ACLI, members at odds over NASD

Oct 24, 2005 @ 12:01 am

By Sara Hansard

WASHINGTON - While the American Council of Life Insurers is looking to make nice with NASD, some of its members are talking about suing the regulatory agency.

Both Gary Hughes, ACLI executive vice president, and a lawyer who represents insurance companies said some insurers have talked about suing Washington-based NASD if the Securities and Exchange Commission approves the organization's controversial variable annuity suitability rule. The proposal, if approved, would be one of only a few NASD rules that set regulatory standards for a specific product.

At the last session of the ACLI's annual conference here Oct. 11, Mr. Hughes said the association's board has identified NASD as its "biggest regulatory concern."

In an attempt to improve relations, ACLI officials have begun meeting with NASD officials to discuss their differences. To that end, Mr. Hughes and ACLI president and chief executive Frank Keating met Sept. 26 with Elisse Walter, executive vice president for NASD regulatory policy and oversight, and Tom Selman, NASD senior vice president of investment companies regulation.

"Things have gotten pretty strained recently," Mr. Hughes said in an interview. "We went over there to say, 'What can we do to improve communications?' They were very agreeable to that."

No additional meetings have been scheduled yet. The Washington-based ACLI plans to have NASD officials meet regularly with top executives of the council's 356 member firms, as well as company officials who head business lines, those who handle "nuts and bolts" business matters and salespeople, Mr. Hughes said.

"It's good for us to hear the concerns they have. It's good for them to hear the practical business implications some of their proposals have on us," he said.

"The ACLI asked for meetings between NASD officials and ACLI or life insurance industry representatives, and we are extending to them the same courtesies that we would extend to other industry representatives and lobbyists," said NASD spokesman Herb Perone.

Champing at the bit

Despite the attempts at reconciliation, some of ACLI's members are champing at the bit.

"It's almost been universal," said Joan Boros, a partner with Washington law firm Jorden Burt LLP, who represents life insurance companies and mutual funds. "A goodly number" of her insurance company clients, "have called me up and said, 'Can't we sue them? Can't we bring an action with regard to this thing or that thing?'"

Neither Ms. Boros nor Mr. Hughes would identify any particular companies.

Over the past several years, more private groups have taken securities regulators to court.

The Denver-based Financial Planning Association is suing the SEC over the fee-based brokerage exemption from investment advisory firm registration.

The U.S. Chamber of Commerce in Washington has won an initial round in court against the SEC's independent mutual fund chairman rule, which has forced the commission to reassess the regulation's effect.

Another challenge is being waged against the SEC's hedge fund adviser registration requirement.

Talk of litigation against NASD is "emblematic of the degree of frustration that some companies have had," Mr. Hughes said. "There are almost always better ways to address the issue rather than litigation."

Meanwhile, state securities regulators are becoming increasingly aggressive about pushing for more authority over the insurance industry's variable products.

One advocate of state regulation of variable products is Jim Nelson, Mississippi's assistant secretary of state. Mr. Nelson said his state is seeing a new trend in VA abuses, and he suggested the industry support a self-regulatory organization.

"Now we're seeing a new twist of people in established, good retirement funds taken out of those and put into variable annuities," said Mr. Nelson, who heads business regulation and enforcement in Jackson. The state is investigating three cases in which retirees from large companies were persuaded by brokers to switch their retirement money to variable annuities from 401(k)s and established pension funds, he said.

Mr. Nelson declined to identify the companies involved.

Uphill battle

"I sincerely wish that the insurance industry would stop some of this," Mr. Nelson said. "Self-regulation would go a long way."

The ACLI faces an uphill battle in trying to fight off additional regulation of variable annuities by NASD and state securities regulators. NASD officials have chafed at comments made by Carl Wilkerson, ACLI vice president and chief counsel for securities and litigation, who has accused NASD of "regulatory grandstanding" with the suitability rule proposal (InvestmentNews,

July 11).

Sales of variable annuities have been the focus of NASD's attention for several years. In April, Waddell & Reed Financial Inc. of Overland Park, Kan., agreed to pay NASD a $5 million fine and reimburse more than 6,000 VA customers $11 million for switching their variable annuities without permission, which, in many cases, NASD deemed unsuitable.

Last year, NASD and the SEC issued a report warning that variable products are inappropriate for many investors because of their high fees (InvestmentNews, June 14, 2004).

State securities regulators are becoming increasingly aggressive in regulating variable annuity sales, as well, even though only a few states specifically define variable annuities as securities (InvestmentNews, April 25, 2004).

The North American Securities Administrators Association Inc. in Washington has set up a variable annuities project group to study what states are doing to regulate variable annuities. The group is supporting efforts by states to define variable products as securities, said John Cronin, the group's chairman.

Many states are considering adopting the model Uniform Securities Act proposed in 2002 by the National Conference of Commissioners on Uniform State Laws in Chicago.

The ACLI has fought against states defining variable products as securities that could be regulated by state securities regulators, arguing that would lead to duplicative regulation with insurance regulators. Variable products already are defined as securities under federal law.

"As states see the increased number of complaints - and a lot of insurance statutes don't have provisions such as restitution in them - the states have stepped up their efforts to protect consumers," said Mr. Cronin, who is a securities examiner in the securities division of the Vermont Department of Banking, Insurance, Securities and Health Care in Montpelier.

"The more states that define them as securities and treat them as such, you have a greater level of continuity between federal and state regulation," he said.

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