The
Financial Industry Regulatory Authority Inc.'s proposal to widen its purview to include non-securities products has left some in the fixed-annuities industry gnashing their teeth.
Finra is seeking comments on Regulatory Notice 09-25, which indicates that the New York- and Washington-based regulatory organization may want to expand suitability guidelines to all recommendations of investment products, services and strategies, regardless of whether they include securities.
If the proposal goes through, it could bring insurance and other non-securities products into Finra's universe — a move that the Milwaukee-based National Association for Fixed Annuities condemned in an angry June 4 note on its website as “the first step in an obvious strategy to control all activities at the broker-dealer.”
“Rule 09-25 is expecting you to be an expert in other suitability arenas so that you can meet the standard,” Kim O'Brien, executive vice president of NAFA, said in an interview. “I think the expectation placed on the adviser is going to harm the customer in the end.”
If the proposal becomes official, it would require two layers of due diligence for the recommended products, according to Marc Menchel, executive vice president and general counsel at Finra.
TWO LAYERS
The first round would determine whether the product was generally suitable, while the second would examine whether the product was suitable to the client's individual situation.
The non-securities products wouldn't be subject to the same level of scrutiny that is in place for variable annuities, which are under heightened suitability standards and require extra detail on riders and subaccounts.
The proposed rule would expand protections for clients, some of whom lack the savvy to know which products fall into which regulatory domain, Mr. Menchel added.
“We have a hard time understanding that if you walk into a broker-dealer and they sell you an array of products, why do only securities have the suitability standard, but others don't?” he said.
But that argument doesn't hold water for those who interpret the proposal as a sign of a turf war.
“Finra has no business regulating anything other than what goes through securities brokers who are already part of Finra,” said Pasquale J. Sacchetta, president of CFIG Wealth Management LLC in Westport, Conn. He is a registered investment adviser and also sells insurance.
“They're using their expertise with variable annuities to say how great they would be [at regulating] fixed-index annuities, but all they know how to do is update a compliance manual,” Mr. Sacchetta added.
New suitability standards on products that aren't securities wouldn't necessarily protect the customer, he said. Mr. Sacchetta argued that recommendations from advisers should be governed by a fiduciary standard of care.
LACK OF RESOURCES?
Others said that Finra lacks the resources to oversee more products.
“How will they ensure that this is a better system?” said Sheryl J. Moore, president of Advantage Group Associates Inc. in Des Moines, Iowa. “They're regulating a few products, and they're not doing that great of a job.”
Ms. Moore said that she is also concerned that there would be regulatory overlap with existing state rules on suitability.
“It's going to be duplicative,” she added. “We already have this oversight from the states, and I don't think Finra will be able to catch everything.”
Mr. Menchel said that the additional suitability wouldn't be problematic if layered onto any rules set by the states through the Kansas City, Mo.-based National Association of Insurance Commissioners' annuity suitability rule.
“If it's more strict, they already satisfy our requirement by satisfying the state rules,” he said. “If it's not as restrictive as ours, then why would we let broker-dealers settle for a lesser standard on the rest of their products?”
Mr. Menchel also waved off the criticism from various industry members. “I think, sometimes, all rule filings invite an amount of sound and fury,” he said.
Broker-dealers' sentiments on how the rule would affect their business vary.
Ms. Moore said that she consulted with broker-dealers when Finra delineated firms' duties for equity index annuity sales in 2005 and that more Finra oversight would mean that more broker-dealers would look for experts to ensure compliance with suitability rules for non-securities. That isn't necessarily the case, however, for firms such as
Raymond James & Associates Inc. of St. Petersburg, Fla., said Scott Stolz, president of Planning Corporation of America, the firm's insurance agency.
“Anything that goes through the firm now goes through the same suitability tests we use for variable annuities,” he said.
Gerry Gunderson, senior vice president and general counsel at National Planning Holdings Inc. in Santa Monica, Calif., said that his firm is still formulating a response to the proposal, but said that the request seems to put
financial planning activities squarely under Finra's jurisdiction. He addressed the issue while on a panel at NAVA's Government and Regulatory Affairs Conference in Washington last week.
NAVA of Reston, Va., is the trade association for variable annuity providers.
Some advisers agree with the spirit of the proposed regulations, acknowledging the need for streamlined rules on products.
“Regulations are coming from too many different areas, and it's very time-consuming to adhere to them,” said Edward W. Gjertsen II, vice president of Mack Investment Securities Inc., a Glenview, Ill.-based investment adviser and independent broker-dealer. “But we wouldn't need these regulations if we were all fair and upfront, and if nobody ever robbed from clients.”
Although Finra awaits comments on its proposal — which are due by June 29 — advisers who already answer to multiple regulators contend that as long as they have had their clients' best interests in mind, a new rule shouldn't make much of a difference.
“If you're truly a fiduciary, then it's not any more onerous than what you're already doing internally,” Mr. Gjertsen said.
E-mail Darla Mercado at [email protected].
