Reps responsible for variable annuity guidance: Regulators

Many changes in the pipelines as insurers seek to escape big VA liabilities

Jun 18, 2013 @ 10:54 am

By Darla Mercado

variable annuities, suitability, finra
+ Zoom

As life insurers alter variable annuity contract language and implement other changes to escape from their large VA liabilities, compliance experts and regulators are stressing that suitability rules apply and reps are ultimately responsible for the guidance they give clients on how to proceed.

Carriers like Axa Equitable Life Insurance Inc., The Hartford Financial Services Group Inc. and Transamerica Life Insurance Co. have instituted programs that allow them to buy out clients' variable annuity benefits in exchange for a higher account value. Others have tried to limit their VA liability by cutting off additional contributions to contracts that have already been purchased or by nudging clients to reallocate their investments to options with less risk and less return.

Though the methods carriers use are the domain of insurance regulators, broker-dealer representatives are on the hook for what they tell clients to do next, panelists said at the Insured Retirement Institute's Government, Legal and Regulatory Conference in Washington yesterday.

The Financial Industry Regulatory Authority Inc.'s Rule 2111, the suitability rule, applies when reps make a recommendation, even after the initial sale of the annuity.

“If the rep says, 'yes, you should take the buyout' or 'no, you shouldn't' or if they suggest that the client put in more money before the insurer cuts off [subsequent premiums] — that brings in suitability,” said Thomas J. Christel, lead senior regulatory specialist of member regulation at Finra.

Indeed, even a suggestion that a client hold on to an old variable annuity contract instead of taking the buyout is technically a suggestion that the client “hold” the investment and that recommendation should be documented, Mr. Christel noted.

To contend with the number of contracts that are going to be subject to buyouts, Jim Shorris, executive vice president and deputy general counsel at LPL Financial LLC, suggested that firms come up with a due diligence process that vets these offers — and does so separately from the rest of the annuity business.

“It shouldn't be exposed to the firm's desire to curry favor with an insurer,” he said. “If a carrier wants to get rid of unprofitable business, use your due diligence team to come up with an internal review.”

On the insurance regulation side, state insurance cops are responsible for examining the buyouts carriers pitch and the notification they give clients. They also can veto these programs.

“We look at the program, the letters [to clients] and the ads,” said James R. Mumford, first deputy commissioner in Iowa's insurance division and securities administrator at the state's securities bureau. “We give a thorough review at the state level on how [the business] is being treated. There are programs that have been proposed that we haven't approved.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

How advisers can better communicate the risks and rewards of investing in emerging markets

Senior columnist John Waggoner discusses how financial advisers can help clients better understand the advantages of having exposure to emerging markets and the increased volatility that often comes along with investing in them.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print