December 17, 2002
Ms. Katherine A. England
Division of Market Regulation
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-1001
RE: Proposed Supervisory Controls Amendments
Dear Ms. England:
I represent a life insurance company that markets Variable Universal life and Variable Annuity policies. Following are our comments concerning proposed NASD amendments to supervisory controls.
3010. (c)(2) Supervision: inspections of an office by a person who is independent from the activities being performed at the office and those persons providing supervision to that office would be unduly burdensome for life insurance companies selling variable life and variable annuities. "Activities performed" occur at the home office as well as hundreds of branch offices across the nation. Requiring independent inspections at each site would be costly, time consuming, and would duplicate the efforts already performed by the supervisor, our company's internal audit staff, our broker's audit staff, our Insurance Marketplace Standards Associations (IMSA) recertification process as well as the audits performed by the Departments of Insurance.
3012(a)(1) Supervisory Controls: We have the same comments as made above, in addition: the testing and verification requirements that are based on "size and resources of the firm and scope of its activities" is ambiguous and open to interpretation. What sampling of activities will be considered adequate? How are "resource and size" measured to determine testing and verification requirements?
The definition of "independent" person is ambiguous. Could a person employed by the home office "independently" inspect branch offices? Could an "independent" person be employed by the Company's public accounting firm? How are the resources and size of the firm measured to determine the degree of independence required?
3110 (d) Books and Records: the requirement that a name or account designation be placed on "each transaction" is impractical for administration of a variable life or variable annuity policy. Dozens of transactions involving expense charges and insurance charges will automatically occur each month for the multitude of funds associated with each policy.
The requirement that a person who has passed a qualifying principal exam must authorize account changes or designations would be burdensome and add to the expense of administering these changes. Name changes, ownership changes, address changes, and beneficiary changes are now performed at the clerical level. Introducing a qualifying person who is "personally informed of the essential facts" into to the process would be expensive and impede the service we provide to our policyowners.
In conclusion, the life insurance industry is one of the more heavily regulated of the financial institutions. Presently, we perform several regulatory functions through these existing entities:
There are also external regulatory entities which oversee our practices:
Adding another "independent" auditor to exam practices which are in our own self interest to perform properly would only add to the cost of the services we charge the clients we serve without adding any significant layer of protection.
Thank you for taking the time to review and consider our comments. We appreciate the role of the Securities & Exchange Commission in ensuring the integrity of our investment industry.
Paul M. Phalen, CLU, FLMI
Assistant Vice President - Variable Product Services