FIRMA NATIONAL RISK MANAGEMENT TRAINING CONFERENCE BDIA HOT TOPICS APRIL 29, :15 AM – 10:15 AM

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 1  Areas of Focus FINRA’s 2009 Examination Program

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 2  Cash Alternatives  Sales of Securities in a High Yield Environment Sales Practice Issues

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 3 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 4  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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 5 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 6 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 7 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 8  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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 9  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)

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 10  NASD Rule 2310 requires that a member shall have reasonable grounds for believing that a recommendation is suitable Regulatory Notice  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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 11  Online Workshop Compliance 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 Resources

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 12 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 13 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 14 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 15 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 16 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 17 Registered Principal Responsibilities  Review each purchase and exchange application before sending to insurance company for processing  Effective date extended  These provisions may change

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 18 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

Preventive Compliance Meeting  Confidential  Copyright 2007 FINRA 19 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 for more informationwww.finra.org/education

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