Interpretive Letter to Harley Whitfield, American Equity Capital, Inc.
May 20, 1999
American Equity Capital, Inc.
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Re: Application of Non-Cash Compensation Rules to Sales Contest
Dear Mr. Whitfield:
This letter responds to your fax of April 27, 1999, regarding the application of NASD Conduct Rule 2820(h) to a sales contest sponsored by American Equity Investment Life Insurance Company ("American Equity"). Based on our telephone conversations and the material that you faxed to me, I understand the facts as follows. The sales contest will run from May 1 to July 31, 1999. Under the contest, sales representatives registered with a broker-dealer affiliated with American Equity will have the chance to win either a golf putter, a Daytimer for Windows, or a travel gift certificate if they meet certain sales targets during this period. In order to qualify for a prize, representatives must accept at least three applications for variable annuities issued by American Equity for a total of $100,000 in premiums, or at least three variable universal life applications for a total of $5,000 in target premiums. Representatives are allowed to win only one prize per person, and certain other conditions apply to the contest.
Under Rule 2820(h), variable annuity and variable universal life insurance sales contests that award non-cash compensation to registered representatives of NASD member broker/dealers are prohibited unless they meet certain conditions. Rule 2820(h)(4)(D) permits a non-cash sales contest sponsored by a member for its associated persons, or by a non-member company for associated persons of an affiliated member, provided that: (i) the contest is based on the total production of all variable contracts distributed by the member; (ii) the contest requires that credit received for for each variable contract is equally weighted; (iii) no unaffiliated company participates in the organization of the contest; and (iv) the record-keeping requirements of Rule 2820(h)(3) are satisfied.
You have represented that the broker/dealer affiliated with American Equity only distributes one variable annuity and one variable life product. As discussed in Notice to Members 98-75, because of the substantial differences in design, purpose, cost structure, commission payouts, and target audience for variable annuity and variable life products, NASD Regulation has determined that the total production and equal weighting requirements may apply separately to variable annuity and variable life products, and they do not need to be combined in the same incentive arrangement. Thus, because the member broker/dealer does not offer any other variable products, the contest does not appear to raise any total production or equal weighting issues.
Of course, the member is still required to meet the record-keeping requirements of Rule 2820(h)(3) with respect to this contest. In this regard, the member must maintain records of all compensation received by its associated persons from American Equity, including the names of the recipients and the nature and value of the prizes awarded.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues that you have raised based on the facts you have described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
If you have any questions, please do not hesitate to call me at (202) 728-8233.
Joseph P. Savage
Advertising/Investment Companies Regulation