September 19, 2005
Comments on NASD proposal to create new Rule 2821 SR-NASD-2004-183
1st Global is pleased to respond to the request for comments on proposed rule filing SR-NASD-2004-183, which proposes new rules including specific sales practice standards and supervisory requirements for transactions in deferred variable annuities Proposal.
1st Global Capital Corp. 1st Global is a fully disclosed retail broker-dealer registered to conduct business in all domestic jurisdictions, with over 1200 Registered Representatives offering securities services through nearly 600 branch and non-branch locations. As the Chief Executive Officer of 1st Global, I appreciate the opportunity to submit comments on the issues raised in the above captioned proposed rule change by the NASD.
As a preliminary matter, 1st Global would like to offer the following general commentary.
It is worth noting that we believe that the increased volume of customer complaints/arbitrations cited by the NASD results more from market volatility and the increased publicity and active promotion of litigation than any industry-wide systemic supervisory failures. Furthermore, we believe that the trend is a general one not limited solely to variable annuities.
Various regulators, together with the financial press, have trumpeted the supposed conflict of interest experienced by a commissioned-based registered representative whenever recommending a variable annuity. This perceived conflict of interest is at the core of the proposals emanating from the NASD and other regulators. We respectfully request that the NASD consider another conflict of interest: the conflict of interest inherent whenever a client seeks to recoup investment losses from a broker-dealer.
The conflict is evidenced by the fact that if clients admit that they were fully aware of all material information regarding a purchase, they are denied relief. Whereas, if they represent that such information was not adequately disclosed, they may obtain relief. For this reason, we believe that representations made by clients that information was not adequately disclosed needs to be viewed with the same degree of skepticism with which the NASD views claims by a registered representative and broker-dealer that such information was adequately disclosed.
Please do not misconstrue our initial commentary as anti-consumer protection sentiment. 1st Global is a securities industry participant and we know firsthand that this industry is the most regulated in the United States. That degree of regulation has transformed financial services into the most transparent, consumer friendly industry in the world. Notwithstanding recent shortcomings, we believe that the industry is second to none when advancing its objective of serving the consumer. As a participant in such an industry, we strongly support the NASDs effort to further enhance investor education and protection. However, we believe that the Proposal taken in its entirety is impractical and overreaching, and would cause significant, unnecessary harm to member firms while providing only marginal benefits to investors benefits that could be provided via a much more non-invasive manner through currently existing rules and guidance.
As to the specifics on this Proposal, we are not in favor of the Proposal as currently drafted. We believe that establishing new product specific suitability standards as well as establishing new product specific required client information is not appropriate.
New Suitability Standards
The fact that the NASD believes it has to go far beyond the suitability criteria contained in its general suitability rule Rule 2310 to establish a product specific suitability rule directed only at variable annuities is troubling to our firm. The only other product specific suitability test imposed by the NASD outside Rule 2310 applies to options, currency warrants, index warrants and securities futures see Rules 2860 and 2865. The suitability standards for securities futures described in Rule 2865 are not as onerous as those proposed by the NASD for variable annuities. It is 1st Globals opinion that the establishment of a new suitability rule for variable annuities is unwarranted.
If Rule 2310 provides satisfactory suitability standards for all other products except the volatile, high-risk products mentioned above, it should be appropriate for determining the suitability of variable annuities. If the NASD believes that additional product-specific suitability criteria should be applied to variable annuities, it should develop those criteria through discussions with manufacturers and distributors of these products. It should ensure that the criteria are clear and can be applied uniformly, and either add the product specific criteria by amending Rule 2310 or add the criteria by Interpretative Memoranda IMs.
Required Customer Information
This proposal requires certain information that is not required by the SEC Books and Records Rule applicable to all accounts, NASD Conduct Rule 3110 applicable to all accounts or NASD Conduct Rule 2310 applicable only to recommended transactions. Specifically, that information is: existing investment and insurance holdings, liquid net worth and liquidity needs. 1st Global believes that uniform standards for all products should apply. For this reason, 1st Global believes that the NASD should propose modifications to either Conduct Rule 3110 or 2310 if there is a desire to require member firms to obtain additional customer information.
In summary, we do not support the Proposal in its current form. We have outlined the many concerns that we have with the Proposal. We feel that substantial modifications are necessary prior to any implementation.
Thank you again for providing the opportunity for the industry to participate in the rule making process.
Stephen A. Batman