing the guarantee value without fair warning, “we expect brokers to focus on this issue,” Ketchum said. “Registered principals must be given the information necessary to evaluate a proposed replacement, to ensure it complies with Rule 2821 and with their suitability obligations. The principal must know the value of the guarantee and whether it is ‘in the money,’ and must evaluate the comparative guarantees of each product to ensure the replacement is suitable for the customer.”