Nancy M. Morris
Securities and Exchange Commission
100 F Street, NE
Washington DC 20549-1090

RE: File Number SR-NASD-2004-183, Amendment Number 2

Dear Ms. Morris,

Who we are

Rosenthal Retirement Planning, LP is a Registered Investment Advisory Firm specializing in retirement planning. Our advisors are registered representatives offering securities through Securities America, Inc., a registered Broker/Dealer. We believe that the proposed NASD variable annuities Rule 2821 could have a substantial, unintended negative impact for our clients as well as our industry. Many clients choose a variable annuity as a vehicle for their retirement dollars instead of other vehicles such as mutual funds, because variable annuities often carry certain guarantees that are not available elsewhere. These potential benefits include, but are not limited to: death benefits; “living benefits” such as guaranteed minimum income benefits, and guaranteed minimum withdrawal benefits; annuitization options; internal dollar-cost-averaging; the ability to transfer assets between “investment families” without cost; periodic rebalancing; and fixed account options. Many of our clients are interested in one or more of these benefits.

Regarding Existing Rules

The proposed rule is redundant and duplicates requirements which are already in force, such as NASD Rule 2310 and NASD Conduct Rule IM 121310-2. In addition, there have been several alerts and notices issued by the NASD involving variable annuities. It appears that the proposed new rule is primarily based upon the NASD “Notice to Members” issued in 1999 (NtM 99-35).

Regarding Unintended Negative Consequences

In regards to the proposed NASD Variable Annuities Rule 2821, our first concern is for our clients. There are several points in this proposed rule that could pose unintended negative consequences for clients. In addition to the fact that the NASD has previously and adequately addressed variable annuities, the following is a summation regarding a few of our concerns should Rule 2821 move forward.

Regarding Variable Annuities being categorized with Securities Futures

The proposed additional disclosures for variable annuities seem to unfairly categorize variable annuities along with much higher risk investments such as securities futures. This makes it appear as if variable annuities are much higher risk investments than they actually are. We believe this disclosure requirement could cause some investors to seek alternative investments for the wrong reasons, resulting in a possible unintended consequence of this proposed rule.

Regarding Final Intended Use

The proposed rule requires that the consumer know the final intended use of the variable annuity. This rule seems to be redundant to the suitability section of the new account form. But, the question could be perceived as even more specific in nature. The “final intended use” seems like an illogical request that could make the investor feel as if they would be committed to this statement (their answer) in the future. This rule could lead them to another investment option in order to avoid this “commitment” and additional paperwork which is required. Perhaps this would lead the investor to invest in something different, for the wrong reasons. They may simply choose to invest in something without all of these “burdens to entry.” I think some financial advisors may also stop recommending variable annuities simply to avoid unnecessary headaches. This rule seems unfair to the client in either case.

Regarding Undue Concentration

For many clients, the majority of their net worth is invested in their IRA. Many of these individuals ultimately invest their IRA assets into mutual funds or variable annuities, and sometimes both. In our office, the choice of where to invest the IRA only occurs after a lengthy discussion regarding several different IRA alternatives. This discussion includes a great deal of information about the advantages and disadvantages of mutual funds and variable annuities, as well as other possible options. Typically, the client determines if they want the additional guarantees (and fees) of a variable annuity. If they don’t want the additional features of a variable annuity, we typically utilize mutual funds. Does this “undue concentration” rule mean that these retirees will not have the option of using a variable annuity with additional guarantees even if that is what they want? What if they had “too much” in mutual funds? What if they currently have “too much” in their 401k plan at work? In most cases, variable annuities can provide tremendous diversification. The diversification comes from the underlying investments, not whether those investments are held inside of a variable annuity, a group of mutual funds, or the investor’s 401k plan. Certain clients want additional guarantees that can only be provided by a variable annuity. So, does this mean that these individuals would not have the option of those additional guarantees? Or, would they be limited to investing only a certain percentage of their assets or net worth into a variable annuity? If a variable annuity was a particular asset class this would seem appropriate, however it is not. It is similar to a “shell or wrapper.” The variable annuity is the shell or wrapper which holds the underlying investments, which are typically invested into a multitude of subaccounts representing several asset classes. We believe this “undue concentration” requirement could cause some investors to seek alternative investments for the wrong reasons, therefore resulting in a possible unintended consequence of this proposed rule.

Regarding No Exchanges within 36 months:

According to this proposed ruling, a customer cannot have deferred variable annuity exchanges within 36 months. What happens if there is a new program that becomes available before the 3 year timeframe ends, and because a regulatory agency arbitrarily decided three years is the minimum, must the customer wait to take the opportunity for a new product that better addresses their specific needs? Of course the most important factor in any exchange is that the exchange or transfer is suitable for the client, and that there is also an economic benefit to the client. The wording and phrasing of this proposed rule is unclear and difficult to understand, leaving room for misinterpretation. The additional suitability criteria being considered is also confusing, unclear, and possibly irrelevant in determining actual suitability. For example, the criteria states that the member is prohibited from recommending the purchase or exchange of a variable annuity to a customer unless among other things the advisor has a reasonable basis to believe that the customer has been informed. Does that mean they must be informed about variable annuities before seeking the counsel of the advisor, or before the transfer is initiated, or before the transfer is finalized? Or, does this mean that the customer must be informed about all of the positives or negatives surrounding a potential exchange before that exchange occurs? Also, when referring to advisors who have a high rate of variable annuity exchanges, what is the definition of variable annuity exchanges? Is this referring to variable annuity to variable annuity exchanges, or is this referring to transfers from another style of investment to a variable annuity, or both? Does this include exchanges from one variable annuity to another variable annuity when there are no surrender charges on the old annuity or the new annuity, or rather only when surrender charges are involved? What exactly is considered “an exchange?” We believe this “no exchanges within 36 months” rule could cause someone to stay invested in their current annuity for the wrong reasons, therefore resulting in a possible unintended consequence.

Regarding Age, Liquidity, Investment Experience, and amount of Life Insurance

Is the amendment assuming that all variable annuities must be long term investments? Is it assuming that variable annuities are always unsuitable for seniors? What if the investor is age 70 and wants the guarantees of a variable annuity, and he (or she) decides they want to invest in a variable annuity using a conservative investment allocation and this particular variable annuity has no surrender charges? Is this automatically inappropriate just due to their age? What if they are 75? Or, what if this investors’ family history is quite lengthy? It seems they may be “penalized” because of their age with this ruling.

Regarding Liquidity

Many variable annuities today have no surrender charges whatsoever, and almost all variable annuities may be allocated as conservatively as the client wishes.

Why should a variable annuity with no surrender charges be placed in the same category as a variable annuity with surrender charges lasting seven years or more?

Regarding Prior Investment Experience

What if a client has no prior investment experience outside of their employer’s 401k plan? Would this preclude them from investing in a variable annuity? Would it also preclude them from rolling all of their money over at retirement to a variable annuity IRA even if they wish to? What about a mutual fund IRA?

Regarding Life Insurance

We believe the proposed changes regarding disclosures about “the amount of existing life insurance” could cause some investors to seek alternative investments to avoid the questions about what they believe to be their own personal business. Why would the fact that they currently own a certain amount of life insurance determine whether a variable annuity was appropriate or not? If someone wants to insure their house, why can’t they also insure their IRA through a death benefit, or some type of living benefit, or perhaps both – provided by a variable annuity?

Regarding Guarantees

Many retirees are concerned about outliving their income and many variable annuities provide certain guarantees in this area. Why should an annuity be inappropriate for this type of investor just because of their age, their investment experience, or what amount of life insurance they may already own? We believe the proposed changes regarding “age, liquidity, investment experience, and the amount of existing life insurance” could cause some investors to seek alternative investments for the wrong reasons, therefore resulting in a possible unintended consequence of this ruling.

Regarding Stated Percentage of Customer’s Net Worth

As I stated above, many retirees are concerned about outliving their income and many variable annuities provide certain guarantees in this area. Why should a client be limited to putting only a certain percentage of their net worth in a variable annuity? What if the majority of the client’s net worth is in the client’s pension and 401k and they want to roll those accounts over at retirement? What if they want guaranteed income and wish to utilize a variable annuity IRA with a “Guaranteed Minimum Income Benefit?” This rule could prevent them from doing exactly that. We believe the proposed change could result in possible unintended consequences and potential harm to those investors seeking the features of a variable annuity by preventing them from investing in one in the first place.

Regarding Registered Principal Review

The proposed two day registered principal review for each variable annuity purchase or exchange could pose a hardship for the client, the registered representative, or possibly both. The two day requirement is unrealistic when considering business and personal schedules for all concerned. A lengthier time frame makes more sense. This could allow for a more careful examination of the paperwork and ultimately the annuity contract for both the client and financial advisor. Also, what would the documentation entail? This question is not addressed in the proposed rule. The two day rule could cause the review of paperwork to become rushed. This rule may lead to an unsuitable transaction by “slipping through the cracks,” because mistakes are more likely when paperwork is rushed.

Regarding Special Training

A special training track plus a two day supervisory requirement is an impractical and unnecessary requirement imposed upon our business causing additional expenses and time away from the business. It is unnecessary to mandate that the registered representatives should understand the material features of variable annuities, when the NASD has already addressed this obligation in Conduct Rule 2310. Why not make any variable annuity training a part of the normal firm element CE? Why not make part of the firm elements going forward include training in variable annuities instead of having a completely different CE module? Why not be much harder on the wrongdoers as opposed to additional training for “the masses?”

All Variable Annuities are not the same

If the purpose and intent of the proposed NASD rule 2821 is to stop the abuses that have occurred regarding variable annuities, then a better solution would be to add meaningful disclosures to the VA prospectuses, focus on enforcing the rules that are already in place and strongly go after the abusers instead of limiting the customers’ choices. There is such a wide variety of variable annuities available to the public that to lump them all together into one ruling is not an accurate or careful response to potential abuses. Much of the new proposed rule assumes that all variable annuities have lengthy and/or high surrender charges. In our office, we primarily utilize variable annuities for our clients which have no surrender charges. Occasionally, we use annuities with a three-year surrender charge period. Should these annuities be included in the same category as an annuity with a lengthy surrender charge period and/or high surrender charges? Why not separate those that have little to no surrender charges from those which have large and/or lengthy surrender charges? Why not separate those with surrender charges of three years or less from those with surrender charges of more than three years? Additionally, those with surrender charges lasting longer than seven years or those with abnormally high surrender charges such as the “bonus annuities” could be separated as well. Please go after the abusers, not the clients and the advisors with an honest concern for their clients.


W. Burk Rosenthal, CFS
President, Rosenthal Retirement Planning, LP
Registered Principal, Securities America, Inc.

W. Burk Rosenthal
100 E. 15th Street, Suite 100
Fort worth, TX 76102
(817) 336-2000

Securities offered through Securities America, Inc., a registered broker/dealer, member NASD/SIPC.

Rosenthal Retirement Planning, LP and Securities America, Inc. are not under common ownership