A new rule governing broker-dealers' sales of deferred variable annuities is about to drop, and the firms are arming themselves to face it — but not without a little grumbling.
A new rule governing broker-dealers' sales of deferred variable annuities is about to drop, and the firms are arming themselves to face it — but not without a little grumbling.
The Financial Industry Regulatory Authority Inc.'s Rule 2821, which had been in the works since 2004, received approval from the Securities and Exchange Commission on Sept. 7.
At press time, the non-governmental regulator said that its official regulatory notice would be issued by this Wednesday, giving firms six months to comply.
"We've already been receiving some questions as to if that's enough time," said Larry Kosciulek, director of investment company regulation at FINRA of New York and Washington. He provided guidance to the insurance industry last week in Boston at the annual conference of LIMRA International Inc, a life insurance marketing and research organization based in Windsor, Conn.
"We've had this proposal for three and a half years. Even if we tried to talk to the SEC, they won't buy any sort of extension," Mr. Kosciulek added. He expects that the rule will take effect next May or June.
Rule 2821 contains four provisions governing sales of deferred variable annuities: It imposes a suitability requirement on the sale of the products. The rule also requires principals to review transactions within seven business days before the customer's application is sent to the insurance carrier.
Broker-dealer firms must also have written supervisory procedures for complying with the rule. Finally, the firms have to document and develop training programs for their sales force to make sure they understand how deferred variable annuities work.
The provisions also apply to the exchanges of variable annuities, but not if a customer is switching from a VA to an unregistered index annuity. Also, suitability requirements apply to riders and subaccounts.
While major broker-dealer firms have had suitability guidelines in place for some time, the seven-day limit for reviewing and processing transactions has raised some eyebrows. For instance, customers can sign the application but delay turning it in to the registered representative, holding up the processing.
Additionally, if a customer makes an error or submits an incomplete application, the firm has to notify them, and that can take time.
"What kind of customer service is this? I can't control when a client sends an application," one attendee commented at a New York Securities Industry and Financial Markets Association symposium on the rule last month.
SIFMA is based in New York and Washington.
Independent broker-dealers also face obstacles as they may have a decentralized compliance structure, meaning that the applications go through multiple processing centers.
"Tracking and showing the paper trail, and providing evidence that you've achieved principal review in the time frame, presents operational challenges for some firms," said David Bellaire, general counsel and director of government affairs at the Financial Services Institute Inc. of Atlanta. The independent-broker-dealer firms his group represents have been adjusting their policies and are largely prepared for Rule 2821, he said.
But FINRA has remained firm on the seven-day deadline, saying that the date isn't going to change. Also, if a principal signs off on the application on day two, the broker-dealer firm has to pass it on to the carrier the next day — they can't hold it for the remaining five days, said Robert H. Watts, a special consultant to LIMRA.
Compliance via automation has been the way to go for large broker-dealers such as LPL Financial Services of Boston and San Diego.
The firm has paired up with Blue Frog Solutions of Pompano Beach, Fla., to roll out an annuity order entry system in which advisers queue up for principal review.
From there, the application goes to the carrier. A compliance database provides surveillance, and bars improper transactions.
The system will become mandatory early next year.
LPL has also been training its agents and support staff with educational modules and webcasts. "The training component is important, not just on the system but also for the rationale behind the transaction and the justification for why the purchase is suitable for the customer," said Joe Tuorto, managing director and chief compliance officer of LPL Independent Advisor Services.
Similar training and automation programs are under way at MetLife Inc. of New York and Merrill Lynch Insurance Group Inc. of Pennington, N.J.
The cost could be a problem for smaller broker-dealer firms, as straight-through processing carries a hefty price tag, Mr. Tuorto added. But small firms have fewer clients and applications.
Additionally, tighter oversight won't hurt VA sales, contrary to what some industry observers fear. "We find that anytime you raise the bar for suitability, there's an initial chilled response, but our greater task is to show advisers how this helps them make better recommendations," said Marc A. Cohn, vice president of corporate ethics and compliance at MetLife.
In the long run, the need for VAs will take care of any sales decreases, Mr. Cohn added.
FINRA also expects the insurance companies to do their part and aid broker-dealers with training on their products, Mr. Kosciulek said.
Major carriers, including Allianz Life Insurance Company of North America in Golden Valley, Minn., have signaled their support of Rule 2821 but haven't yet indicated how they will work with their broker-dealers.
Although firm on the deadline for implementation of the rule, Mr. Kosciulek said, the group isn't criticizing VAs as a whole but rather ensuring supervision and suitability.
"We're not saying they're inappropriate; there have been a great number of improvements on these products," he said. "But this is a gigantic issue, and you're bound to certain conditions."
Darla Mercado can be reached at dmercado@crain.com.
