OK, so your head is already spinning over compliance. So what’s new? How about a new set of compliance rules that will make your job even more challenging? Don’t worry, there’s still hope-you just need to follow six important rules to stay out of the compliance spotlight.

If the wildly capricious behavior of the financial markets of late weren’t enough to make an advisor’s head spin, then the ever-shifting and increasingly imposing regulatory landscape certainly will. While the pending overhaul of the financial regulatory system casts an ominous shadow on that landscape, there are plenty of other, narrower compliance and regulatory issues looming for advisors and insurance agents, particularly those who are active in the annuity market. For those involved in fixed index annuities, for instance, there’s the matter of how the Securities and Exchange Commission will handle its controversial revisions to Rule 151A, which would classify FIAs as securities, thus requiring a securities license of anyone who sells them.

On the variable annuity side, meanwhile, there’s the ongoing campaign by FINRA and other regulators to crack down on unsuitable sales, both with new contractholders and with existing ones who exchange one contract for another via the 1035 process.

Given the unsettled regulatory situation, it’s not getting any easier for advisors who deal in annuities to serve their clients while also meeting their mounting compliance responsibilities, contends Steve Bailey, a registered investment rep at HB Financial Resources, the Charlotte, N.C., firm he founded. “Right now, we are over-complianced. I’m concerned that will hurt our ability to provide creative, custom solutions for clients at a time when they need them most. Basically, we’ll just be order-takers, not true advisors.”
Amid so much regulatory flux, one thing is certain: Advisors who take a proactive approach to compliance, and who demonstrate a commitment to meeting new requirements, even when it means allocating more of their time and resources to doing so, will be best positioned to thrive once the dust settles.

“You can’t hide from this [regulatory] stuff, whether it’s with variable annuities or indexed products,” says Jason Lea, senior vice president at Broker’s Service Marketing Group, an independent insurance and annuity wholesaler and marketing firm based in Providence, R.I. “The [federal] government is demonstrating that it is of the belief that more oversight [of financial markets and products] is better.”

What of 151A?

Any discussion of regulatory issues surrounding fixed index annuities usually starts and ends with Rule 151A–in particular, whether the SEC ultimately will decide to treat FIAs as securities.

Back in 2008, the commission stated its intent to treat FIAs as securities starting in January 2011, but that ruling was put into limbo by a court decision late last year. The SEC has since delayed implementation of the new policy until at least 2013, pending further review. Meanwhile, legislation introduced and still pending in both houses of the U.S. Congress would codify that FIAs are insurance products, not securities, thereby preventing the SEC from making a move to regulate them.

How will the case shake out? “Anyone who tells you they know the answer to that is crazy,” says Lea.
The 151A delay represents a reprieve for index annuity producers, who under the new SEC policy, would have been required to get their Series 6 and 63 licenses to sell the product if they didn’t have them already.

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.

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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.”