Changing regulations mean EIA compliance challenges

As new annuity rules continue to develop, chief compliance officers at broker-dealers say that they still face some challenges in implementing compliance procedures with their financial advisers.

Regulatory changes are flying fast at compliance departments, as the Financial Industry Regulatory Authority Inc. of New York and Washington and the Securities and Exchange Commission consider how they will treat insurance products — particularly equity index annuities — and expand their jurisdiction into more areas of financial planning.

As a result, compliance officers at broker-dealers have been fighting to keep up with the developments and to ensure that advisers and clients don’t become overwhelmed in the annuity sales process.

The topic was the subject of a panel discussion at NAVA’s Government and Regulatory Affairs Conference last week in Washington. NAVA, the variable annuity trade association, is based in Reston, Va.

“[Annuity] suitability is important when you have to prove to yourself, or to an arbitration panel, that they’re suitable,” said Kathy Vannoy Pineda, compliance chief at Boston- and San Diego-based LPL Financial’s institutions services channel. She was a featured speaker on the panel.

“Registered representatives sell these, but they can also be sold by advisers wearing a fiduciary hat,” Ms. Pineda said. “They’re regulated by different regulators, and that’s a big part of why we have the result of making our financial advisers a bit crazy.”

In order to deal with the difficulties of the annuity sales process, many firms developed electronic forms for registered reps and principals to use in expediting consumer applications.

Such a form has been available to advisers at Wells Fargo Advisors LLC in St. Louis for the past six to eight years, said panelist Todd Thompson, vice president and compliance manager at Wachovia Corp., which is now part of Wells Fargo & Co. of San Francisco.

The firm’s use of the online annuity form predates the implementation of a provision of Finra’s Rule 2821 on annuity suitability, which requires reps to detail the considerations that they use when recommending a variable annuity and calls upon registered principals to review the completed applications within seven business days, he said.

In the past, advisers had blasted that rule for making annuity recommendations even more paper-intensive.

But the case was different at Wachovia, Mr. Thompson said.

“We were in a fairly good situation to comply with the requirements of 2821, and we were already gathering most of the data,” he said. “We had been fortunate enough to overlay suitability review and compliance control aspects into the work flow.”

PAPER PREFERENCE

Nevertheless, not all firms have fully mandated the use of electronic applications.

LPL, which has been training its advisers, has experienced some resistance from those who are accustomed to using a paper format, Ms. Pineda said. “It makes their lives that much easier when they switch [to the electronic format]; they get an approval right away,” she said.

Despite the new technological developments that ease the annuity sales process, there are still some difficulties in assessing rider suitability — a key compliance point with Finra’s Rule 2821. The complexity of the riders, as well as the fact that different companies can produce similar riders, makes it difficult to perform an apples-to-apples comparison of the features, Mr. Thompson said.

John Hancock Financial Services Inc. has implemented a system to simplify the side-by-side comparison process, Thomas Horack, assistant vice president of compliance at the Boston-based firm, said during the panel discussion.

Going forward, the compliance officers said that they expect the issue of suitability versus fiduciary to heat up.

Finra staff members who were present at the NAVA conference last week, including chief executive Richard Ketchum, said that the difference in the standards — one that applies to broker-dealers and the other that applied to investment advisers — must be resolved.

“Two different standards is simply untenable in this world for persons engaging in very similar activities,” Mr. Ketchum said during a keynote address at the conference.

“DISCLOSE EVERYTHING’

“What you’re trying to do is the best thing for the customer; you disclose everything,” Mr. Horack said. “I think that’s a big issue for the next year or so.”

A number of situations can complicate just how the matter would be resolved. For instance, Ms. Pineda asked how advisers who are also registered reps and licensed insurance agents would be affected when a client wants to buy an equity index annuity from them.

“It will be interesting to see this come out and to help make sense out of it,” she said.

E-mail Darla Mercado at [email protected].