Financial Industry Regulatory Authority recently released Regulatory Notice 16-12 to provide guidance to firms on their responsibilities for sales of pension income stream products. Contracts for pension income stream products involve at least three parties: the pensioner, the investor and a pension purchasing company that facilitates the sale, which may use a member firm and its associated persons to sell these products to investors. In those circumstance, the sales are subject to applicable FINRA rules.
Pension income stream products present a number of investor protection issues, including: (1) significant commissions to purchase the products, (2) illiquidity, and (3) because federal laws prohibit the assignment of particular pension benefits, a pensioner is typically only bound by contract to make the future payments to the investor. As a result, if a pensioner stops making monthly payments, an investor may be left with only a breach of contract claim.
Pension income stream products also may present a number of issues for pensioners, including: (1) pension purchasing companies may not clearly disclose the costs and terms of the product, (2) pension purchasing companies may present confusing offer terms, thereby making it difficult to understand the product, and (3) pensioners may not understand that they may be required to obtain a life insurance policy and that the payments for the policy are subtracted from the lump-sum payment.
Additionally, pension purchasing companies may attempt to circumvent federal and state laws by asserting that pension income stream products are neither a security nor a loan. Whether a particular pension income stream product is a security is dependent on the facts and circumstances specific to that product. FINRA stresses, however, that if a member firm treats a pension income stream product as a non-security when in fact it is a security, it risks violating FINRA rules that impose specific obligations on securities activities. More specifically, if a firm mischaracterizes an income stream product and treats it as an outside business activity under FINRA Rule 3270, rather than a private securities transaction under FINRA Rule 3280, there can be serious ramifications, including: failure (1) to supervise sales of the product, and (2) of the obligation to make sure that all persons engaged in the marketing and sale of such products are appropriately qualified and registered.
As a result of the investor protection issues and regulatory concerns that may arise in the marketing and sale of pension income stream products, member firms that participate in the sale of pension income stream products should adopt procedures and training of associated persons with respect to such products.
The full regulatory notice is available here.