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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
                 clifford.kirsch@sablaw.com




1
    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
            Report)
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
3
    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
4
    Variable Annuity Exchanges

    A.   Recent Enforcement Activity
    B.   Exchanges in the Context of
         Registered Representatives Switching
         Firms
    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
6
    Sale of Variable Annuities to Seniors
    (continued)

    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
             seniors
            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



7
    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
             seminars
         –   Incorporate as part of branch office review and firm’s 3012
             review
         –   Review processes in light of “free lunch” sweep
             documentation request
8
    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)
9
     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



10
     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
         impacted?
        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?



12
     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?
13
     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
         days?
        What impact does the rule have on
         automated suitability systems?



14
     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
         transactions?



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