The Financial Industry Regulatory Authority has drafted an update of the rules that govern FINRA members’ communications with the public about variable life and variable annuity products.
The proposed rule, FINRA Rule 2211 (Communications with the Public About Variable Insurance Products), would replace NASD Interpretive Material 2210-2 (Communications with the Public About Variable Life Insurance and Variable Annuities).
The National Association of Securities Dealers, Washington, created FINRA, Washington, in 2007, when it merged with the enforcement arm of the New York Stock Exchange.
FINRA is going through NASD and New York Stock Exchange rules and updating them as it converts the predecessor group rules into FINRA rules.
FINRA must get approval for Rule 2211 from the U.S. Securities and Exchange Commission, and the SEC has published FINRA’s discussion of the proposed rule in the Federal Register.
The proposed rule “would apply to all communications with the public about variable insurance products other than institutional sales material,” FINRA says.
When FINRA posted a draft of the proposed rule on its own website, the Committee of Annuity Insurers, Washington, asked FINRA to exclude correspondence – materials going to fewer than 25 investors in any 30-day period — but FINRA says it is continuing to apply the rule to correspondence, to protect consumers.
The proposed rule also would apply to communications concerning group variable contracts, unless otherwise specified, FINRA says.
Paragraphs in the rule would deal with matters such the ban on implying that variable products are mutual funds; the ban on exaggerating the issuer’s financial strength; and the ban on falsely implying that variable insurance products are short-term liquid investments.
Most commenters supported these rules, but one insurers said the prohibition on implying that variable annuities are liquid investments should not apply to variable annuities that impose no surrender charges, FINRA says.
FINRA notes that the prohibition applies only to false statements, and that an issuer of a variable insurance product with no surrender charges might be able to describe it is a liquid investment.
“While FINRA supports plain English disclosure, FINRA believes that each firm should tailor its disclosure based on the features of the product being promoted,” the organization says.
Paragraph (f) would set the rules for describing a variable product’s past performance.
“Proposed paragraph (f)(2)(C) would require communications that present variable life insurance policy performance to urge investors to obtain a personalized hypothetical illustration,” FINRA says. “Upon such investor request, a firm would be required to provide an illustration that reflects all applicable fees and charges disclosed in the prospectus, including the cost of insurance.”
Paragraph (g), which would address use of illustrations of possible future product performance, would keep “the requirement that all illustrations must show investment results that are based on an assumed gross annual rate of return of 0%,” FINRA says.
If an insurer came up with an illustration based on multiple assumed rates of return that vary year by year, the rates “would have to be based on the actual performance of a broad-based securities market index for the period shown by the illustration,” FINRA says.
Today, insurers can generate “random rates” for multiple-rate illustrations.
If Rule 2211 is adopted as written, random-rate illustrations would no longer be allowed, FINRA says.
Some insurers said switching to real historical data would cause information technology headaches, and New York insurance regulators argued that using real market data could lead consumers to rely too much on historical data.
FINRA recognizes New York regulators concerns, but it “believes that the use of the actual performance of a broad-based securities index will reduce the likelihood that a firm will ‘game’ an illustration by selecting multiple assumed rates that produce the highest possible results for the illustration,” the organization says.