Interpretive Letter to Marc Menchel, Menchel Consulting LLC
A member firm that routes an unsolicited customer order for a variable life settlement to another member firm that is permitted to engage in such activity would not constitute a material change in the routing firm’s business operations that would require it to file a continuing membership application, provided that the stated conditions are satisfied.
February 24, 2016
Mr. Marc Menchel
Menchel Consulting LLC
9464 Deramus Farm Court
Vienna, VA 22182
Re: Request for Interpretive Guidance on NASD Rule 1017 and Regulatory Notice 09-42 Regarding Variable Life Settlements
Dear Mr. Menchel:
By letter dated February 22, 2016, you request guidance, on behalf of FINRA member Welcome Life Securities (WLS), as to the meaning of being "engaged in the business of variable life settlements" such that it would constitute a "material change in business operations" under NASD Rule 1011(k) requiring the filing of a continuing membership application (CMA) pursuant to NASD Rule 1017, as set forth in FINRA Regulatory Notice 09-42 (July 2009).
You state that WLS is a registered broker-dealer and FINRA member. You further state that WLS's membership agreement allows it to engage in variable life settlements. You posit that some FINRA members with membership agreements allowing them to sell variable life insurance or annuities but not to engage in variable life settlements (Routing Firms) question whether routing variable life settlement business to members allowed to engage in that activity (Executing Firms) would require Routing Firms to file CMAs.
In this regard, FINRA Regulatory Notice 09-42 (July 2009), states that "expansion into business activities related to variable life settlements constitutes a material change in business operations under NASD Rule 1011(k)." The Notice further provides that, "before engaging in variable life settlements, a firm must first file a [CMA] and receive approval of this change in business operations under NASD Rule 1017."
You believe that a Routing Firm should be allowed to route an unsolicited potential customer order for a variable life settlement to an Executing Firm without having to file a CMA if all of the following five conditions are met:
- The routed potential variable life settlement order is unsolicited.
- The total compensation for the transaction being charged by the Executing Firm is price advantageous over a surrender or lapse of the policy and that all remuneration being charged by the Executing Firm, including any amounts to be paid to the Routing Firm, are disclosed in advance and in writing to the customer.
- The Routing Firm verifies that the Executing Firm may engage in variable life settlements, as reflected on FINRA BrokerCheck® under the heading of "Firm Operations Types of Business" with a description that the firm will provide life insurance settlement broker services or some equivalent description with the same import.
- Every potential customer receives in writing from the Routing Firm the following written disclosure prior to routing the variable life settlement business -
[Name of Routing Firm] does not provide direct life settlement broker services. Therefore, upon your approval and acknowledgement below, we will refer your potential transaction to [Name of Executing Firm], a broker-dealer that specializes in this market. [Name of Routing Firm] may be paid a referral fee of up to [___] % of the total fee charged for the sale by [Name of Executing Firm]. The exact dollar amount charged by [Name of Executing Firm] and the referral fee paid to [Name of Routing Firm] will be disclosed to you in writing prior to the completion of the transaction. You are under no obligation to complete a sale and may accept or reject a potential contract at any time prior to execution of a contract based on this information or any other information set out in the sales contract.
- Every potential customer receives in writing from the Executing Firm, prior to executing any contract for the sale of a variable life contract, disclosure of the exact dollar amount charged by the Executing Firm and the referral fee paid to the Routing Firm, as well as disclosure that the potential customer is under no obligation to complete a sale and may accept or reject a potential contract at any time prior to execution of a contract based on this information or any other information set out in the sales contract.
Sales of existing life insurance policies to third parties - referred to as variable life settlements - involve materially different factors and raise materially different issues than more widely held securities such as stocks or bonds. FINRA has highlighted these differences and broker-dealers' sales-practice and other obligations regarding variable life settlements in a number of Regulatory Notices.1 Broker-dealers engaged in variable life settlements must adhere to that previous guidance and must comply with all applicable laws and rules. Here, however, the question is not what a broker-dealer's obligations are when it engages in variable life settlements, but rather whether a Routing Firm is engaged in variable life settlements such that it constitutes a material change in business operations for purposes of NASD Rules 1011(k) and 1017.
FINRA agrees that a Routing Firm that satisfies the five conditions delineated above may route an unsolicited potential customer order for a variable life settlement to an Executing Firm without having to file a CMA based on a material change in business operations.
We trust that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them and NASD Rules 1011(k) and 1017, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved. In addition, you should be aware that any changes in the facts as you have described them or any amendments to NASD Rules 1011(k) or 1017 will require further consideration and may cause us to reach a different conclusion. If you have any questions on this matter, please contact me at (202) 728-8270.
James S. Wrona
Vice President and
Associate General Counsel
cc: Jeffrey Pasquerella - Sr. Vice President and Regional Director
1. See, e.g., Regulatory Notice 09-42 (July 2009); Notice to Members 06-38 (Aug. 2006).