September 30, 2002
Susan S. Krawczyk, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
Re: Interpretative Request Regarding Indiana Replacement Illustration
Dear Ms. Krawczyk:
This responds to your letter of August 13, 2002, in which you request interpretive guidance on the application of NASD Rule 2210 to hypothetical illustration requirements imposed by Indiana state law with respect to the sale of certain variable annuity products. Based on the facts that you have represented, we would not consider an illustration produced by your client solely to comply with Indiana law to be “sales literature” that would trigger the requirements of Rule 2210.
Your letter sets forth the following relevant facts:
Your client American Family Securities, LLC (“AmFam Securities”) is an NASD member that distributes variable annuities in the state of Indiana issued by its affiliate, American Family Life Insurance Company. Indiana law requires an insurer to provide a “policy summary” to applicants who seek to replace an existing life insurance policy, including a variable annuity contract. The policy summary is intended to provide the applicant with information to compare the existing policy with the proposed replacement. Indiana law requires the policy summary to include a hypothetical illustration that compares the annual premiums, guaranteed cash surrender values and guaranteed amount payable upon death. AmFam Securities does not currently use illustrations in conjunction with its sale of variable annuities.
Since the hypothetical illustration would be included only to comply with Indiana law, NASD does not believe the illustration would constitute sales literature under Rule 2210. Accordingly, AmFam Securities would not need to file the illustration with NASD or otherwise comply with the content requirements of IM-2210-2 with respect to the illustration. This interpretation only applies to the use of the illustration to the extent required by Indiana law. Any additional use of such an illustration would require compliance with Rule 2210 and related interpretive materials.1 Moreover, this interpretation is subject to the following additional conditions: (1) the illustration may be used only in sales to Indiana residents; (2) the illustration may be used only in the context of a proposed replacement insurance contract; and (3) if AmFam Securities begins using variable annuity illustrations for purposes other than compliance with Indiana law, it must include a separate illustration from that required by Indiana law that fully complies with all applicable NASD rules.
I hope this letter is responsive to your inquiry. This letter responds only to the issues you have raised based on the facts as you have described them. It does not address any other rule or interpretation of NASD or all of the possible regulatory and legal issues involved. Further, please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by NASD’s Board of Governors.
Very truly yours,
Philip A. Shaikun
cc: Carlotta A. Romano, District Director – Chicago District Office
1 See also Letter from Robert J. Smith to W. Thomas Conner (February 5, 1999).