From: Deborah Castiglioni
Thank you for the opportunity to comment on the proposed NASD Rule 2821 concerning revised sales practice standards and supervisory requirements for transactions in deferred variable annuities.
These products are certainly complex and can be difficult for consumers to fully understand, especially if not properly explained (or understood) by the representative selling the product. I believe enhanced suitability requirements and required training of reps. and supervisors is absolutely a step in the right direction to improve some of the the sales practice problems associated with the sale of variable annuities.
I would also like to express my agreement with the deletion of the original "point of sale" disclosure requirements proposed in a previous Notice, which would have created an extremely burdensome and unworkable process for member firms. Additionally, as the NASD commented in it's most recent submission to the Commission, their point of sale rule may have created redundancies with proposals already under consideration by the SEC for point of sale disclosures for these same products, as well as others. (Not to mention possible discrepancies in the requirements between the two regulators if "point of sale" disclosure had continued to be recommended.)
I would like to express my sincere concern with respect to both the "principal review" aspect of the rule, as well as the comments included in the rule concerning principal responsibilities pertaining to variable annuity purchases within an IRA.
In terms of the principal review requirement, the main area of consternation concerns the requirement to have principal review and approval "prior" to transmission of the customer application. In and of itself, I would be in favor of this requirement, except for the "prompt transmission" requirement. Due to the requirements of NASD Rule 2820(d) and similar financial responsibility requirements under SEC Rules 15c3-1 and 15c3-3, this would require that an application that was accompanied by the purchase payment be remitted either the same day received - or, I believe generally accepted business practice for "prompt transmission" would include up until noon the following business day. In practice, there are many remote, unregistered branch offices that do not have a Principal on site. It would be impossible to have a Principal pre-review and still "promptly" transmit the application and funds within the timeframe now requested by the new rule proposal. Even if the original documents were sent via overnight mail, the expectation would be that the OSJ principal was going to drop everything else they might be doing (or heaven forbid if he/she was out of the office for a day) and review and potentially approve the application to get it out in the mail that day. This also creates problems for very small firms that have a limited number of principals available to perform these reviews. In order to effectively review and supervise these applications, I feel that either the rule should allow for "prompt transmission" upon "receipt" of the application at the Principal's office, or provide an exception for variable annuity products from what is normally considered "prompt transmission" in other areas of the securities rules. If neither option appears workable, then I would favor going back to a "post" principal review within 2 days of the mailing date of the application - which should still afford an acceptable amount of time to terminate the contract if the supervisor deems the purchase to be inappropriate. (I know the footnote of the Rule proposal mentions that some insurance companies process applications in a very short time period - one or two days - but I have to say that in my 17 years as an owner of a broker-dealer, I have not experienced such quick turnaround and cannot think of one instance where a policy was issued that quickly.) The position of the NASD that the rep. can just delay acceptance of the purchase payment until the application has a principal's approval is not the way business is conducted in the normal course. It would be unrealistic to expect an advisor to accept the client's application, yet ask them to hold off for a few days on sending in the check.The second area where I take issue concerns the language in the proposal concerning deferred variable annuity sales within an IRA account. The paragraphs I'm referring to read:
"Thus, principals must ensure that the deferred variable annuity's features other than tax deferral make the purchase of the deferred annuity for the IRA appropriate."
"In this regard, members should note that paragraph (b)(1)(C) of the proposed rule requires associated persons and paragraphs (c)(1)(A) and (d)(1) of the proposed rule require principals to determine whether the customer appears to have a need for the features of a deferred variable annuity as compared with other investment vehicles."
I'm not completely sure how the NASD or the Commission would propose that a "principal" is intended to verify this information. I fully understand the principal review process: i.e. expenses, client age, liquidity issues, suitability from an investment objective standpoint, etc. However, if the product is sold within an IRA solely due to the comfort the client feels by the guarantees inherent in the contract, or the riders added to a specific contract, how is the reviewing principal supposed to verify this information? Am I now to contact each potential client independently to ask them why they chose to buy a variable annuity in an already tax-deferred account? If you received this type of phone call after purchasing a product - requesting you "explain" why you felt it was necessary, wouldn't you feel that you must have made a mistake? After all, the firms' calling to question what you did.... This would totally undermine the work the advisor has previously done when they met with the client - sometimes 2 or 3 times, and the time they had spent, typically several hours or more, analyzing the client's needs.
I believe that this portion of the rule proposal goes too far and is beyond what would otherwise be considered a reasonable review. If this is maintained as part of the approved rule, then I would implore the Commission to at least require a uniform document from the issuing companies, that a client would sign, indicating why they chose to purchase the product - even though the IRA already provided tax deferral. I am strongly against this approach, however, as clients are inundated with paperwork already. We cannot continue to approach every problem in our industry with additional paperwork for clients to sign. The print keeps getting smaller and the stack keeps getting taller.
Thank you for taking the time to consider my comments. If you have any questions, please feel free to contact me either via e-mail at: email@example.com, or via phone at 636-537-8770.
Member NASD, MSRB, SIPC