Information on Selling Annuity

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					    Broker-Dealer Supervision of
       Variable Annuity Sales
                 Clifford Kirsch
                 Sutherland Asbill & Brennan LLP
                 1114 Avenue of Americas-40th Floor
                 New York, NY 10036
                 (212) 389-5052

    Relevant Suitability Requirements

    A.    NASD Suitability Requirements
         1. Conduct Rule 2310
         2. Conduct Rule 2110
         3. Special Guidance for Variable Annuities
                a) NASD Notice to Members 99-35
                b) The SEC/NASD 2004 Joint Report
    B.    State Insurance Suitability Requirements
         1. NAIC Suitability (formerly Senior Protection) in
            Annuity Transactions Model Regulation
         2. California’s Best Practices (December 2006
2   C.    State Securities Requirements
    Proposed NASD Rule 2821

    A.     Background and Comments on Rule 2821
         1.   Notice to Amendments 04-45
         2.   Amendments and Rule Filings with the SEC
         3.   General Review of Comments on the Rule
    B.     Rule 2821’s Substantive Provisions
         1.   Coverage
         •    Original Purchase or Exchange
         •    Non-recommended Transactions
         •    Subsequent Purchase Payments
         •    Reallocations
         •    Retirement and Benefit Plans
    Proposed NASD Rule 2821 (continued)

     2.   Requirements
            a) Recommendation Requirements
                1) General Requirements

                2) Exchanges

                3) Documentation

                4) Customer Information

            b) Principal Review and Approval
            c) Supervisory Procedures
            d) Training
    Variable Annuity Exchanges

    A.   Recent Enforcement Activity
    B.   Exchanges in the Context of
         Registered Representatives Switching
    C.   Exchanges of Variable Annuities into
         Equity Indexed Annuities
    D.   Proposed Rule 2821
5   E.   Compliance Considerations
    Sale of Variable Annuities to Seniors

    A.   Overview of Regulatory Concerns
            Liquidity Concerns
            Confusion about guarantees
            Exchanges

    B.   Overview of Regulatory Framework
            NASD Proposed Rule 2821
            State Insurance Initiatives
               State Annuity Transactions Model Regulation
               California December 2006 Report (“A Suitable Match:
                Best Practices for Annuity Sales)
            State Securities Initiatives
    Sale of Variable Annuities to Seniors

    C.   Compliance Considerations
            Consider Establishing Suitability “red flags” that require special review at
             certain ages
            Consider establishing “hard” blocks for certain types of sales involving
            Conduct Forensic Testing – Make sure you are flagging the appropriate
             transactions (Be mindful of how regulatory exams challenge “red flags”
             created for certain ages).
            Consider Providing Targeted disclosure (something like “A Guide for
             Seniors Purchasing Annuities”)
            Be mindful that Seniors are ineligible for certain annuity riders
            Don’t confuse contract issue age with appropriateness of sale
            Consider “inforce” illustrations and other periodic outreach
            Consider a centralized customer outreach program for seniors
            Surveillance should focus upon “one size fits all” sales activity
            Consider point of sale questions targeted to Seniors

    Sale of Variable Annuities in
    Connection With Senior Seminars

    A.   Overview of Regulatory concerns
    B.   Overview of Regulatory Initiatives
         –   “Free lunch” sweep
                   Expected to launch nationwide by early September
    C.   Compliance Considerations
         –   Review and Approve all seminar material
         –   Establish a checklist covering branch manager review of
             senior seminar activity
         –   Track those sales that take place in connection with
         –   Incorporate as part of branch office review and firm’s 3012
         –   Review processes in light of “free lunch” sweep
             documentation request
    Variable Annuity Exchanges into
    Equity Indexed Annuities

      A.   NASD - Notice to Members 05-50
             Does not take a position on whether EIAs are securities
             Expresses concern regarding the marketing and sales of EIAs.
                 Requires representative to disclose to firm that he or she is
                   engaged in the sale of EIAs
                 Recommends maintaining a list of acceptable unregistered EIAs,
                   and prohibiting associated persons from selling any other
                   unregistered EIA
                 All recommendations to liquidate or surrender a registered
                   security must be suitable, including where such moneys are used
                   to fund the purchase of an unregistered EIA.
                 Encourages firms to consider requiring that all sales of
                   unregistered EIAs occur through the firm, subject to firm
                   supervision of marketing, suitability, and training.

      B.   Other NASD Initiatives
             NASD “Sweep” of VA to EIA Exchanges
             NASD Review of EIA Marketing pieces (filed on a voluntary basis)
     Variable Annuity Exchanges into
     Equity Indexed Annuities (continued)

       C.   State Actions
             Massachusetts (December 2006 Consent order
               against Investors Capital Corporation)
             Minnesota Complaint (filed January 9, 2007)
       D.   SEC
             Review of status of EIAs As Unregistered Securities

       E.   Compliance Considerations

     Questions-Rule 2821

        Is Rule 2821 likely to advance at the SEC? If so,
         what can we expect as a compliance date?
        Will the NASD’s 2007 exam program look to the
         principles underlying 2821?
        What type of transactions are covered by the rule?
         How are reallocations or subsequent payments
        How will we need to document the suitability
         determination required by the rule?
        With respect to exchanges, how will we need to
         document the suitability determination required by
11       the rule?
     Questions-Rule 2821 (continued)

        Is general disclosure sufficient for the rule’s
         disclosure requirement? Is a written
         document required? How will we document
         compliance with this aspect of the rule?
         Should we involve insurance companies in
         the review of our disclosure?

     Questions-Rule 2821 (continued)

      What type of customer information will
       we be required to obtain? Has the
       NASD specified how firms must capture
       this information? Should we look to
       define certain terms?
      What if the customer refuses to
       provide the information? Should we
       make certain types of information “good
       order” requirements?
     Questions-Rule 2821 (continued)

        What steps will firms have to take in order to
         comply with preapproval requirement?
        What if approval can not be secured in seven
        What impact does the rule have on
         automated suitability systems?

     Questions-Rule 2821 (continued)

        What type of surveillance/exception reporting
         is contemplated by the rule?
        What additional training will be required as a
         result the rule?
        Will the NASD expect to see more rejected


Description: Information on Selling Annuity document sample