ACTION ALERT
To: All NAIFA Members
From: David E. Smithkey, CLU, RFC, NAIFA President
Date: July 12, 2006
Subject: NAIFA Members Should Urge SEC to Not Approve Proposed NASD Rule Imposing Specific Suitability, Principal Review Requirements for Deferred Variable Annuities
Background: In June 2004, the NASD requested comment on a proposed new NASD rule that would impose specific suitability and principal review requirements in connection with the sale of deferred variable annuities (VAs). NAIFA filed formal comments opposing the new rule, and over 1,000 NAIFA members responded to a NAIFA Action Alert and submitted comments to the NASD in opposition to the proposal.
In July 2005 the NASD filed an amended version of the proposed rule with the SEC, and the SEC asked for public comments on the proposal. (In order to become final, NASD rules must be submitted to the SEC for approval.) In September 2005, NAIFA filed written comments with the SEC again opposing the proposed rule, and over 1,500 NAIFA members submitted comments to the SEC opposing the proposal. NAIFA members have accounted for over 80 percent of the comments submitted to the NASD and SEC regarding this proposal!
The NASD has now filed another amended version of the proposal with the SEC, and the SEC has once again requested public comment on the proposal. It is very important that NAIFA members once again alert the SEC about NAIFA's concerns! The SEC needs to know that NAIFA and its members are still concerned about the NASD's proposed rule—and we can show this concern by sending even more comments to the SEC than we did last year!
NAIFA's Position: NAIFA firmly believes people who engage in unscrupulous or misleading sales practices should be aggressively prosecuted and subject to appropriate and meaningful sanctions. Imposing a specific suitability requirement for the sale of variable annuities, however, would duplicate requirements currently found in the NASD's general Suitability Rule 2310, which applies to all sales of securities. If regulators believe there are abusive practices in the VA marketplace, appropriate enforcement of the existing NASD suitability rule is the solution.
The proposal also contains detailed requirements regarding the review of all VA transactions by a principal of the firm. Such requirements will lead to constant second guessing of the salesperson's advice by someone with less first hand knowledge than the producer.
Finally, we believe the NASD proposal is a "solution in search of a problem." The available data simply does not support the NASD's claims that problems in the variable annuity marketplace require the adoption of this new rule. In recent years NASD disciplinary actions concerning variable annuities and the people who sell VAs have constituted a very small percentage of the NASD's total disciplinary actions, despite the fact that registered representatives working for broker/dealers affiliated with life insurers--i.e., variable products salespeople-- make up over 50 percent of the total population of registered representatives.
What You Can Do: You are strongly urged to submit comments to the SEC urging the SEC not to approve the NASD's proposal. All comments must be submitted by July 19, 2006. You can submit comments electronically by visiting http://capwiz.com/naifa/home/, NAIFA's fast and simple to use Legislative Action Center. Select "Urge SEC to Not Approve Proposed NASD Rule." Scroll down to "Take Action" and fill out the requested information. The sample comments below will automatically be forwarded to the SEC.
In the alternative, you may submit comments by sending an email to rule-comments@sec.gov or by mailing three copies of your written comments to:
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-9303
All email and written comments should reference File Number SR-NASD-2004-183 in the subject line.
Sample Comments: It always has a greater impact if you use your own words when submitting comments. The following sample language can be used as the basis for your comment letter or, if you prefer, as the text of your email:
I am a licensed insurance professional and variable product salesperson. I am writing to you concerning the suitability standard and principal review requirements pertaining to the sale of variable annuities contained in NASD proposed Rule 2821. Although the latest NASD proposal includes several amendments made to earlier versions of the proposal, the proposed rule's requirements are redundant, unnecessary, will provide no meaningful additional protection to consumers and will adversely impact my business. I urge the SEC to disapprove the proposal.
I firmly believe people who engage in misleading sales practices should be aggressively prosecuted and subject to appropriate sanctions. The NASD, however, has failed to adequately justify the need for the proposed rule. To the contrary, the available data does not support the NASD's claims that the level of sales problems in the variable annuity marketplace calls for the adoption of the proposed rule. Unsuitable variable annuity sales made up less than .50 percent of the NASD's disciplinary actions over the last five years, and complaints about mutual funds and individual securities far outnumber those concerning variable annuities. Furthermore, the vast majority of the comments received by the NASD and SEC regarding the proposal opposed the new rule, and the NASD has not adequately responded to the concerns raised by the vast majority of commentators.
Furthermore, proposed Rule 2821 duplicates current supervision and suitability requirements that are already in place. NASD rules (including Rule 2310) already contain suitability requirements that apply to all sales of securities, including variable annuities. If regulators really want to protect consumers, appropriate enforcement of the existing suitability rule rather than adopting a new rule is the answer.
In addition, the requirement for review by a principal found in the proposed rule deviates in several significant ways from the general supervision requirements found in Rule 3010. This requirement appears to present a bias against these products, and will lead to constant second guessing of my advice and recommendations (based upon less first hand information than was available to me).
The NASD proposal is a solution in search of a problem that could ultimately harm consumers by making these products less available to people who could benefit from them. For these reasons, I urge the SEC to disapprove NASD proposed Rule 2821. 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 Sara Miga at 703-770-8104, smiga@naifa.org.
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