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Regulation and Compliance > Federal Regulation > FINRA

Annuity update: If FIAs are not securities, what about FINRA 05-50?

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On July 15, I sent a letter to FINRA CEO Richard Ketchum and asked, “Since 151A has been vacated and Congress says index annuities are exempt, when will FINRA be rescinding Notice to Members 05-50?” Ketchum hasn’t got back to me yet.

Five years ago, “Notice to Members 05-50 Equity-Indexed Annuities: Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities” was released. The justification for attempting to assume regulatory jurisdiction for a non-security is found in Section 3, which states that if an index annuity is ever found to have been a security then FINRA will have jurisdiction. Later, Section 4 essentially says that due to this uncertainty, broker-dealers had better treat index annuities as securities if they know what is good for them.

“Might” become securities
For the last five years, FINRA has effectively required B/Ds to supervise index annuity sales because they “might” become securities and Rule 3040 generally prohibits private securities transactions. Because fixed index annuities “might” become securities, FINRA extended their interpretation of Rule 3030 to strongly suggest B/Ds control, supervise and approve any and all outside annuity activities. Congress and the courts have removed this uncertainty.

Rule 3040 cannot be applicable anymore because you can’t have a private securities transaction if the transaction involves a product that the law says is not a security. All that is required under FINRA Rule 3030 is for the B/D to be notified of an outside business activity, but the rules do not appear to contain any explicit requirement that the B/D supervise these outside activities nor do they seem to give the B/D the authority to deny or terminate a representative’s affiliation if the representative refuses to allow the B/D to supervise his or her outside business activities.

What will happen?
My guess is if a B/D is already using this rule as a reason to place restrictions on the index annuities sold (or requiring affiliated agents to run their annuity sales through the B/D) that the B/D will continue to do so. I’m also guessing this issue will come to a head when a B/D decides it doesn’t want to supervise index annuity sales because they are not securities sales according to Congress and the courts, and FINRA then jumps on the B/D for failure to supervise. Whether or not FINRA changes their treatment of index annuities in recognition that the questions raised by 05-50 have now been answered is up to FINRA.


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