New regulatory moves have stirred as much controversy in our industry during the past year as has "05-50," the National Association of Securities Dealers (NASD) Notice to Members 05-50 Equity Indexed Annuities -- Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities. This edict has created many questions and uncertainties -- for you, for your broker dealer, and perhaps even for your clients. In fact, the leading indexed annuity carrier announced major home office staff layoffs this past summer as a result of declining sales blamed in part on this regulatory uncertainty. You are not alone if this affected your willingness or your ability to offer indexed annuities to your clients. So what do you do now?
In the 16 months since 05-50 came out, I have spoken with well over 100 broker dealer firms and hundreds of individual registered representatives. It's easier to understand the changes occurring if you stand in the shoes of your broker dealer's compliance principals. Getting some quality indexed annuity education is the best thing you can do for yourself and your broker dealer. Some annuity marketing organizations and insurance companies are excellent resources.
Let's review the landscape and your options for selling indexed annuities. See if you recognize yourself in any of these scenarios.
Mr. Big Annuity Producer
If indexed annuities are the majority of your income and your broker dealer now requires you to do your indexed annuity business under firm supervision, you have a tough business decision to make. To preserve your indexed annuity compensation and to keep a wider selection of "approved" indexed annuity products to sell, you may need a new broker dealer. There are some BDs who are entering marketing relationships that allow you to be paid full "street commissions."
Before you take that major step, try to introduce your current annuity marketing organization to your broker dealer. What's the value of your ability to sell investment products compared to the value of your primary indexed annuity practice? I do not recommend that you lapse your NASD registration. With a little work, you can find a broker dealer that will provide you with a wider product selection and your usual compensation if your BD doesn't want to help you.
Ms. Full-Time Adviser
If your investment sales are the majority of your income and your broker dealer relationship is satisfactory, you probably will find a way to live with the indexed annuity supervision regime of your BD. The "haircut" to your compensation is not severe and you can keep most of your current indexed product selection. Your primary concern may be the service on your indexed annuity business going forward. Ask your broker dealer if you can continue to work with your current annuity marketing organization. You'll learn a lot about the flexibility and capabilities of both when you do this. If your BD values your investment and annuity business, it can find a way to supervise your sale and not disrupt your indexed annuity practice.
Ms. Sometime Adviser
If your investment sales are only incidental to your primary insurance and annuity practice, you may have to find a new broker dealer, one that is willing to work with a registered rep who does not write a substantial volume of investment sales. Don't expect to find a BD that doesn't supervise indexed annuities and doesn't require much for investment sales volume (e.g. at least $25,000 annual gross dealer concession, or "GDC"). On the other hand, a BD that does permit lower investment sales might not reduce your indexed annuity compensation. Instead they might count your indexed business toward the BD firm's total production and give you a higher production-based payout rate on both investment and indexed business.
Mr. Regular Replacement
If your practice frequently involves the replacement of investment products like variable annuities, mutual funds, and brokerage accounts with indexed annuities, you will be living even more dangerously going forward. The NASD expects broker dealers to enforce client suitability requirements, particularly for investment replacements. Your future replacements will require documentation of real client benefits from the future replacement sale. The NASD does not view replacements favorably and the burden of proof is on the registered rep and the BD. Talk to your BD's compliance officer about specific replacement requirements, especially as they may relate to investment product replacement with indexed annuities.
Mr. Independent Producer
You may be a financial practitioner who values independence enough to react angrily to your BD's new indexed annuity supervision requirements. Does your BD truly value the flexibility and practice independence that its reps enjoy, or does your firm dislike indexed annuity product sales? If your firm requires as much or more supervision for indexed annuities than it does for variable annuities, it may be telling you that it wants variable annuities much more than indexed annuities.
The NASD has not required that variable annuity rules for suitability and other issues also be applied to indexed annuities; nor has it required that your firm "haircut" your indexed annuity sales. If your firm has 100 variable annuities on the "approved" list but only 10 indexed products, that tells you something. On the other hand, if your firm permits indexed annuities with 10 or 12 years of surrender charges, thinks an A- Best rating is adequate, and will review new indexed products you submit to them, you should consider staying right where you are now.
Ms. Insurance-Only Agent
For those of you who are not registered representatives, 05-50 does not affect you. We may see additional state insurance regulation of indexed annuity sales in the next few years, but until that happens, your indexed annuity sales need only meet existing state licensing, marketing, and suitability requirements, and perhaps other state regulations.
The NASD and the National Association of Insurance Commissioners met last May to discuss how to coordinate the regulations for marketing fixed indexed annuities and variable annuities. These coordination efforts are continuing. Expect to see additional state licensing or continuing education requirements for indexed annuity sales, as well as additional supervision responsibilities for indexed annuity carriers.
Mr. Seminar Specialist
If your practice is built on client seminars, you'll likely have issues with your BD going forward. If your BD has begun indexed annuity sales supervision, it will require that you submit your indexed annuity seminar for compliance review and approval -- even if you do not discuss investment products or concepts in the seminar. This will probably change your presentation in some important ways.
Many BDs have their own approved seminar programs and many will review and approve seminars submitted to them. You'll now have to meet the BD's particular disclosure requirements at a minimum. If you're thinking of changing BDs, you'll want your prospective new BD to review and comment on your seminar program before you actually transfer firms.
Ms. Direct Marketing Maven
If you do volumes of direct mail to obtain prospects for fixed indexed annuity sales, and your BD now supervises such sales, it will require compliance approval of your direct mail pieces. Perhaps your direct mail firm has worked with investment reps previously and can help you. Does your direct marketing firm or broker dealer already have compliance-approved pieces? How flexible is your BD? If you decide you need a new BD, put your indexed annuity practice up front. You may want to submit to some product restrictions or compensation reduction to keep your NASD license and your indexed annuity practice.
Compliance Decision Factors for BD Firms
Notice 05-50 says that "firms must adopt special procedures" for indexed annuity sales. Your BD will evaluate and decide what it must do about compensation, product availability and approval, case processing, suitability, replacements, and training. I believe that the NASD is less concerned about rep compensation and product selection than it is about sales supervision. The BD should be in a position to evaluate whether your particular indexed annuity sale is suitable. It should also look closely at replacements, especially investment replacements. The NASD does not require that you consider an investment product for sale before you look at an indexed annuity.
Practice Decision Factors for Registered Reps
As a registered rep selling indexed annuity products (and some experts believe that as much as 50% of all indexed annuities are sold by registered reps), you want your BD to respect this side of your practice and impose only as much supervision as NASD compliance regulations (and Notice 05-50) reasonably require. You obviously don't want to sacrifice compensation, and you don't want a narrow selection of "approved" indexed products. You'd like your firm to require only a copy of your case paperwork (along with any firm required documents) instead of the original paperwork.
Perhaps your firm can form a marketing alliance with those annuity marketing organizations that provide you with the services you now find valuable. Ironically, Notice 05-50 implicitly recognizes the client benefit and industry value of a principal-protected product like the indexed annuity.
What If Your BD Does Not Supervise Indexed Annuity Sales?
If your BD has made no announcement of indexed annuity supervision, it is probably just a matter of time. The notice did not set a time limit for implementation. Many firms that have made no supervision announcement are developing indexed annuity supervisory programs. No BD firm really wants to be empty-handed about indexed annuities for their next NASD exam.
Some firms still do not recognize that their own registered reps sell indexed annuities. Future exams or complaints will quickly wise them up. If your firm doesn't supervise today, that's your good luck. If you are looking at transferring to a BD that does not supervise indexed annuities today, remember that it may not stay that way. If you are searching for an "indexed annuity friendly" broker dealer, choose one with a supervision regime you can live with and avoid those that have not made a decision. You don't want to be too smart by half.
There are BDs with "friendly" indexed annuity supervision programs. Your sales will be supervised -- recognize and live with that fact. You can find BD firms that allow you to continue to earn your existing commissions and sell your favorite products. Some of these firms work with annuity marketing organizations to provide services and support that you are accustomed to receiving.
The Last Word (For Now)
We can argue at length about whether the indexed annuity is an insurance product or an investment product. Under present law, I believe it clearly is an insurance product; the Securities and Exchange Commission will not declare it to be an investment product.
On the other hand, the NASD has asserted its supervisory authority over the sales activities of registered representatives. If you are a registered rep, your BD can mandate that it supervise your sales of non-investment products. To think that you can ignore your BD's indexed annuity supervision requirements because the product is not a registered investment is both wrong and dangerous. You can be late paying your taxes and still remain a U.S. citizen, but you cannot ignore this compliance supervision, sell indexed annuities as before 05-50, and remain a registered rep. There is no indexed annuity probation or amnesty for those who are now selling away.
Paul McGillivray, JD, is advanced marketing vice president for Creative Marketing International Corporation. His 26 years of industry experience include serving as a marketing and recruiting officer for two life insurance companies, and as a principal of a NASD-registered broker dealer. He joined CMIC in 2000.
