Looking Forward: Where Are We Headed on Life Insurance Suitability?

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Eugene Barker
8 years ago
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1 Looking Forward: Where Are We Headed on Life Insurance Suitability? ACLI Legal & Compliance Conference July 9, 2008 Karen Alvarado, Transamerica Susan Krawczyk, Sutherland Overview Observations Regulatory developments in flux Jurisdictional land-grab Challenges for the industry Implementing suitability programs in different distribution contexts Traditional career force General agencies and independent agencies Independent broker-dealers Case management firms, IMOs and BGA networks Direct marketing Investment advisers and financial planners Retirement markets 1

developments in flux Jurisdictional land-grab Challenges for the industry Implementing suitability programs in different distribution

2 Observation No. 1 Competition among regulators NAIC Suitability in Annuity Sales Model Regulation State alternatives to NAIC model regulation State Attorney General indexed annuity settlements New NASD Rule 2821 and related proposals SEC Rule 151A proposal and other developments State securities regulators NAIC Model Suitability Regulation Suitability in Annuity Transactions Model Regulation Finalized by NAIC in 2003 Adopted by a number of states Framework: Reasonable efforts to collect consumer information Reasonable grounds for believing recommendation is suitable on basis of consumer s disclosures System for insurer supervision of recommendations Allocation of responsibilities among insurer, producer and general/independent agency Safe harbor if general/independent agency complies with NASD suitability rules 2

related proposals SEC Rule 151A proposal and other developments State securities regulators NAIC Model Suitability Regulation Suitability in Annuity Transactions Model Regulation Finalized by NAIC in

3 Challenges Setting suitability standards Thresholds, ranges, ratios Scope of insurer review Periodic reviews of records Reasonably designed to assist in detecting and preventing violations Reasonable inquiry to assure that third party is performing the functions Annual certification Selection of third parties for review Difference of views among regulators Sources for Guidance State Attorney General settlements relating to indexed annuities IMSA proposals Further NAIC rulemaking 3

performing the functions Annual certification Selection of third parties for review Difference of views among regulators

4 NASD VA Developments NASD Rule 2821 became effective May 4, 2008 Status: Parts of rule delayed Proposed amendments pending with SEC Framework: Reasonable efforts to collect investor information Disclosure of terms and features Reasonable basis for belief that customer Customer has been informed Customer would benefit from certain features Particular contract, subaccounts and riders are suitable based on information collected Principal review and approval process Supervisory system Training New role for insurers? Other NASD Suitability Rules NASD Rule 2821 applies to variable annuities only NASD Rule 2310 applies to After-purchase transactions in variable annuities Registered MVA contracts Variable life Also for variable life: NASD Notice to Members Information collection requirements Soft disclosure requirements Suitability standards Principal approval common practice No training or special processing turnaround requirement NASD Rule 2310 Reasonable efforts to collect information Recommendation based on information collected Guidance on variable life insurance settlements 4

suitable based on information collected Principal review and approval process Supervisory system Training New role for insurers?

5 SEC Developments In June 2008 SEC proposed new Rule 151A Would treat indexed annuities as securities SEC registration FINRA suitability rules Open issues State securities regulation? More FINRA rulemaking? Contingent annuities Securities? Subject to NASD Rules? State Securities Regulators Want jurisdiction More cooperation among insurance and securities regulators Indexed annuities on NASAA 5 hot scams list 5

More FINRA rulemaking? Contingent annuities Securities? Subject to NASD Rules?

6 Challenge How to develop a suitability program that will comply with different and evolving regulatory requirements Product specific approach Recognizing differences between Annuity and life products Variable and non-variable SEC-registered and non-registered State-specific approach Recognizing differences in local state requirements Insurer vs. producer Allocation of responsibilities Observation No. 2 Suitability issues linked with other sales practices issues Sales to seniors Professional designations Prospecting techniques Point-of-sale presentations Replacements in connection with producer transfers 6

Recognizing differences in local state requirements Insurer vs. producer Allocation of responsibilities Observation No.

7 Sales to seniors NAIC suitability rule began as a sales to seniors initiative Top issue for securities regulators SEC, FINRA and NASAA have hosted senior summit for 2 years FINRA investor education initiatives Notice guidance on sales practices involving seniors Investor alerts for seniors and retirees Professional Designations Senior designations NAIC Model Bulletin and Consumer Alert NASAA Model Regulation FINRA guidance 7

Notice 07-43 guidance on sales practices involving seniors Investor alerts for seniors and retirees

8 Prospecting and Point-of-Sale Issues Free lunch seminars Early retirement seminars Ghost-written articles FINRA guidance on sales practice and suitability issues for replacements in connection with rep transfers Challenge Do you disentangle these issues from your suitability program or address them in your suitability program? What is insurer s responsibility for prospecting and marketing activities? 8

rep transfers Challenge Do you disentangle these issues from your suitability program or address them

9 Observation No. 3 Rules contemplate a simplistic distribution model That differs from reality That doesn t account for diversity in distribution NASD variable annuity suitability rules mandate a particular processing sequencing that doesn t align with all distribution contexts Challenge Designing a suitability program that works for the different distribution contexts Can you design an approach that works across distribution channels? Will a suitability program differ from channel to channel? 9

distribution NASD variable annuity suitability rules mandate a particular processing sequencing that doesn t align with all

10 Distribution Channels Implementing a suitability program in different distribution contexts Career agents General agents and independent agents Independent broker-dealers Case management firms, IMOs and BGA network of producers Investment advisers and financial planners Direct marketing Retirement markets Career Agents Insurer Career Agents 10

broker-dealers Case management firms, IMOs and BGA network of producers Investment

11 Career Agents NAIC model rule: Insurer supervises their recommendations Maintains written procedures Conducts periodic reviews of its records reasonably designed to detect and prevent violations of the rule General and Independent Agents Insurer General Agent General Agent General Agent General Agent Producers 11

reasonably designed to detect and prevent violations of the rule General and

12 General and Independent Agents NAIC Rule: Recognizes that general/independent agent is responsible for its producers General/independent agent must either: Adopt insurer's system to supervise recommendations OR Establish and maintain own system If insurer relies on agent, must make reasonable inquiry Annual certification plus Periodic review by insurer Independent Broker-Dealers Insurer Captive Distributor Broker-Dealer/Agency Registered Reps 12

Establish and maintain own system If insurer relies on agent, must make reasonable inquiry Annual certification

13 Independent Broker-Dealers Like general agents Insurer can contract with broker-dealer for broker-dealer to maintain system of supervision over producers Safe harbor for compliance with NASD rules in the case of variable annuities Insurer challenges: Getting annual certifications from brokerdealers Conducting periodic review Networks Network Network Organization Broker- Dealer/ Agency Agency Agency Broker- Dealer/ Agency 13

variable annuities Insurer challenges: Getting annual certifications from brokerdealers Conducting

14 Networks Case management firms, IMOs and BGAs Maintain network of producers But not traditional general agency structure Not positioned to establish and maintain system for supervision of producer recommendations Issues Which third party maintains supervisory system? Role of insurer Direct Marketing Insurer Consumers 14

maintain system for supervision of producer recommendations Issues Which third

15 Direct Marketing Are these recommended transactions? Licensing and registration considerations NASD proposal to amend Rule 2821 to exclude non-recommended transactions Investment Adviser/Financial Planner Insurer Adviser/Planner Consumers _1 15

amend Rule 2821 to exclude non-recommended transactions

16 Investment Adviser/Financial Planner Adviser/financial planner may not be licensed as producer How is solicitation and sale structured? Is producer involved? Or is sale treated as direct sale by insurer to purchaser? Applicability of NASD rules to variable annuities offered in this channel Contingent annuities Retirement Markets Retirement products generally exempt from suitability rules Recent changes under Pension Protection Act affecting business practices FINRA guidance on early retirement seminars 16

Applicability of NASD rules to variable annuities offered in this channel Contingent annuities Retirement Markets Retirement

17 Thanks for listening! 17

Broker-Dealer Supervision of Variable Annuity Sales

Broker-Dealer Supervision of Variable Annuity Sales Clifford Kirsch Sutherland Asbill & Brennan LLP 1114 Avenue of Americas-40 th Floor New York, NY 10036 (212) 389-5052 clifford.kirsch@sablaw.com 1 Relevant