Unlike its life insurance counterpart, STATs also have the assumed liability of the broker-dealer writing such business
Amid calls for tougher rules to deter stranger-owned annuity sales, one prominent broker-dealer executive is arguing that curtailing such questionable deals is simply a matter of following current securities and insurance laws.
Speaking on the behalf of broker-dealers at a regulatory hearing held by the National Association of Insurance Commissioners' life and annuities committee in Washington last week, Caleb J. Callahan compared stranger-originated annuity transactions, or STATs, to stranger-originated life insurance (STOLI), the sale of life insurance for the explicit purpose of selling it over the secondary market to an investor. But he noted that unlike STOLI, STATs have several layers of regulatory oversight, plus the assumed liability of the broker-dealer writing such business.
“What's different with STATs is the introduction of securities regulators that didn't exist with STOLI,” said Mr. Callahan, vice president of investment services for ValMark Securities. “They can't escape Finra and SEC oversight; they are registered products. The relationship between the rep and the broker-dealer — they are treated as one entity for legal purposes.”
Stranger-originated annuity transactions involve an investor's purchasing a variable annuity, naming an elderly or sickly individual as the annuitant and then cashing in on the death benefit and market gains on that person's death.
STATs, which must be performed through broker-dealers if they involve variable annuities, could violate a handful of rules handed down by the Financial Industry Regulatory Authority Inc., including regulations governing principles of trade and the use of manipulative and fraudulent devices, Mr. Callahan said.
Registered reps are also prevented from giving a gift in excess of $100 to an individual if it's related to that broker's business, making it a violation for brokers to pay more than that amount to a sickly person to act as an annuitant, he said.
Finra also has the power to issue regulatory notices to give broker-dealers guidance through a regulatory notice, applying existing rules to these STATs, Mr. Callahan said.
“This additional layer of securities law addresses many of the issues,” Mr. Callahan said. Finra's 2330 rule on variable annuity suitability and principal approval of VA sales, as well as the NAIC's revamped annuity suitability model rule, also provide protection, as they call for background information on the annuity's owner and look into the objective of the annuity purchase.
Lawrence Kosciulek, director of investment company regulation at Finra, has indicated that the group may consider providing firms with guidance on STATs.
The role of broker-dealers and registered reps in STAT transactions became an area of focus after three broker-dealer firms were sued by Western Reserve Life Assurance Co. of Ohio and Transamerica Life Insurance Co. for processing variable annuities in this manner. Specifically, the carriers claimed the firms — LifeMark Securities Corp., Fortune Financial Services Inc. and The Leaders Group Inc. — violated contractual obligations to supervise and train their reps.
