VA Suitability More Important As Boomers Age, Regulators Say
by Matt Brady
The original version of this story was published on National Underwriter Life & Health Magazine
Suitability in variable annuity sales is becoming an increasingly important issue as the "baby boomer" generation approaches its senior years, according to state and federal regulators at the National Association for Variable Annuities compliance and regulatory affairs conference in Washington.
"It's not debatable, anymore, whether suitability applies to annuities, because it does," said James Mumford, first deputy commissioner of the Iowa Insurance Division.
He added that while some arguments have been made that suitability rules should only apply to sales of fixed annuities, variable annuity sales are under the suitability umbrella as well.
The National Association of Insurance Commissioners, Kansas City, Mo., has adopted a model rule governing suitability in such sales, he said, which has been passed by "at least 35 states," with an additional "seven or eight" having passed other suitability laws.
Ann Furman, an attorney in the Washington office of Jorden Burt, LLP, said suitability has become a "big issue" among regulators of variable annuities. "Part of that has to do with the total assets invested in variable annuities," which she said amounted to approximately $1.39 trillion as of the first quarter of 2007.
Lawrence Kosciulek, associate director of NASD investment companies regulation, said suitability is covered by a general rule that says there must be "reasonable grounds" for a sale of any financial product.
The term "reasonable grounds," he said, means the seller of the product should have gathered background information on the would-be purchaser and verified that the sale will provide some benefit to them.
A proposed NASD suitability rule, which was introduced in 2004 and has been amended 4 times since, would apply specifically to variable annuities transactions. The NASD has sent the rule on to the Securities and Exchange Commission, Washington, Mr. Kosciulek said, and is waiting to hear back from the SEC on its fate.
When and if proposed rule 2821 is approved by the SEC, the NASD will issue guidance for implementation after 60 days in a notice to members, he said, and the rule will take effect 180 days after that.
Many of the issues currently being debated about that rule, such as the timing of a proposed "principal review" for variable annuities transactions involving payments made to insurers, would be clarified. "Hopefully, we'll clarify these issues in the notice to members," he said.
While there has been some debate with the industry over the proposed rule, Mr. Kosciulek said he doesn't "envision any substantive changes" to the rule as it is currently proposed, and much of the industry seems to accept that they'll have to adjust their operations to meet it and are now more concerned about the preparation for those changes. "For the most part, firms are just asking when," the measure will take effect, he said.
The aging baby boomer generation is an important factor in the suitability regulation effort, noted John Walsh, associate director and chief counsel for the SEC Office of Compliance Inspections and Examinations, because the growing elderly population will make ensuring consumer protection all the more important. "This is a fundamental long-term shift in our markets," he said, "and in our focus as regulators."
Mr. Walsh said the SEC has a "very active enforcement element" on suitability because "many of these cases involve really fraudulent activity" such as Ponzi schemes or just fake securities.
Recent efforts, he said, have focused on seminars offering seniors a "free lunch" or supposedly neutral financial advice, which can sometimes end up as a sales presentation.
Although he said it's "too early to tell" what the results of that effort will be, Mr. Walsh said firms who host seminars should be asking serious questions about how they advertise such seminars, specifically the degree to which they control the advertising and the claims being made about what the seminar will offer.
Examining these issues is important in case regulators should come asking about the seminar, he said, "both so you have the answers and secondly, so you have answers that you're comfortable with."
Companies should also be sure their representatives can explain why they may have switched products for a consumer. "Can your reps explain why product B is enhanced over product A?" he asked the audience, "and can they document that analysis?"