Annuities compliance: Six rules to stay on the right side of compliance

Advisors who are active in the FIA market and don’t want to wait for a resolution to the 151A situation can circumvent the uncertainty by earning their Series 6 and 63 licenses, says Lea. Not that such a step is necessary at this point, however. “I think it’s kind of premature to do that now, since we’re at least two-and-a-half years away” from potential implementation of any revisions to Rule 151A, he says.
In the meantime, says Lea, the best course for advisors with regard to FIA regulation is to meet their current compliance responsibilities while taking the initiative to voice their opinions on Rule 151A to policymakers in Washington. “Get involved. It sounds hokey, but talking to your U.S. congressman or U.S. senator about the issue is the most important thing you can do.”

Staying above the VA fray

While variable annuity salespeople don’t have any regulatory changes of the magnitude of 151A hanging over their heads, they have their hands full figuring out how to function under FINRA Rule 2330, which imposed new sales practice standards for recommended purchases and exchanges of deferred
variable annuities, effective February 8 of this year.

Having just implemented the new policy, FINRA (the Financial Industry Regulatory Authority) has embarked on an enforcement “sweep” involving VA suitability and sales practice abuses, says Brad Burgtorf, CPA, a principal consultant for ACA Compliance Group. A key area of focus in that sweep are 1035 exchanges involving VAs. With industry displacement prompting so many annuity salespeople to switch firms, regulators are watching closely to see that advisors aren’t recommending unsuitable 1035 exchanges merely to maintain control of annuity assets after changing firms, explains Burgtorf, a former SEC examiner based in Denver, Colo.

Another potential factor in the VA regulatory picture, he says, is an SEC-led initiative to protect senior investors. Launched in 2006, that campaign, which also involves FINRA and the North American Securities Administrators Association, is focusing on specific securities, such as variable annuities, and the specific senior-oriented sales forums in which they are sold, such as seminars. Again, the main issues are suitability and sales practices.

What can advisors involved in VAs do to stay out of the regulatory crosshairs?

1. Portray products evenhandedly when discussing VAs with clients. “We make a point of telling them up-front the pros and cons of each product,” explains Bailey. “We would rather lose a sale early in the process than have a client come back later with complaints” about an annuity they purchased, he says.
2. Emphasize training and education for members of the sales, operations and compliance departments. For annuity producers, says Burgtorf, “have a new product review process so they understand the risks, the fees and the expenses of a product and the issuer of that product.”
3. On the compliance side, says Burgtorf, “make sure monitoring systems are up to speed so they capture all your business and can identify abusive behavior” by salespeople.
4. Be transparent about fees and commissions. “We tell people exactly what we make” on an annuity contract, says Bailey, “and show them exactly what we are doing to earn that commission.”
5. Be clear in client communications and document them diligently.
   “Everything we do now [with regard to client communications involving VAs]–I don’t care what it is—is sent to compliance first for review,” says Bailey. Lately he’s been encouraging his advisors, when communicating with specific clients about variable annuities, to use the phone instead of e-mail, because “e-mail can be misconstrued and confusing.”
6. Lean on the broker-dealer. “Most good broker-dealers are on top of this [compliance] stuff, so you can put the ball in their court and say, ‘You tell us what we need to do,’” says Bailey.

Get More: Stay on top of reform and regulation – Subscribe to Senior Market Advisor’s monthly e-newsletter, Market Conduct & Suitability.

Then there’s the elephant in the room: federal legislation to restructure the financial regulatory regime. On the table are huge fundamental issues such as new fiduciary and suitability standards for a wide range of advisors, including those involved in annuities. “These issues,” Lea says, “dwarf what’s at stake with [Rule] 151A.”