Finra may wade into STATs controversy

Meanwhile, the National Association of Insurance Commissioners has scheduled a hearing in Washington this month to discuss the transactions

Finra is considering providing broker-dealers with guidance on stranger-originated-variable-annuity transactions — the latest twist in the flap surrounding the controversial investments.

In a stranger-originated-annuity transaction, or STAT, an investor purchases a variable annuity, naming a sickly or elderly individual as the annuitant. Upon the ill person’s death, the investor collects the death benefit and any investment gains.

In a panel discussion last week, Lawrence Kosciulek, director of investment company regulation at the Financial Industry Regulatory Authority Inc., said that the securities industry watchdog is contemplating providing its members with guidance on stranger-originated transactions.

Under Finra’s model, registered reps have to provide information on the intended use and objective of an annuity. “I think a principal looking at a [customer’s] application and following our [suitability] rules would look at the application more closely,” Mr. Kosciulek said.

Regulators, too, are starting to look more closely at the sales of stranger-originated variable annuities. The National Association of Insurance Commissioners has scheduled a hearing in Washington this month to discuss the transactions and examine whether they affect insurable interest.

Questions about the insurable interest behind third-party annuity sales have been at the center of a number of lawsuits filed recently. Both Transamerica Life Insurance Co. and Western Reserve Life Assurance Company of Ohio have sued a Rhode Island attorney who set up third-party deals, along with the broker-dealers and registered representatives who processed the annuities.

Given the confusion, it’s hardly surprising that stranger-originated variable annuities are now a major concern for compliance officers at financial services companies.

Kathy VanNoy-Pineda, chief compliance officer at LPL Financial, noted that advisers at the broker-dealer are not permitted to get involved in setting up such transactions. “It’s sleazy,” she said, “and since it involves a product with a death benefit, insurable interest should be an issue.”