ICI Comments on NASD's Deferred Variable Annuity ProposalWashington, DC, September 21, 2005 - The Institute supports NASD's goal of ensuring that deferred variable annuities are sold only to purchasers for whom they are suitable and agrees that it is important to address sales practice problems in this area, but expresses concern that a recent NASD proposal sets a bad precedent, according to a recent comment letter. Background
The National Association of Securities Dealers, Inc. (NASD) has proposed to create a new rule, NASD Rule 2821, that would impose new requirements on NASD members who recommend the purchase of deferred variable annuities, and would require registered principals to review and approve variable annuity transactions, among other things. Specifically, Rule 2821 would require: - that no broker-dealer recommend to any customer the purchase, sale, or exchange of a deferred variable annuity unless the broker-dealer has reason to believe that the customer has been informed of the material features of the deferred variable annuity, the customer has a long-term investment objective, and the deferred variable annuity is suitable for the particular customer;
- that, prior to recommending a deferred variable annuity, a broker-dealer make reasonable efforts to obtain information about the customer, including the customer's age, annual income, financial situation and needs, investment experience, investment objectives, investment time horizon, risk tolerance, and tax status, among other things; and
- that a registered principal review each variable annuity transaction and consider whether the customer appears to have a demonstrable need for the features of a deferred variable annuity as compared with other investment vehicles; the customer's age or liquidity needs make a long-term investment inappropriate; and the amount of money invested exceeds a stated percentage of the customer's net worth or is more than a stated dollar amount.
ICI Position
While the Institute supports the goals of NASD's proposal, ICI states in a recent comment letter that the proposal sets a bad precedent by establishing a separate regulatory framework for one particular product. ICI states that such a precedent could lead to a patchwork of different standards that will complicate compliance efforts. The proposal also prescribes detailed, one-size-fits-all requirements that do not recognize the variety of NASD members' business models and, in some cases, will be unworkable. The Institute recommends that, rather than adopting the proposed rule, NASD rely on and enforce its existing rules. In addition, we recommend that NASD issue updated guidance on sales of deferred variable annuities. Related Links
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