Quest CE

On April 15, 2009, the SEC approved amendments to NASD Rule 2821 governing purchases and exchanges of deferred variable annuities.

Rule 2821 establishes sales practice standards regarding purchases and exchanges of deferred variable annuities.  The rule addresses four main areas of concern.

•    The rule has requirements governing broker recommendations, including suitability and disclosure obligations.
•    It includes various principal review and approval obligations.
•    The rule requires member firms to establish and maintain supervisory procedures reasonably designed to achieve compliance with the standards set forth in the rule.
•    The rule has a training component.

The recommendation and training sections currently are effective. The effective dates of the principal review and supervisory procedures sections were extended to give the SEC time to consider amendments that FINRA filed after careful consideration of public comments.

On April 15, 2009, the SEC approved those amendments, which become effective on February 8, 2010.  The amendments, among other things, limit the rule’s application to recommended transactions, change the triggering event that begins the principal review period, and clarify various other issues through new supplementary material to the rule.

Prior to the amendments, paragraph (c) of NASD Rule 2821 would have required principals to treat “all transactions as if they have been recommended for purposes of this principal review.” After considering the public comments, FINRA proposed, and the SEC approved, limiting the rule’s application to recommended transactions.

Under the earlier version of paragraph (c) of NASD Rule 2821, principals were required to review and determine whether to reject or approve a deferred variable annuity transaction no later than seven business days after the customer signed the application.

Based on the public comments, FINRA proposed, and the SEC approved, modifying the beginning of the period within which the principal must review and determine whether to approve or reject the application. Pursuant to the amendments, the period will begin to run not from the date of the customer’s signature but from the date when a firm’s office of supervisory jurisdiction (OSJ) receives a complete and correct copy of an application.

The supplementary material makes clear, that firms generally allowed to handle and carry customer funds under SEA Rules 15c3-1 and 15c3-3 are not prohibited by NASD Rule 2821 from depositing funds for a deferred variable annuity prior to principal approval.

FINRA also reconsidered the question of whether firms could forward funds to insurance companies for deposit in the companies’ “suspense accounts” prior to principal approval. FINRA has modified its earlier position rejecting such a process, discussed in Regulatory Notice 07-53 (Nov. 2007), and now will allow such action under certain conditions, including, that the insurance company segregate the funds in a manner equivalent to that required of a member firm under SEA Rule 15c3-3.

Quest CE has announced the completion of their new FINRA Rule 2821 training website.

The site, www.FINRA2821Training.com, allows individuals the ability to demo a course and independent brokers and advisors can sign up for training.

The Financial Industry Regulatory Authority has decided to put off enforcing a proposed deferred variable annuity sales review regulation until 180 days after it rewrites the regulation.

The proposed regulation, Rule 2821(c), would require that a FINRA member firm principal review the suitability of each deferred VA application within 7 business days after the customer had signed the application and before the application had been submitted to the insurance company.

“A number of firms asserted that 7 business days beginning from the time when the customer signs the application may not allow for a thorough principal review in all cases,” FINRA officials write in an explanation of the decision to postpone implementation of the proposed rule. “These firms asked that a different timing mechanism be used.”

Some commenters also questioned whether the proposed rule should apply to broker-dealers that do not make investment recommendations to customers and do not employ principals to perform suitability reviews, officials write.

FINRA now is preparing to respond to those concerns and others by proposing “substantive amendments” to Rule 2821 and wants to notify member firms that they can wait until a later date to comply with the rule, officials write.

FINRA is the product of a merger of the National Association of Securities Dealers, Washington, and the regulatory arm of the New York Stock Exchange.

Rule 2821(c) is part of Rule 2821, a package of proposed deferred VA suitability and supervision guidelines, which was approved by the U.S. Securities and Exchange Commission in September 2007.

The rule originally was set to take effect May 5. In January, the SEC let FINRA postpone implementation of Rule 2821(c) until Aug. 4.

The new notice will push implementation back till October or later.

FINRA’s new Variable Annuity Rule requires that financial institutions train their registered representatives on deferred variable annuities. Rule 2821 requires organizations and agents to understand the requirements of the new rule and establish a schedule for compliance training. They must also have a record-keeping system in place.

Developed by industry experts, Quest CE’s Deferred Variable Annuity Training Program allows supervisors and registered representatives to complete the training module online at their convenience. Once a student successfully completes a course, they may print a certificate of completion for their records. Additionally, student progress and completions can be monitored by compliance administrators online, and all records are maintained through Quest CE’s online record-keeping solution.

Quest CE’s Deferred Variable Annuity Training Program was designed to help financial professionals understand the suitability issues that affect the sale or exchange of deferred variable annuities.

With Quest CE’s two training modules, one for supervisors and one for producers, companies can ensure compliance with FINRA Rule 2821.