FINRA Rule 2330, which sets up guidelines for the sale of deferred variable annuities, was the topic of a panel discussion on annuity suitability here at FINRA’s annual conference.
Last year, the Securities and Exchange Commission, Washington, approved several amendments which took effect in February 2010. Recommendation and training requirements were among the specific topics that the panel discussed, fielding questions from attendees participating in the session.
VA customers need to be informed about the expenses associated with these contracts and need to benefit from features in the contract, said Larry Kosciulek, director, FINRA Investment Companies Regulation, Washington. Not only should a VA be suitable for a client, but the subaccounts within the VA as well, he added.
In response to an audience question about what kinds of fact patterns set off concerns over suitability, Joseph Savage, FINRA’s vice president and counsel-investment companies regulation, said that a pattern of transactions such as all the clients of a registered rep buying the same annuity features and subaccounts would be one instance that would raise suitability concerns.
Another red flag would be raised if there is an elderly customer with a limited net worth, Kosciulek added. But he continued, there needs to be individual consideration of each case. For instance, if someone is in ill health at age 55 and another consumer is a tri-athlete at age 70, it raises the issue of how to look at retirement and a long-term investment, Kosciulek explained. “We are concerned with the sale of a deferred product at an advanced age when it is difficult to take advantage of the product’s features,” he said.
When asked about 1035 exchanges, Kosciulek responded that it requires a cost benefit analysis and that the rep should be able to demonstrate that the new contract economically benefits a customer and that it is better than the old contract. There needs to be reasonable steps taken to get background information to demonstrate that the annuity is suitable for the customer such as the intended use of the annuity and the consumer’s time horizon, according to Kosciulek.
A key part of the new rule is training, Kosciulek continues. Both the rep and the supervisor need to know about the product being sold, he says. So, if the product offers living benefits, “I say you better understand the pros and the cons if you are making a recommendation.”
As an example, FINRA’s Savage said that a rep would need to know the difference between the account value in a customer’s contract and the withdrawal base used to determine the withdrawal benefit.
When asked by an audience member if FINRA is seeing sales abuses to those who are too young, he responded that there was one case of a high school student who needed money for college and was sold a VA. However, he was careful to note, that cases must be individually examined. So, for instance, the sale of a VA to a 30-year old may raise questions but may be tied to legitimate reasons for the sale such as investing part of an inheritance.
Kathy VanNoy-Pineda, executive vice president and brokerage chief compliance officer, LPL Financial Services, Boston, advised reps to keep good records. She said that if a complaint or a legal case arises, it will be necessary to demonstrate a reason for a recommendation and why the product and even the subaccounts are suitable. “If you can’t prove you’ve had these discussions, then you may as well assume that they didn’t happen,” she cautioned.
And, VanNoy-Pineda continued, the same applies to training sessions. Training sessions need to be formalized, scripts of training kept and a record of what script was used for the audience being trained, she added.
And, in response to a question from the audience, VanNoy-Pineda said that if in the course of training it became apparent that a broker did not understand features of a VA, her firm would go back and examine that broker’s book of business and determine if there is anything that the firm needs to do.
When asked about regulation of insurance companies, Jim Mumford, first deputy commissioner, Iowa Insurance Division, said that a new suitability model law developed by the National Association of Insurance Commissioners, Kansas City, Mo., holds a company responsible for any unsuitable annuity sales. The insurer can ask a broker-dealer to set up a system to detect unsuitable sales but the insurer is still required to monitor the system, Mumford explained. The insurer cannot contract out responsibility but rather only the monitoring function, he added.
During the panel discussion, FINRA’s Savage also noted that FINRA is interested in keeping a close eye on stranger-originated annuity transactions (STAT), because there are not many situations in which buying for a stranger would be suitable.
This article was first published in Life Settlement Review.