NASD amends controversial deferred VA rule

Aug 7, 2006 @ 12:01 am

By Dan Jamieson

IRVINE, Calif. - Although NASD has amended a controversial proposal that would boost standards involving the sale of deferred variable annuities, some industry interests continue to put up a fight.

In comment letters filed last month, more than 100 industry representatives took shots at the latest changes to a proposal that would require sellers of deferred variable annuities to meet special suitability requirements. When the rule change first was proposed in December 2004, it also received a flood of negative responses from those in the industry.

The latest criticisms came in response to amendments that Washington-based NASD filed with the Securities and Exchange Commission in May. The SEC put the changes out for comment, with responses due by July 19.

The changes were intended to make the proposal more palatable to the industry.

But many of those commenting said that the latest modifications don't go far enough to address the industry's initial concern, which is that NASD suitability rules already cover variable annuities. Many have called the proposal vague and worry about how NASD might enforce it.

"We don't think there's been a need shown for this," said Gary A. Sanders, senior counsel for law and state relations at the National Association of Insurance and Financial Advisors in Falls%A0;Church, Va., formerly the National Association of Life Underwriters.

Regulators disagree, however.

In complaints involving the elderly, state regulators have reported that variable or equity index annuities were involved in 65% of the cases in Massachusetts, and 60% in Hawaii and Mississippi.

Patricia Struck, president of the North American Securities Administrators Association Inc. of Washington, cited those figures last month during an SEC-sponsored meeting on protecting older Americans. She is the Wisconsin state securities administrator.

Industry observers expect the SEC to approve some version of the VA suitability rule.

The proposal has "an awful lot of momentum," said David Bellaire, general counsel at the Financial Services Institute Inc., an Atlanta-based group that represents independent-contractor broker-dealers.

With the large number of comments just received in response to the latest changes, "we're hopeful it will get [NASD] to slow down to take a second and third look," he said.

"We would like to see changes to make it more similar to [NASD's] general suitability requirement," Mr. Bellaire added.

Latest changes

NASD has removed several provisions from the proposal that the industry found objectionable.

Those include a requirement that firms would have to have sufficient reason to believe that VA prospects had long-term investment objectives and a need for the product. In judging need, annuities were to be compared with other investment vehicles.

In previous comment letters, some said that these provisions were too vague and an unprecedented move by regulators to mandate product comparisons.

The revised rule would require firms and brokers to have a reasonable basis to think that "the customer would benefit from the unique features of a deferred variable annuity (e.g., tax-deferred growth, annuitization or a death benefit)," the proposal said.

NASD also softened a requirement for a pre-review of VA sales by a principal. The self-regulatory organization now wants a principal to review the transaction within two days, and it dropped specific review criteria.

Even so, principals will be hard-pressed to make a decision in two days, said Mike DeGeorge, general counsel for the National Association of Variable Annuities of Reston, Va. NAVA recommended that the review be done "promptly" rather than within a strict time limit that could cause rescissions, he said.

Still a tough mandate

The proposal still would institute supervisory and training requirements tailored specifically to variable products.

Furthermore, registered representatives would have to sign off on the fact that they informed VA buyers of surrender charges, possible tax penalties, mortality-and-expense fees, advisory fees and charges for riders.

"These determinations shall be documented and signed by the associated person recommending the transaction," the proposal stated.

Prior to a sale, reps and firms also would have to make "reasonable efforts" to gather detailed financial data on customers.

In a comment letter last month, the Public Investors Arbitration Bar Association of Norman, Okla., urged NASD to require brokers to disclose the commissions they make from VA sales.

High commissions cause abusive sales, according to PIABA, which represents investor plaintiff's attorneys.

The FSI said that cost information should be incorporated into a separate pending SEC point-of-sale-disclosure rule that would detail costs to investors for a variety of packaged products. The SEC proposed the rule in 2004, issued a revised version last year and is still working on a final version.


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