Interpretive Letter to Thomas E. Hellings, Securities America, Inc.
August 31, 2000
Thomas E. Hellings
Senior Compliance Examiner
Securities America, Inc.
950 N. Kings Hwy, Suite 103
Cherry Hill, NJ 08034
Re: Sales of Variable Annuity Bonus Products
Dear Mr. Hellings:
This letter is in response to your letter of June 7, 2000 in which you seek guidance regarding sales of variable annuity bonus products by Securities America, Inc. ("Securities America") and the appropriateness of such sales under current NASD rules and regulations.
In your letter, you state that Securities America is proposing to sell a new variable annuity bonus product to individuals holding existing variable annuity bonus products in tax-qualified accounts. An individual would transfer funds from his or her existing variable annuity bonus product pursuant to a free withdrawal provision to a new account and receive a "bonus" equal to 4-5% of the amount deposited. According to your letter, the primary intent of effecting such a transaction is for an individual to increase the amount of his or her assets by the amount of the bonus received for transferring funds to the new account. A secondary benefit for an individual would be a potential increase in the overall death benefit protection for the individual if the amount transferred to the new contract represented investment gains that are not afforded death benefit protection under the initial contract. Your letter also sets forth the basic parameters that would apply to such transactions.
Variable annuity contracts are securities, and accordingly, their sale (including the transfer of customer funds from one contract to another contract) is subject to NASD rules. Of particular importance are NASD Rules 2310 (Suitability) and 3010 (Supervision). NASD Rule 2310 requires that a member, in recommending to a customer, the purchase, sale or exchange of any security, have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his or her other security holdings and as to his or her financial situation and needs. Paragraph (b) of Rule 2310 requires a member to make reasonable efforts to obtain certain information about an individual so as to be able to make a suitability determination.
With regard to the proposed sales described in your letter, we are of the view that Securities America must make an independent suitability determination for each customer based on such customer’s information, including his or her financial status and investment objectives. Securities America also must ensure that it has appropriate procedures in place to achieve compliance with its supervisory responsibilities under NASD Rule 3010. In this regard, NASD Regulation has issued several Notices to Members that address the application of NASD rules to sales of variable contracts.1
These Notices assist members in establishing procedures necessary to sell these highly complex products and to make appropriate suitability determinations. The guidelines focus on the need for members to (1) obtain comprehensive customer information; (2) require careful review of accounts by principals; and (3) provide potential customers with accurate disclosure of sales charges and other fees, tax implications, and expected benefits.
Please also refer to a brochure published by the Securities and Exchange Commission entitled "Variable Annuities: What You Should Know," which is available on the SEC’s Web site at www.sec.gov.
I hope this letter responds 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 as described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Kosha K. Dalal
Assistant General Counsel
NASD Regulation, Inc.
|cc:||Thomas Clough, District Director
NASD Regulation, Inc., District 4
1See, e.g., Notice to Members 00-44 (July 2000) (reminding members of their responsibilities regarding the sale of variable life insurance); Notice to Members 99-35 (May 1999) (providing guidance to assist members in developing appropriate procedures relating to deferred variable annuity sales to customers); and Notice to Members 96-86 (December 1996) (reminding members that sales of variable contracts are subject to NASD suitability rules).