Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 7, 2007

FINRA Issues Guidance on New Rule on DVAs

FINRA issued both Regulatory Notice 07-53, including the text of new NASD Rule 2821, and a press release summarizing broker-dealers' compliance and supervisory responsibilities for deferred variable annuities.  The Rule, which becomes effective May 5, 2008, requires that, when recommending a deferred annuity transaction, a registered representative must:

Make a reasonable effort to obtain and consider various types of customer-specific information, including age, income, financial situation and needs, investment experience and objectives, intended use of the deferred variable annuity, investment time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance and tax status.

Have a reasonable basis to believe the customer has been informed of the material features of a deferred variable annuity, such as a surrender charge, potential tax penalty, various fees and costs, and market risk.

Have a reasonable basis to believe that the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization or death or living benefits.

Make a customer suitability determination as to the investment in the deferred variable annuity, the investments in the underlying sub-accounts at the time of purchase or exchange, and all riders and other product enhancements and features contained in the annuity contract.

Have a reasonable basis to believe that a deferred annuity exchange transaction is suitable for the particular customer, considering, among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges, and has had another exchange within the preceding 36 months.

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While this rule is a good and long overdue step forward, I expect it to make very little difference in the rate at which seniors are sold unsuitable variable annuities.

While our securities regulatory system is based on a theory of full disclosure, with seniors and many other investors customer behavior is much more relationship driven.

Brokers are trained to sell, recruited for their sales ability, and paid and promoted for sales production.

This rule may help claimants attorneys in arbitration actions alleging unsuitable variable annuity sales, but I expect the rampant sale of variable annuities to retirees who need immediate income to continue unabated.

Bottom line, variable annuities are unsuitable for retirees who need immediate income.

Thanks for your thorough explanation of the new rule.

Posted by: Investor's Watchdog | Nov 15, 2007 7:15:17 AM

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