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Small broker-dealers remain angered over 7-day VA rule

Say inadequate review window is issue

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By Darla Mercado

January 14, 2008 6:01 am ET

Despite FINRA's proposed three-month stay of the new seven-day principal review rule, principals at small broker-dealer firms are still angry, arguing that the delay in the effective date gives them insufficient time to prepare.

"The extension of time is just a way to take the heat from a really bad piece of regulation," said Dan Taylor, an attorney and founder of Advisor Freedom, a Charlotte, N.C.-based provider of business capability programs for advisers. "It's one more level of Draconian bureaucracy that FINRA wants to insert in the small broker-dealer's life."

Broker-dealers are angry about Rule 2821, which regulates the sale of deferred variable annuities, and especially a section of the rule that requires them to review customers' applications before sending them to an insurance carrier no later than seven days after the customer signs.

As late as last fall, the New York- and Washington-based Financial Industry Regulatory Authority Inc. had indicated that there would be no extensions (InvestmentNews, Nov. 5), so the industry was surprised when the regulator delayed the principal review requirement until Aug. 4, replacing the anticipated May 5 date.

In that interim, FINRA will also address how the rule applies to broker-dealers who sell without recommendations, and insurance carriers' use of suspense accounts to hold clients' money during review.

A lobbying movement, which included the American Council of Life Insurers in Washington and the Financial Services Institute Inc. of Atlanta, pushed for the extension. "The delay is not the full extent of the relief that FINRA is going to offer," said David Bellaire, general counsel and director of government affairs for the FSI. "I wouldn't speculate, but there may be a change to the triggering event [for the seven-day rule]."

But some industry observers say that FINRA's decision may not be a sign of a kinder and more understanding regulator, extensions aside.

"I don't know if the delay in itself will help the firms that much," said Donald S. Davidson, a partner at Bingham McCutchen LLP in San Francisco. "The hope they might have is that FINRA may make the provisions less onerous for those who undertake principal review from home offices," he said It's problematic for agents to ship documents to home offices overnight, Mr. Davidson added.

Those small firms were quick to agree, but fear reprisal from the regulator.

"Wirehouses can punch out that approval quicker than people who are working with pens and papers," said a New Hampshire-based registered principal, who asked not to be identified. Not only do some ap-provals take up to 20 days to complete, but the cost of the technology upgrades and personnel needed to expedite the process will be passed on to the customers, he added.

"The cost of our ticket is the cost of compliance oversight, which borders on neurotic. We might need a new set of people processing annuities," the principal said.

Critics also fear that FINRA, responding to past abuses with variable annuities, is looking to "overregulate" the entire small-broker-dealer industry and make variable annuities undesirable products to sell.

"Deferred annuities have been sold for a long time without principal review," Mr. Taylor said. "This level of review and the accompanying liability for a principal creates a chilling effect for the sale of these products."

Critics of the rule argue that consumer protection already exists, because principals are under regulatory scrutiny to lead their sales staff, and clients have a 10-day "free look" period in which they can reject their contracts.

"This is unnecessary mediation," the New Hampshire-based registered principal said. "We think they're reasonable transactions, and if they weren't, we would get complaints."

A registered principal in Florida said that a recent FINRA audit that should have taken one week was stretched to three weeks because the variable annuity records weren't in the format the auditors wanted. The staff had to consolidate three sets of clients' files into one for FINRA's review.

"They wanted a daily-blotter record of every action the brokers do in a trading day," the principal said.

Nevertheless, he said, his firm is prepared for a May deadline.

FINRA maintains that its extension is reasonable and allows small firms to update their systems to meet the new seven-day principal review deadline.

"We became convinced that broker-dealers couldn't manage the start time" in regard to the seven-day countdown, said Marc Menchel, executive vice president and general counsel of FINRA.

Preparation paid off for The Strategic Financial Alliance Inc. of Atlanta.

'AMPLE TIME'

"Given the number of iterations the rule has gone through, we as a firm have had ample time to make the adjustments," said chief compliance officer Ed Woll.

During examinations, regulators have asked to see 50 to 75 contracts, but the firm never has had problems with compliance, Mr. Woll said.

Although the three-month reprieve won't make a significant difference for small firms, any additional time to get organized is better than none, said Lisa J. Roth, chairwoman of the National Association of Independent Broker Dealers Inc. in San Diego.

Still, the NAIBD expects compliance with the seven-day rule to be an automated procedure for most firms. Ms. Roth, president of Monahan & Roth LLC in San Diego, expects to deal with the costs of compliance for small and independent broker-dealers at the group's technology symposium in March, where member firms of varying sizes will share their solutions.

"Because our industry is so diverse, it becomes challenging when regulations give specific time frames and protocols," she said.

"Whether small firms will be able to rally and implement procedures to get the job done in time is up in the air," Ms. Roth added.

Darla Mercado can be reached at dmercado@crain.com.

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