Broker-dealers will need to beef up compliance and oversight of variable annuity sales by their representatives at the start of next year.
In the wake of the Securities and Exchange Commission’s approval this month of a new
Financial Industry Regulatory Authority rule concerning sales practices of deferred variable annuities, firms will need to realign their policies and procedures, industry attorneys and compliance officers said.
The SEC approved the rule on Sept. 7. It is intended to enhance broker-dealer sales practices concerning the purchase and exchange of variable annuities.
Regulators had been tinkering with the VA suitability rule, which took three years to gain approval. In March, New York- and Washington-based FINRA, then known as NASD, made a fourth change to the proposal in almost two years.
“It was a long time,” said Clifford Kirsch, a partner in New York with Washington-based law firm Sutherland Asbill & Brennan LLP. “Firms have been anticipating it and giving thought to how they’ll meet its requirements.”
Once FINRA in the coming weeks formally announces the SEC’s approval of the rule, broker-dealers have 180 days to meet its requirements, Mr. Kirsch said.
The industry “has been talking about this for years,” said Paul Tolley, chief compliance officer with Commonwealth Financial Network of Waltham, Mass.
One heartening development is that FINRA listened to the industry to complete the rule, he said.
“If nothing else, this at least shows the comment process works pretty well,” Mr. Tolley said. The rule “is quite different” from its original proposal, he said, with regulators making it broader, and cutting out some wording.
The rule has four chief parts, the SEC said in a prepared statement.
First, it creates a “suitability obligation” based on the VA “characteristics.”
Next, it has standards for principal and branch manager reviews of transactions before the client’s application is sent to the insurance company.
In addition, firms must have specific written supervisory procedures in place to meet the rule’s standards, and they must also document the training they give reps to ensure compliance, as well as the reps’ understanding of the product.
The SEC said the rule on deferred variable annuities is critical for the elderly.
“Because deferred variable annuities are often marketed to investors looking toward retirement, it has been a particular focus in the context of protecting senior investors against financial fraud,” the SEC said in the statement.
The rule’s final form was streamlined, Mr. Kirsch said.
“It’s a lot more practical than originally proposed,” he said.
Regulators dropped certain requirements, such as a specific discussion of each annuity, and gave more time — seven days — for principals and branch managers to review transactions, Mr. Kirsch said.
The rule will require work, he said.
FINRA wants the rep and branch manager to “really pin down” that the annuity transaction is appropriate, Mr. Kirsch said.
“Firms must get a lot of information to make that determination,” he added.
Exchanges of variable annuities will also require additional information, including a “side-by-side analysis and [explanation of] why this new product benefits investors,” Mr. Kirsch said.
Under the new rule, the clock starts ticking sooner on the purchase of a product and when it needs to be reviewed, he said.
“Seven days is generally sufficient, but that’s starting when the customer application is signed, not when it’s received by the branch manager,” Mr. Kirsch said.
And firms also have new supervisory and training requirements, he said.
Broker-dealers are required to have “targeted surveillance” of reps if they show “a high rate of variable annuity exchanges,” Mr. Kirsch added.
Bruce Kelly can be reached at
[email protected].
