Brokers, insurers juggle hot potato of VA suitability

Both are responsible, but duty comes at different points in sales process, observers say

Jun 9, 2008 @ 12:01 am

By Sara Hansard

Both brokers and insurers bear responsibility for the suitability of variable annuity sales, but at different points in the sales process, industry officials said at a conference last week.

"Who really should own suitability? On the one hand, [should] it really be distributors who have front-line responsibility or direct-line contact, who have the opportunity to really capture the essence of what the rules are trying to deal with?" asked Richard Wirth, assistant general counsel of Hartford Life Insurance Co. of Simsbury, Conn.

"Or is it the [responsibility of the] insurers, the backroom processors, to check everything?"

Mr. Wirth spoke as part of a panel on suitability at the Compliance and Regulatory Affairs Conference, which was held in Washington by NAVA Inc. of Reston, Va.

"Prior to the sale, it has to rest with the broker," responded Chip Lunde, a partner in Miami law firm Jorden Burt LLP. "The broker's the only entity that has the direct contact with the customer, [and] has the obligation to know the customer and the opportunity to gather the information from the customer."

"Post-sale monitoring, I think the insurance company can certainly gather data and monitor the sales to make sure that they're consistent with the guidelines set by the insurance company," he said.

But brokers and insurance companies need to nail down which entity will be responsible for training agents about variable annuities in selling agreements, Mr. Lunde said.

"If the insurance company is going to provide training to the [registered representative], are they going to ensure that the training will meet the brokers' training requirement under 2821 or [does] the broker remain responsible for training?" he asked.

The New York- and Washington-based Financial Industry Regulatory Authority Inc.'s Rule 2821 governs the sale of deferred variable annuities.

"There's been a big shift in how the manufacturers are holding out their products," Elaine Duffus, chief compliance officer for Nationwide Securities Inc. of Columbus, Ohio, said during the panel discussion. "There's a little less rah-rah about the products."

Instead, manufacturers are providing more explanation of the products and more information about the type of customer for which a particular product would be appropriate, Ms. Duffus said.


"The manufacturers and distributors both are beginning to come together more in what is needed," she said. "We are getting there, but we're very dependent on what the manufacturers provide."

Training "must be objective," Jim Wrona, assistant general counsel of Finra, said during the panel discussion. "It can't just be a marketing tool."

Some organizations are moving toward using databases to compare features of variable products, Mr. Wrona said. That type of information is needed so that features can be compared side by side, Ms. Duffus said.

A substantial number of the complaints that Florida securities regulators receive from senior investors involve purchases of annuities, William Reilly, chief of the Bureau of Securities Regulation in Florida's Office of Financial Regulation in Tallahassee, said during the panel discussion. The one-size-fits-all method of selling annuity products to seniors "is a problem that we see more often than we like to," he said.

Some states appear to be moving toward limiting sales of annuities to clients, based on a maximum age, Mr. Wirth said.

Legislation was introduced in Florida this year that would have given customers a one-year "free-look" period for annuity purchasers 75 and over, Mr. Reilly said. When the legislation was passed, the free-look period was dropped to 14 days for all investors, he said.

Many proposed state securities laws "are a reaction to the fact that there are a lot of people who have complaints in this situation," Mr. Reilly said.

Regulators are watching to see how variable annuities are being sold to the public, and Finra has made regulating variable annuities a top priority, said Susan Merrill, executive vice president and chief of enforcement for Finra, who delivered a keynote address at the conference.

"Brokers have the right to make a living," she said. "But when making money leads firms and brokers to bad advice and [to] make unsuitable sales, it is simply unacceptable."

Finra officials have seen cases where brokers convinced customers to switch out of variable annuities before surrender periods expired, meaning that customers had to take penalties, "even when the new product may not [have been] a better investment and [would] only tie up the investor's money for a longer period of time, with a new surrender period," Ms. Merrill said.

In January, Finra fined Banc One Securities Corp. of Chicago $225,000 for making unsuitable sales of variable annuities to 23 customers and having inadequate procedures governing annuity exchanges, she said. In addition, the bank was required to let the customers sell the variable annuities without penalty, overriding the six-year surrender period.

Bank representatives had recommended that the predominantly elderly customers exchange fixed annuities, which were then paying a minimum of 3%, for variable annuities. Customers were further exhorted to put all their assets into the fixed-rate feature of the variable annuities, which was paying a maximum of 3%.

"If firms are recommending annuities to any customer, they must act in the customer's best interest, taking into account all relevant factors," Ms. Merrill said.

One of the biggest challenges in the $1.5 trillion VA market "is providing clear disclosure of complex products to a diverse group of investors," Andrew "Buddy" Donohue, director of the Securities and Exchange Commission's investment management division, said during another keynote speech at the conference.

The SEC's proposal for a simplified summary prospectus for mutual funds outlining investment objectives, costs and risks "could have a significant impact on variable-product issuers in their role as distributor of underlying fund shares," he said.


The insurance industry has discussed with the SEC the possibility of developing a similar short-form disclosure document for variable-product prospectuses.

"This is a good first step that should help facilitate a productive dialogue between the [SEC] staff and the industry regarding the requirements of any variable annuity short-form disclosure document," Mr. Donohue said.

At a minimum, such a short-form document "must be able to stand alone so that its effectiveness does not rely on information incorporated from other documents," he said. All fees and charges should be disclosed in the document, and it must describe the basic features of the product in clear, concise English.

"Given the complexity of these products, that is not an easy task," Mr. Donohue said.

E-mail Sara Hansard at


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