areas of focus

FIRMA NATIONAL RISK MANAGEMENT TRAINING CONFERENCE

BDIA HOT TOPICSAPRIL 29, 20099:15 AM – 10:15 AM

2Preventive Compliance Meeting Confidential Copyright 2007 FINRA

Areas of Focus

FINRA’s 2009 Examination Program


Cash Alternatives

Sales of Securities in a High Yield Environment

Sales Practice Issues


Protection of Senior Investors and Baby Boomers is a FINRA Priority

A growing number of our nation’s investors are at or near retirement age

75% of the nation’s consumer financial assets are held by someone who is 50 or order

Senior Investors


Securities regulators have been concerned with the use of “free lunch” sales seminars

SEC, NASAA and FINRA conducted a joint sweep

Senior Investors – Sales Seminars


Of all examination conducted, the finding were:

5 or 4 % found no problems or deficiencies.

63 or 57% found that firms used advertising and sales materials that may have had misleading

59% found indications that firms had poorly supervised sales seminars

23% found indications of unsuitable recommendations

13% found indications of possible fraudulent practices

Senior Investors – SEC, NASAA, FINRA Sweep Findings


Best Practices Identified in the Sweep

Centralizing the process

Timeframes for supervisory review and approval

Home office review and approval prior to use

Seminar guest speakers to be reviewed and approved

Senior Investor – Best Practices


Best Practices Identified in the Sweep

Two levels of supervisory approval

Written Guidance

Branch Managers attend seminars

Marketing materials created at a central level

Senior Investor – Best Practices


Broker-Dealers must provide certain sales material to FINRA

Advertisements and sales literature concerning mutual funds and variable annuities must be submitted for review within 10 business days of first use or publication (NASD Rule 2210(c)(2)(A)).

Senior Investors–Rule Considerations NASD Rule 2210


Sales literature must be approved by a registered principal prior to the seminar

Firm must maintain all sales literature in a separate file for three years

File must include the name of the registered principal that approved the seminar

Broker-dealer must also maintain information concerning the source of any illustrative data

Rule Considerations: NASD Rule 2210 (b) and NASD Rule 472 (d)


NASD Rule 2310 requires that a member shall have reasonable grounds for believing that a recommendation is suitable

Regulatory Notice 07-53

New NASD Rule 2821 regarding broker-dealers' compliance and supervisory responsibilities for deferred variable annuities.

Effective Date: May 5, 2008

Rule Considerations: NASD Rule 2310 and NASD Rule 2821


Online WorkshopCompliance Practices to Protect Senior Investors at finra.org / Education Programs

E-Learning Course Senior Investor Suitability Considerations

at finra.org / Education Programs

Report of Examinations of Securities Firms Providing “Free Lunch” Sales Seminars at finra.org / Reports

Senior Investors Regulatory Notice 07-43

Resources

13Preventive Compliance Meeting Confidential Copyright 2007 FINRA 13

Variable Annuities

A contract promising periodic payments (annuitization)

Variable rate of return

Features: Tax-deferred treatment of earnings Death benefit Annuity payout options Living benefits

Accumulation phase

Distribution phase

Deferred versus immediate annuities


Applicable Rules

General suitability rule (NASD Rule 2310)

Supervision and supervisory controls (NASD Rules 3010 and 3012)

Deferred variable annuities (NASD Rule 2821) Paragraphs (a), (b) and (e) are effective May 5, 2008

Effective date of NASD Rule 2821 paragraphs (c) and (d) have been deferred


NASD Rule 2821

Applies to purchase and exchanges Does not cover sales or surrenders Applies to purchases to fund IRAs Does not apply to purchases in employer-sponsored plans, unless recommendation made to an individual plan

participant

Four main requirements: Recommendation requirements Principal review and approval Firm supervisory procedures Firm training program


Registered Representative Responsibilities

Reasonable basis to believe that purchase or exchange is suitable, based on:

Customer has been informed of material features Customer would benefit from one or more features Annuity as a whole is suitable; underlying subaccounts, and any riders or similar product enhancements are

suitable

Document and sign determinations

Reasonable efforts to obtain and consider customer information, including:

Customer’s age, income, financial situation, needs, investment experience, investment objectives, intended use of the deferred variable annuity, existing assets, liquidity needs, liquid net worth, risk tolerance, tax status, investment time horizon


Added Responsibility If Recommending An Exchange

Consider implications of Surrender charges New surrender period Loss of existing benefits Fees or charges

Consider benefits from product enhancements and improvements

Consider any previous exchange within last 36 months


Registered Principal Responsibilities

Review each purchase and exchange application before sending to insurance company for processing

Effective date extended

These provisions may change


Broker-Dealer Firm Responsibilities

Supervisory procedures Procedures reasonably designed to achieve compliance with rule Surveillance procedures to identify high volume of exchanges Procedures to address and correct non-compliant exchanges Automated supervisory systems may be used

Training requirement For reps who sell deferred variable annuities For registered principals who review transactions Must cover material aspects of deferred variable annuities


FINRA Training Resources

Variable Annuities: Principal Review (webcast or e-learning)

Variable Annuities: Suitability Issues (webcast or e-learning)

Variable Annuities: Sales Practice Issues for 1035 Exchanges (e-learning)

Variable Annuities: Suitability and Disclosure for New Products (e-learning)

Variable Products: Suitability, Disclosure and Supervision (1-day course)

See www.finra.org/education for more information

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Questions?

areas of focus

Documents