CONTACTS: Monday, April 26, 2004
Nancy Condon 202-728-8304
Herb Perone 202-728-8464
NASD PROPOSES SPECIFIC REQUIREMENTS FOR DEFERRED VARIABLE ANNUITY SALES
Concerns Over Suitability, Disclosure, Supervision Cited
Washington, D.C.—In an effort to address continuing concerns surrounding sales and exchanges of deferred variable annuities, NASD’s Board of Governors has proposed a new rule that would impose a wide range of new requirements tailored specifically to transactions in deferred variable annuities—from new sales practice standards and supervisory requirements to increased disclosure and sales force training.
“Because of our concerns about unsuitable recommendations and inadequate supervision, variable annuity sales have been the focus of increased, NASD-wide attention for the last two years and the subject of more than 80 disciplinary actions during that time,” said NASD Chairman and CEO Robert Glauber. “We believe this rule proposal represents an appropriate approach to ensuring adequate protection for investors considering or purchasing deferred variable annuities.”
In general, the new rule would codify and make mandatory best-practice guidelines that NASD had previously issued. NASD intends to request public comment on the proposed rule. Details of the proposal will be made available in a Notice to Members.
The key requirements of the rule proposal include:
In recommending a deferred variable annuity transaction, a registered representative would be required to determine that:
the customer has been informed of the unique features of the variable annuity;
the customer has a long-term investment objective, and
the deferred variable annuity as a whole, and its underlying sub accounts, are suitable for the customer, particularly with regard to risk and liquidity.
The registered representative would be required to document these determinations.
Disclosure and Prospectus Delivery
The firm or its representative would be required to provide the customer with a current prospectus and a separate, brief, “plain English” risk disclosure document highlighting the main features of the particular variable annuity transaction. Those features would include:
liquidity issues, such as potential surrender charges and IRS penalties;
fees (including mortality and administrative fees, investment advisory fees and charges for riders or special features);
federal tax treatment for variable annuities;
any applicable state and local government premium taxes, and
The risk disclosure document would be required to inform the customer whether a “free look” period applies to the variable annuity contract, during which the customer could terminate the contract without paying any surrender charges and receive a refund of his or her purchase payments.
Before a registered representative could effect any transaction in a deferred variable annuity, a registered principal would be required to review and approve the transaction. The registered principal would be required to consider specific factors (for instance, whether the customer’s age or liquidity needs made a long-term investment inappropriate). Before a registered representative could complete a recommended transaction, the registered principal would be required to review and approve, in writing, the suitability analysis document and a separate exchange or replacement document, if the transaction involved an exchange or replacement of an existing variable annuity.
The rule proposal would require registered firms to establish and maintain specific, written supervisory procedures reasonably designed to achieve compliance with the rule’s standards.
Registered firms would be required to develop and document specific training policies or programs designed to ensure that registered representatives and registered principals comply with the rule’s requirements and that they understand the unique features of deferred variable annuities.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.