Compliance September 11, 2007

SEC Approves FINRA Rule for Deferred Variable Annuity Sales

The Securities and Exchange Commission (SEC) has approved a new Financial Industry Regulatory Authority (FINRA) rule governing broker-dealer sales practices with respect to purchases and exchanges of deferred variable annuities.
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The SEC said the rule, approved on September 7, has four primary components:

  • It imposes a suitability obligation tailored to the characteristics of deferred variable annuities.
  • It contains standards for principal review and requires principals to review transactions before the customer’s application is forwarded to the issuing insurance company for processing.
  • It requires members to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in the proposed rule, and
  • It requires members to develop and document specific training policies or programs designed to ensure compliance with the requirements of the rule and salespersons’ understanding of the material features of deferred variable annuities.

Additionally, the SEC issued an order exempting FINRA members from becoming fully subject to Exchange Act Rule 15c3-3 and being required to maintain higher levels of net capital in accordance with Rule 15c3-1 while holding customer funds for no more than seven business days to complete the required principal review under the new FINRA rule.

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More information is available through the SEC press release.

Compliance September 11, 2007

FINRA to Check Securities Firms’ Sales Practices with Seniors

The Financial Industry Regulatory Authority (FINRA) announced the initiation of two regulatory sweeps intended to ensure that securities firms are using appropriate sales practices in their dealings with seniors and individuals nearing retirement.
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The first sweep will examine whether brokers are using so-called “professional” designations to mislead and defraud investors, according to a FINRA news release. FINRA is concerned about the proliferation of professional designations, particularly those that require no meaningful training or specialized knowledge but suggest an expertise in retirement planning or financial services for seniors.

The sweep also will help inform possible rulemaking on the use of designations, the release said.

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FINRA has also issued a comprehensive Regulatory Notice to the industry that informs firms and brokers about their obligation under securities rules when selling products to seniors. The Notice outlines best practices in areas ranging from suitability to acceptable use of professional designations that firms can use when dealing with senior customers.

In the second sweep, FINRA will look at early retirement seminars conducted by securities firms designed to entice older workers to liquidate their retirement funds and invest them with a specific firm or representative. In the past year, FINRA fined two firms a total of $5.5 million and ordered the firms to pay $26 million in restitution related to early retirement investment schemes aimed at Exxon and Bell South employees.

In addition, FINRA is launching a new campaign aimed at informing human resource professionals and unions about the risks of flawed or fraudulent early retirement seminars. FINRA will offer a Seminar Scan program that will review the information related to a financial seminar sent to a human resource department.

There are two other regulatory sweeps ongoing in the area of protecting seniors – one examining the sale of collateralized mortgage obligations targeted at seniors, and a second focused on the sale of life settlements. FINRA currently has about 70 open investigations that involve seniors or senior-related issues.

More information is at www.finra.org.

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