On May 21, 2008, FINRA filed with the SEC a proposal to amend its suitability rule covering the sale of variable annuities.
The proposal would limit the scope of Rule 2821 to recommended purchases and exchanges of deferred variable annuities and recommended initial sub-account allocations, rather than to all purchases and exchanges. Also, broker-dealers whose principals disapprove applications will no longer have the option of informing the customer of the reason for disapproval, and authorizing the transaction if the customer affirms his or her desire to proceed.
The proposal would require registered representatives to promptly transmit completed and correct applications to a broker-dealer’s office of supervisory jurisdiction (OSJ). In addition, the proposal would require principals to review and approve or reject applications within seven business days of the broker-dealer’s receipt of the application at an OSJ.
The proposed amendments include a “Supplementary Material” section that provides interpretive guidance, including as follows:
- Broker-dealers may forward checks made payable to an issuing life insurance company or, if the broker-dealer is fully subject to Rule 15c3-3 under the Securities Exchange Act, transfer funds to the insurance company prior to principal approval, provided the customer is informed of the proposed transfer(s), and the insurance company, pursuant to a written contract with the brokerdealer, agrees to: (a) segregate the broker-dealer’s customers’ funds in certain qualifying bank accounts that protect the funds from the rights of creditors, and hold only cash or certain other instruments; (b) not issue the variable annuity prior to principal approval; and (c) promptly return the funds to a customer upon the customer’s request or broker-dealer’s rejection of the application; and
- Prior to principal approval, brokerdealers may share the information required for principal review with the insurance company, provided that the insurance company agrees not to issue the contract prior to principal approval.