Action Alert

To: All NAIFA Members

From: David E. Smithkey, CLU, RFC, NAIFA President

Date: November 29, 2005

Subject: NAIFA Members Urged to Submit Comments to NASD Asking NASD to Back Off on Equity Indexed Annuities

Background: Equity-indexed annuities (EIAs) are fixed annuity products that provide the option of having additional interest credited to the owner based on the performance of an outside index, such as the S&P 500. Most EIA products are not registered under the federal securities laws. To date, neither the Congress nor the SEC has determined that EIAs should be characterized as securities.

The National Association of Securities Dealers (NASD) recently issued Notice to Members (NtM) 05-50 addressing broker/dealer (b/d) responsibilities for supervising sales of unregistered EIAs. In its notice, the NASD expressed concern that EIAs were being marketed and sold as investment vehicles rather than as long term accumulation products and that the unsupervised use of sales materials that do not fully describe the features and risks of the product could confuse or mislead investors.

Although the NtM expressly states that the NASD was not taking a position on whether particular EIAs were or were not securities, the Notice recommends that member b/ds supervise EIA sales made by the b/d’s registered representatives. The notice also encouraged firms to take other measures, such as treating all sales of unregistered EIAs by the b/d’s reps as private securities transactions under NASD Rule 3040 and requiring that all sales of unregistered EIAs occur through the firm. The net effect of this is that the broker-dealer will treat EIAs as securities and supervise EIA transactions as if the rep were selling the EIA on behalf of the broker-dealer. The broker-dealer will also review the transaction for suitability and will share in the compensation earned by the rep.

NAIFA Position: NAIFA firmly believes that people who engage in unscrupulous or misleading sales practices should be aggressively prosecuted and subject to appropriate and meaningful sanctions. However, in light of the fact that neither the SEC nor the Congress has said that equity-indexed annuities are securities, NAIFA believes that the NASD has overstepped its authority in issuing NtM 05-50, which urges NASD member broker-dealers to, in effect, treat EIAs as securities and supervise EIA transactions by their registered reps as private securities transactions under NASD Rule 3040. For this reason, NASD Notice to Members 05-50 should be withdrawn by the NASD.

NAIFA further believes that the NASD’s concerns regarding the manner in which equity indexed annuities are marketed and sold can best be addressed through the adoption by the states of the NAIC’s Annuity Disclosure Model Regulation and Senior Protection in Annuities Transactions Model Regulation, and by the effective enforcement of existing state unfair trade practices acts and other state laws regulating advertising and marketing practices. Toward this end, NAIFA is currently engaged in a joint cooperative proactive effort with the American Council of Life Insurers to actively promote the adoption by the states of these NAIC models.

What You Can Do: You are strongly urged to submit comments to the NASD urging the NASD to withdraw Notice to Members 05-50, and to send a copy of your comments to the U.S. Securities and Exchange Commission. Even if you do not currently market equity indexed annuities—many see this as the first step by the NASD and broker-dealers to gain control over the products you market. What will be next—life insurance? Health insurance?

You can submit comments electronically through NAIFA’s Online Legislative Action Center at http://capwiz.com/naifa. Select "Urge the NASD to Withdraw Notice to Members 05-50" and complete the requested information. The sample comments below will automatically be forwarded to the NASD, with a copy to the SEC.

In the alternative, written comments may be mailed to:

Barbara Z. Sweeney
Senior Vice President and Corporate Secretary
NASD
1735 K Street, NW
Washington, D.C. 20006-1500,

With a copy to:
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549

Sample Comments: It always has a greater impact if you use your own words when submitting comments. The following sample language may be used as the basis for your comment letter or, if you prefer, as the text of your email to the NASD:

I am a licensed insurance professional. I am writing to you because I believe the NASD has exceeded its jurisdictional authority in issuing Notice to Members 05-50, concerning the regulation of equity-indexed annuities. I am also very troubled by the significant anticompetitive impact that NtM 05-50 will have on the financial products marketplace. I urge the NASD to reconsider this Notice and respectfully request that it be withdrawn by the NASD.

Like my fellow insurance professionals, I firmly believe that people who engage in misleading sales practices should be aggressively prosecuted and subject to meaningful sanctions. However, equity-indexed annuities are fixed annuities products; only a very few EIAs have been registered under the federal securities laws. To date, no entity with valid authority--neither the Congress nor the SEC--has determined that EIAs should be characterized as securities. In light of this, I believe that the NASD has overstepped its authority in issuing NtM 05-50, which urges NASD member broker-dealers to, in effect, treat EIAs as securities and supervise EIA transactions by their registered representatives as private securities transactions under NASD Rule 3040. At most, a rep’s EIA transactions should be treated as outside business activities under NASD Rule 3030.

A more effective way to address any concerns the NASD has regarding the manner in which equity-indexed annuities are marketed and sold is to promote the adoption by the states of the National Association of Insurance Commissioner’s Annuity Disclosure Model Regulation and Senior Protection in Annuities Transactions Model Regulation, and by the effective enforcement of existing state unfair trade practices acts and other state laws regulating insurance and annuity advertising and marketing practices. Toward this end, the professional association to which I belong, the National Association of Insurance and Financial Advisors, is currently engaged in a joint proactive effort with the American Council of Life Insurers to actively promote the adoption by the states of these NAIC models.

For the above reasons, I again urge the NASD to withdraw NtM 05-50. Thank you for your consideration of my views on this matter.

Questions: If you have any additional questions, please contact Gary Sanders at 703-770-8192, gsanders@naifa.org. For technical questions regarding sending your message to the NASD, please contact Vicky Dobbin at 703-770-8113, frontline@naifa.org.

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