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 Suitability Requirements 2 A. NASD Suitability Requirements 1. Conduct Rule 2310 2. Conduct Rule 2110 3. Special Guidance for Variable Annuities a) NASD Notice to Members 99-35 b) The SEC/NASD 2004 Joint Report B. State Insurance Suitability Requirements 1. NAIC Suitability (formerly Senior Protection) in Annuity Transactions Model Regulation 2. California s Best Practices (December 2006 Report) C. State Securities Requirements
Proposed NASD Rule 2821 3 A. Background and Comments on Rule 2821 1. Notice to Amendments 04-45 45 2. Amendments and Rule Filings with the SEC 3. General Review of Comments on the Rule B. Rule 2821 s Substantive Provisions 1. Coverage Original Purchase or Exchange Non-recommended Transactions Subsequent Purchase Payments Reallocations Retirement and Benefit Plans
Proposed NASD Rule 2821 (continued) 4 2. Requirements a) Recommendation Requirements 1) General Requirements 2) Exchanges 3) Documentation 4) Customer Information b) Principal Review and Approval c) Supervisory Procedures d) Training
Variable Annuity Exchanges 5 A. Recent Enforcement Activity B. Exchanges in the Context of Registered Representatives Switching Firms C. Exchanges of Variable Annuities into Equity Indexed Annuities D. Proposed Rule 2821 E. Compliance Considerations
Sale of Variable Annuities to Seniors A. Overview of Regulatory Concerns Liquidity Concerns Confusion about guarantees Exchanges 6 B. Overview of Regulatory Framework NASD Proposed Rule 2821 State Insurance Initiatives State Annuity Transactions Model Regulation California December 2006 Report ( A Suitable Match: Best Practices for Annuity Sales) State Securities Initiatives
Sale of Variable Annuities to Seniors (continued) C. Compliance Considerations Consider Establishing Suitability red flags that require special review at certain ages Consider establishing hard blocks for certain types of sales involving seniors Conduct Forensic Testing Make sure you are flagging the appropriate transactions (Be mindful of how regulatory exams challenge red flags created for certain ages). Consider Providing Targeted disclosure (something like A Guide for Seniors Purchasing Annuities ) Be mindful that Seniors are ineligible for certain annuity riders Don t confuse contract issue age with appropriateness of sale Consider inforce illustrations ti and other periodic outreach Consider a centralized customer outreach program for seniors Surveillance should focus upon one size fits all sales activity Consider point of sale questions targeted to Seniors 7
Sale of Variable Annuities in Connection With Senior Seminars 8 A. Overview of Regulatory concerns B. Overview of Regulatory Initiatives Free lunch sweep Expected to launch nationwide by early September C. Compliance Considerations Review and Approve all seminar material Establish a checklist covering branch manager review of senior seminar activity Track those sales that take place in connection with seminars Incorporate as part of branch office review and firm s 3012 review Review processes in light of free lunch sweep documentation request
Variable Annuity Exchanges into Equity Indexed Annuities A. NASD - Notice to Members 05-50 Does not take a position on whether EIAs are securities Expresses concern regarding the marketing and sales of EIAs. Requires representative to disclose to firm that he or she is engaged in the sale of EIAs Recommends maintaining a list of acceptable unregistered EIAs, and prohibiting associated persons from selling any other unregistered EIA All recommendations to liquidate or surrender a registered security must be suitable, including where such moneys are used to fund the purchase of an unregistered EIA. Encourages firms to consider requiring that all sales of unregistered EIAs occur through the firm, subject to firm supervision of marketing, suitability, and training. 9 B. Other NASD Initiatives NASD Sweep of VA to EIA Exchanges NASD Review of EIA Marketing pieces (filed on a voluntary basis)
Variable Annuity Exchanges into Equity Indexed Annuities (continued) C. State Actions Massachusetts (December 2006 Consent order against Investors Capital Corporation) Minnesota Complaint (filed January 9, 2007) D. SEC Review of status of EIAs As Unregistered Securities E. Compliance Considerations 10
Questions-Rule 2821 11 Is Rule 2821 likely to advance at the SEC? If so, what can we expect as a compliance date? Will the NASD s 2007 exam program look to the principles underlying 2821? What type of transactions are covered by the rule? How are reallocations or subsequent payments impacted? How will we need to document the suitability determination required by the rule? With respect to exchanges, how will we need to document the suitability determination required by the rule?
Questions-Rule 2821 (continued) Is general disclosure sufficient for the rule s disclosure requirement? Is a written document required? How will we document compliance with this aspect of the rule? Should we involve insurance companies in the review of our disclosure? 12
Questions-Rule 2821 (continued) What type of customer information will we be required to obtain? Has the NASD specified how firms must capture this information? Should we look to define certain terms? What if the customer refuses to provide the information? Should we make certain types of information good order requirements? 13
Questions-Rule 2821 (continued) What steps will firms have to take in order to comply with preapproval requirement? What if approval can not be secured in seven days? What impact does the rule have on automated suitability systems? 14
Questions-Rule 2821 (continued) What type of surveillance/exception reporting is contemplated t by the rule? What additional training will be required as a result the rule? Will the NASD expect to see more rejected transactions? 15