Life insurers bow to VA rule change

Sep 26, 2005 @ 12:01 am

By Sara Hansard

WASHINGTON - The life insurance industry is backing down in its battle against an NASD rule change aimed at creating suitability sales practice standards for variable annuity sales.

In comments filed with regulators last week, the American Council of Life Insurers qualified its opposition to the so-called VA suitability rule, saying the proposal needs more revision.

The ACLI's call for changes marks a dramatic shift from its outright opposition to proposal, which, judging by the overwhelming majority of comments on file last week with the Securities and Exchange Commission, is opposed by most in the life insurance industry.

Resigned to rules

It's also a reflection that the group is reconciled to more regulation around the sale of variable annuities.

"ACLI had a change of heart," said Judith Hasenauer, a principal in the Pompano Beach, Fla., office of Blazzard Grodd & Hasenauer PC, a law firm based in Westport, Conn. "They saw the train leaving the station."

Meanwhile, the National Association for Variable Annuities remained firm in its opposition to the proposal, said Ms. Hasenauer, who is chairwoman of the Reston, Va., organization's regulatory-affairs committee.

But opposing NASD can be risky, she said.

"You can't tell them to go stick it in their ear and then have a meeting with them and expect them to be cooperative, she added. "Very rarely has the NASD buckled under the emotional put-it-in-your-eye approach."

For the ACLI, revising the rule represents the lesser of two evils.

"Our primary objective is still to have the rule abandoned," said Carl Wilkerson, vice president and chief counsel of securities and litigation at the Washington-based ACLI.

"But," he added, "recognizing that it could move forward, we wanted to have constructive input in the event the SEC sees fit to approve the rule."

The proposal would establish suitability requirements to which brokers must adhere before selling variable annuities. It would also increase disclosure and require brokers to receive special training before selling variable annuities.

NASD came out with the proposal last year, saying its own investigations uncovered numerous cases where investors had been sold variable annuities that were not suitable.

The proposal is significant because Washington-based NASD rarely imposes regulations on sales practices involving particular products.

Among changes the ACLI would like to see made to the proposal is replacing oral disclosure with a mandate that investors be directed to the funds' prospectus.

It would also like to eliminate a requirement that all variable annuity applications be reviewed by a supervisor at the brokerage firm.

Some in favor

Among the few groups in support of the rule change are the North American Securities Administrators Association Inc. of Washington, the Public Investors Arbitration Bar Association of Norman, Okla., and the Pace Investor Rights Project, sponsored by the Pace University School of Law in White Plains, N.Y.

"For many years now, variable annuities sales practice violations have been in our Top 10 Scams," NASAA president Patricia Struck, who is administrator of the Wisconsin Division of Securities in Madison, wrote in a commentary letter.

At least one financial adviser agrees.

"My experience with annuities and people coming into our firm with annuities [is], we've often seen they were not the right investment vehicle for the client," said Brian Carlton, a insurance consultant and planner Huff Stuart & Carlton, a fee-only advisory firm in Forest, Va.

Critics of the proposal say that it would lengthen the amount of time it takes to sell variable annuities.

That's because brokerage companies would be required to review variable annuity applications before they're sent to insurance companies responsible for underwriting the policies.

"The last thing you want to do is hold up the application for procedural reasons," Mr. Wilkerson said. "Prompt pricing is a very high priority under the Investment Company Act."

NASD modified the proposal somewhat by substituting a written point-of-sale-disclosure requirement for variable annuity sales with a requirement for oral disclosures.

It remains to be seen whether the SEC will approve the change.

The SEC can only approve or disapprove the rule; it cannot modify the NASD proposal. If the SEC has concerns with it, NASD will probably be asked to change portions of it.

The SEC has no set timetable for acting on the rule.

But new SEC Chairman Christopher Cox is likely to be less inclined to issue new regulations than his immediate predecessor, William H. Donaldson, according to many industry watchers.

"Had it been the former chairman, he probably would have been more inclined to approve it," said the ACLI's Mr. Wilkerson. "I think the new chairman is going to be more inclined to review it very carefully and weigh it on its merits."

Burden is perceived

The proposal, if approved, "could make [variable annuities] uncompetitive," said Julie Gebert, vice president and chief compliance officer with United Planners' Financial Services of America, an independent broker-dealer in Scottsdale, Ariz., that is a subsidiary of Pacific Life Insurance Co. of Newport Beach, Calif.


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