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SEC Approves FINRA Rule Governing Sales Practices of Deferred Variable Annuities
Washington, DC, September 19, 2007 – The SEC has granted accelerated approval to a proposed rule from the Financial Industry Regulatory Authority (FINRA) that establishes sales practice standards and supervisory requirements for deferred variable annuity transactions.
In December 2004, the National Association of Securities Dealers, Inc. (NASD) -- since merged into FINRA -- proposed NASD Rule 2821, which concerns the sales practice standards and supervisory and training requirements applicable to transactions in deferred variable annuities. As recently adopted, new Rule 2821 will impose new requirements on FINRA members who recommend the purchase of deferred variable annuities. It will also require FINRA-registered principals to review and approve variable annuity transactions.
The new rule has four primary components:
- Suitability. It imposes a product-specific suitability obligation on FINRA members for an investor’s purchases or exchanges of a deferred variably annuity and for an investor’s initial sub-account allocations. The suitability analysis requires a member to have a reasonable basis to believe that the transaction is suitable, and sets forth the considerations and requirements necessary to achieve that determination.
- Principal Review Standards. A firm’s registered principal must review and approve or reject a transaction prior to transmitting the customer’s application to the issuing insurance company for processing, no later than seven business days after the customer signs the application.
- Written supervisory procedures. Members must develop and maintain written supervisory procedures reasonably designed to achieve compliance with the standards set forth in Rule 2821.
- Training program implementation. Members must develop and implement training programs to educate members on the material features of deferred variable annuities and the requirements of the Rule.
FINRA will announce the effective date of Rule 2821 in a Notice to Members, to be published no later than 60 days following SEC approval. The rule’s effective date will be 180 days following publication of the Notice.
The Institute supported FINRA’s effort to address problems related to deferred variable annuity sales practices, but questioned the need to establish a separate regulatory framework for one investment product and whether a separate rule was necessary to accomplish FINRA’s goal. In granting the expedited approval, the SEC found that FINRA demonstrated that “regulating variable annuities like other products has not been sufficient to curb sales practices abuses” and “the complexity of deferred variable annuities warrant more targeted regulation.”
The final rule addresses additional ICI questions concerning several specific aspects of the proposed principal suitability review requirements, including the timing of the review, the requirement to review transactions that are not recommended, and the necessity of determining a customer’s “need” for the deferred variable annuity as compared with other products.
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