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FINRA Expansion to ALL Recommendations - Securities or Not!

FINRA released a notice late last month asking for comment by June 29th on consolidating Rules Governing Suitability. Particularly troubling is the proposal to expand “suitability obligations to all recommendations of investment products, services and strategies made in connection with a firm’s business, regardless of whether the recommendations include securities.” The notice was issued despite FINRA chief Richard Ketchum's indication that he would not want to significantly alter suitability rules for broker-dealers (Investment News, May 17). Despite this apparent contradiction, the notice is nonetheless a clear attempt to take control – read collect fees - on all product recommendations including life, long term care, health, property & casualty insurance, savings accounts, fixed annuities etc. And, it isn’t just product recommendations it is product, service and strategies. So a suggestion of, say, where to bank, conceivably might require suitability review.

The Rule is just the first step in an obvious strategy to control all activities at the broker dealer. FINRA appears to be oblivious to the real problems of asking a broker-dealer to ensure suitability of a long-term care product. Will they ensure general product knowledge through additional training requirements? Will they ensure specific product knowledge through annual certification testing? Will they require licensing (life, LTC, health etc.)? How will they coordinate with regulators of the various products and services that are not securities? State regulators have already adopted suitability laws based on a unique understanding and knowledge of the products over which they have jurisdiction. What happens when the broker’s suitability review is in contravention to what the state regulators require? Dual regulation, especially when the second is one gained by stealth without legitimate authorization, is a recipe for confusion and expense that will ultimately lead to harmful consequences for the consumer.

Obviously, expanding the suitability obligation is an easier and speedier way than proposing Rule151B-Z, making all of these products securities. But how can anyone who spends 90-95% of their business understanding and making recommendations on over 8,000 mutual funds, almost 3,000 stocks in the NYSE, not to mention bonds and all the other types of securities and managing their clients portfolio filled with their recommendations, be expected to understand the multitude of other products that FINRA would likely categorize as “investment products” enough to determine suitability?

NAFA is frequently asked since Rule 151A was adopted “what’s the big deal?” Typically the question is followed by phrases like “it’s just one product” or “just get licensed.” It is clear that given the Notice’s desire for complete control of all BD activity, it isn’t likely to be just one product or as simple as getting licensed.

But there is more to NAFA’s opposition than FINRA’s product grab beyond securities. The Rule will create unnecessary and duplicative regulation that ultimately will harm consumers because it will be expensive to incorporate and maintain and will severely limit where you may find and from whom you may purchase an annuity.

Another often heard argument made by the media and others in favor of the Rule is that it will ensure suitable sales. To suggest that FINRA or those who sell securities have exclusivity on suitability is highly questionable given their history of sales fraud and misconduct by certain individuals. NAFA would no more suggest that those scandals are indicative of the entire securities field force just as misconduct in an annuity sale is not pervasive among insurance agents. The only real difference between the two is that when the sale in question is a security the client will not likely see their money again whereas with an insured annuity contract, the owner is typically refunded their premium.

Those who have read NAFA’s White Paper on Indexed Products and other publications know that NAFA, its members, and state insurance regulators are committed to a fixed annuity marketplace where consumers fully understand the annuity they purchase, the benefits (both guaranteed and non-guaranteed) they will receive, any and all limitations on those benefits, and any taxes, fees, or surrender charges they will incur if they withdraw money prematurely. The industry supports a thorough suitability review, complete disclosure of all contractual elements and the continual training and education of those who sell. In addition, NAFA member carriers are committed to systemize suitability, disclosure and training supervision and state insurance department have the necessary enforcement tools (both legal and disciplinary) to ensure compliance with state laws that require suitability and marketing disclosure.

There is no doubt that knowing your customer is the cornerstone to suitability; however, as well as knowing your customer you must also follow the fiduciary advice of William Shakespeare - to thine own self be true (Hamlet). - No one can be all things to all people and make suitability determinations on products that are outside your daily business, experience and education. Individuals who sell fixed annuities are in the best position to make a suitability determination of a fixed annuity and individuals who sell securities should make a suitability determination of a security. To ask anyone to determine suitability on all products, services and strategies is like asking an anesthesiologist to determine the suitability of the South Beach Diet when weight loss is desired before surgery. In this example, the anesthesiologist should bring in a dietician and when an annuity strategy is being considered, an agent whose business is selling annuities should be called upon to determine the suitability of the strategy and make suitable product recommendations.

NAFA encourages its members and others who are broker-dealers to submit a comment to FINRA opposing the expansion. You can submit your comments by:

1. Emailing comments to; or

2. Mailing comments in hard copy to:

Marcia E. Asquith
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506

NAFA was created to provide training, education and foster better understanding of fixed annuities including declared-rate, index and payout. It is the only independent, non-profit organization dedicated exclusively to the education and promotion of these unique insurance products.

Kim O'Brien
Executive Director
2300 E Kensington Blvd
Milwaukee, WI 53211

415-946-3532 (fax)

NAFA * 2300 E. Kensington Blvd * Milwaukee, WI 53211 * 888-884-NAFA
NAFA is the National Association for Fixed Annuities. NAFA was created to foster a better understanding of all fixed annuities, regardless of interest creditin strategies. It is the only independent, non-profit organization dedicated solely to the promotion and preservation of these unique products. Permission to distribute and/or reproduce this document for NAFA members may be given upon request. Any unauthorized distribution is strictly prohibited.

Last Updated: 6/3/2009 5:40:00 PM