IRVINE, Calif. — NASD continues to tinker with a pending variable annuity suitability rule, making a fourth proposed change in almost two years.
IRVINE, Calif. — NASD continues to tinker with a pending variable annuity suitability rule, making a fourth proposed change in almost two years.
In an amendment filed with the Securities and Exchange Commission last month, Washington-based NASD proposed that supervisory principals review VA sales within seven days before submitting an application to an insurer. Earlier, it had wanted the review done within five days after an application was transmitted.
But NASD said in its filing that a post-sale review “is not workable.” It said that canceling contracts that already had been issued could be difficult.
“Some principals might hesitate to revoke” a sale, said Michael DeGeorge, general counsel for NAVA Inc. in Reston, Va., formerly the National Association for Variable Annuities. “At least that’s the fear of some of the regulators,” he added.
Mr. DeGeorge said that NAVA has not taken a position on the latest proposals.
The seven-day, pre-sale review period is a welcome change, said Victoria Bach-Fink, chief compliance officer at Wall Street Financial Group Inc. in Fairport, N.Y.
The latest change is one in a series of about-faces by NASD.
Independent reps often have to forward applications to supervisory offices, which itself can take several days, Ms. Bach-Fink said.
When the rule first was proposed in 2004, NASD wanted a post-sale review period. It later changed that to a pre-sale review, then went back to post-sale review and now has reversed course yet again.
The fact that NASD has struggled with developing an appropriate review period suggests that setting a time limit may be the wrong approach, said David Bellaire, general counsel at the Financial Services Institute Inc. in Atlanta, which represents independent-contractor firms.
The FSI and other industry participants want a flexible “prompt review” standard instead of a set number of days.
Firms are motivated to get transactions approved quickly, Mr. Bellaire said.
Other issues
An artificial deadline “could result in reviews that emphasize speed over thoroughness,” Mr. DeGeorge said.
The newly proposed pre-sale review has raised another problem: Holding a transaction for seven days runs afoul of rules requiring prompt transmittal of customer funds.
As a result, NASD has sought no-action relief from the SEC to allow for a seven-day review period.
But the relief would not help some firms that use reserves to protect customer assets, Mr. Bellaire said. Some insurer-owned broker-dealers operate this way, he said.
In another proposed change, NASD wants firms and reps to have “a reasonable basis to believe” that a VA is suitable, instead of requiring that a rep or firm “has determined” that the product is suitable before making a recommendation.
Industry observers say that that’s an improvement, but Ms. Bach-Fink questioned how a principal can make a suitability judgment without meeting clients and understanding their situations.
The rule’s other aspects remain intact, including a requirement that reps and firms make “reasonable efforts” to gather financial data on VA buyers and require brokers to acknowledge in writing that they have informed clients of surrender charges, possible tax penalties, mortality-and-expense fees, advisory fees and charges for riders.
SEC spokesman Kevin Callahan said that he could not predict whether the SEC will ask for comment on the latest changes.
Mr. Bellaire said that the FSI would be filing a comment letter regardless.
A third amendment to the proposal, filed last November, was not published for comment.
The latest amendment was the fourth proposed change for the rule, which has been pending approval at the SEC since July 2005.
Mr. Bellaire said that his members submitted about 80 comment letters last fall, and “we anticipate doing the same for the fourth” amendment.
