Deferred Variable Annuities--The New Rule

Hi. And Happy Earth Day. While you're in your backyard digging holes and planting things, perhaps include this information (-'er, I don't mean bury it--I mean, plant it in your mind so that it may bloom and grow).


Rule 2821 is effective May 5. But not the whole thing: paragraphs (c) and (d) have been put on hold indefinitely, pending SEC's response to FINRA's forthcoming amendments (that's some kinda vague, isn't it?). What this means is: your Reps have to perform and document a suitability analysis for def. v/a purchases and exchanges, but you as Principal don't have to follow the new approval rules--you don't have to make a suitability determination, too. At least not yet. You still have to approve the business like you've always done. The other part of the Rule that will be effective May 5 is the training part: you have to train your reps on the new Rule and on def. variable annuities in general, along with the specific products they offer. I have a feeling you're doing this already for C/E purposes. But be sure to train, by May 5, the reps on the specifics of their new obligations under the Rule; also train them on any new forms you've devised to help them document their suitability analysis. Lastly, interestingly, your firm has to comply with these effective parts of the Rule, but you don't have to have written procedures in place describing the compliance elements you're adopting. That paragraph (d) has been delayed. If you're in the process of updating your WSP manual, or will be soon, it wouldn't hurt to go ahead and include new procedures: you can revise them later, if necessary.


I listened in on the Def. V/A Phone-In Workshop last Friday. Here are the notes I typed up. My apologies for the tone of brevity. FYI: I didn't learn a lot on this phone call and found that the "cya" and "not our job" messages were loud and clear, as usual.


Notes on Rule 2821: Deferred Variable Annuities Phone-In Workshop
April 18, 2008

Presenters: Larry Kosciulek and Andy Favret

1400 participants signed up for call
Questions submitted in advance; no live questions from listeners
(cya introduction: FINRA doesn’t endorse any compliance practice)

Link to materials: http://www.finra.org/EducationPrograms/Materials/p038332

1. UPDATE:
Paragraphs (c) and (d) –effectiveness delayed indefinitely. See rule filing notice sent April 17 by Finra: http://www.finra.org/RulesRegulation/RuleFilings/2008RuleFilings/P038354

2. APPLICABLE TO:
Rule applies to stand-alone purchase of def. v/a and exchange of one for another. Includes purchases in IRA accounts, not transaction in employer-sponsored plans. Does not apply to re-allocation in sub-accounts or to subsequent investments in sub-accounts. Does not apply to recommendations to SELL v/a’s (but other, general rules such as Communications with the Public--Rule 2210--apply to these transactions). Rule would apply to specific recommendations made to individual plan members of an employer-sponsored plan.

Rule applies to recommended transactions (not all communications constitute recommendations)—but the text of Paragraph (c) (that may be amended and is not now effective) states that a principal must treat “all transactions as if they have
been recommended for purposes of this principal review” and must make a suitability determination… FINRA is considered truly making the Rule apply ONLY to recommendations.

3. SCOPE:
Rule pertains to:
Reps who recommend these transactions
Principal who approve them
WSP’s
Training

4. REPS:
When recommending purchase or exchange, must get info and review existing assets. Effective date: May 5

Q: What does “liquidity needs” mean? What info is required?
A: See 2821(b)(2). Liquidity needs is not defined, but age, income, net worth, dependents, short term cash needs for homes, education, etc. are factors to consider.
IRA funds are not liquid assets—because they require a penalty/fee to tap.

Information must be captured so it can be reviewed: no special form is required under the Rule.

Q: Document and sign determinations: what form to use? Is the intent: to provide rationale for transaction or to give disclosure to client?
A: Form should be firm’s choice as appropriate. This is not about disclosure to customer; it’s about suitability.

Remember, investment time horizon—these securities are long term investments. Access to funds before end of surrender or waiting period is costly.

Rep must determine suitability based on factors listed in rule. Must document and sign some record to show this.

Exchanges: primary purpose cannot be RR’s profit. Consider:
Triggers surrender charge?
Lose benefits, increase in fees/charges?
Compare fees/etc. of both
Does customer benefit?Has customer done exchange w/in last 36 months?

Q: The 36-month exchange reference—does it refer to the particular customer’s account?
A: No, in any account w/in 36 months.

Q: Does customer have to sign acknowledgement of disclosures?
A: No but firm may decide to require this.

Remember: ‘Intended use’—important to suitability consideration. Need for cash---not a good reason to buy v/a.

Q: Is an exchange within 36 mos. a call to action?
A: No, an exchange with a customer having done an exchange w/in the last 36 months may not necessarily be prohibited. This information is just part of the necessary background information used to make suitability determination. A yes answer may end up triggering more supervision or a closer look at the proposed transaction.

5. PRINCIPAL:

Paragraph (c) of Rule—Principal must review before sending to insurance co/vendor for processing. This paragraph is not in effect; delayed effective date.

Discussing it anyway….

Q: If customer sends $ directly to vendor how can Principal review transaction before sending for processing?
A: Doesn’t apply to non-recommended transactions or to reinvestments.

Rule is in state of flux for now. Par. (c) will be amended and FINRA will provide guidance.

A: What about in the interim? Bet. May 5 and ultimate effective date of (c) and (d)?

No interim requirement. Keep doing what you’re doing re: Principal review… firms can adopt new procedures now if they want.

Principal doesn’t need insurance license to approve this business. 26, 24 or 9-10 license is okay.

Rule now states that Principal must approve within 7 business days of the customer signing the application. The workshop presenters said it was 7 days from the date the OSJ received the completed application. Assumption: clarification is forthcoming with Rule change.

Application must be sent by next business day after Principal approval (noon on Day 8 at latest)

Firms can hold customer checks pending Principal review—relief from net capital reserve and n/c rules. “Promptly transmit” is waived if 2821 is met.:
Copy check, record date rec’d and date transmitted to vendor or returned to customer. (i.e., on checks rec’d forwarded blotter)
$ must be sent by noon next day after approval.

Possible Rule change about use of suspension a/c’s at ins. companies. This would allow funds to be send pending Principal approval.

6. WSP:

Although this part of the Rule has been delayed, it (paragraph (d)) will not change. Firm will be required to have written procedures.

Automated systems to review/approve v/a business is NOT permitted.

7. TRAINING:

Training program must be in effect by May 5.

Training required on more than just general characteristics--on specific products offered by firm.


Rely on 3rd parties, such as wholesalers, ins. co’s? Okay, but firm ultimately responsible.
Train all reps on 2821 by May 5.
Can put in c/e firm element, but some training should be provided by May 5.

Use webcasts and e-learning to provide training.

For wholesalers who promote v/a products to firms—training req. does not apply (no recs to customers)

8. MISC:

Q: Offshore V/A’s—included?
A: Rule focuses on whether it’s a registered product, not if it’s offshore (no explicit answer to question)

FINRA “Relies on firms to set their own parameters for suitability”—FINRA doesn’t set.

Q: What is reasonable for procedures/disclosures?
A: Firm decides. For instance, could require customer sign-off on purchase/exchange.

Q: Does FINRA have any plans for an online tool like the Mutual Fund expense analyzer to use with V/A analysis?
A: They are exploring this.

Q: Will FINRA be providing other tools, like disclosure forms? Replacement forms?
A: No, they’re not working on this.


Workshop time estimated: 75 minutes; actual time: 50 minutes.

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