South Region Compliance Seminar December 2-3, 2015 | New Orleans, LA Variable Annuities Procedures Practices and Findings

South Region Compliance Seminar  © 2015 FINRA. All rights reserved. Moderator:  Neivon Morantez, Principal Examiner, FINRA New Orleans District Office Panelists:  Mitchell Atkins, Founder and Principal, FirstMark Regulatory Solutions, Inc.  Penny Blackwell, Deputy Regional Chief Counsel, FINRA Enforcement  Ronald King, Chief Compliance Officer, Capital Investment Brokerage, Inc.  Julie Preuitt, Assistant Regional Director, U.S Securities and Exchange Commission 1 Panelists

South Region Compliance Seminar  © 2015 FINRA. All rights reserved. FINRA  2015 Exam Findings –Supervisory Deficiencies  Multiclass Variable Annuities >Supervisory Deficiencies/WSPs >Disclosures >Exception Reports >Training  Exchange Transactions >Compliance with rule 2330 (d) >Manual Systems vs Automated Monitoring 2 FINRA Exam Findings

South Region Compliance Seminar  © 2015 FINRA. All rights reserved. FINRA  2015 Exam Findings – continued –Suitability Concerns  Rider Compatibility >Share Class >Time Horizon  Formal Actions vs. Informal Actions –What Factors Are Considered? –When Are Suitability Charges Considered? 3 FINRA Exam Findings

South Region Compliance Seminar  © 2015 FINRA. All rights reserved. SEC  VA Focus Areas for Policy Divisions  Typical Enforcement/Examination Findings  Rollover Issues 4 SEC – Exam Findings

Creating Effective Compliance Programs Covering Variable Annuity Share Classes FINRA South Region Compliance Seminar New Orleans, Louisiana December 2015 © 2015 FirstMark Regulatory Solutions, Inc., All rights reserved. 5

2 Creating Effective Variable Annuity Share Class Compliance Programs. Stage 2 Current State Review current written supervisory procedures to determine if VA share classes are discussed / discussion is adequate. Review existing key documents and forms Review product due diligence process for vetting products and variations on products Review sample of transactions Stage 3 Stage 4 Gap Analysis Gather information on existing guidance and FINRA/SEC cases Gather information from VA companies Review media articles Peer discussions Compare existing processes, procedures, and forms to information gathered Implementation Present draft WSP amendments for approval Revise Forms and Disclosures Conduct training for appropriate personnel Conduct follow-up testing and verification that new procedures are being effectively implemented Stage 1 Gather Input Discuss processes with due diligence principal / identification of variations Forms changes - new accounts principal(s) Product vendors - rider limitations –rider criteria Recommended WSP changes with CCO / other constituents Advertising principal / © 2015 FirstMark Regulatory Solutions, Inc., All rights reserved. 6

© 2015 FirstMark Regulatory Solutions, Inc. All rights reserved. Key Aspects of Compliance – VA Share Classes Written Procedures and Supervision (FINRA Rule 3110) “Reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA Rules.” – Due diligence process and resulting actions – Input of various departments (e.g., compliance, operations, sales and marketing) – Suitability of recommendations – circumstances under which various share classes and riders are and are not appropriate (time horizon, liquidity needs, reason for selecting share class and riders) – NASD Notice “+” – Complaint handling – patterns of complaints in share classes or riders – Documentation maintained about rationales – these are complex products Representative notes – critically important to document rationale for purchase Product comparison in exchange transactions w/ rationales for exchange and fee disclosure Design forms to include rationales and disclosures as appropriate 7 Objective: To ensure that new and existing products are sold in a compliant manner by approaching from several business and compliance angles.

© 2015 FirstMark Regulatory Solutions, Inc. All rights reserved. Key Aspects of Compliance, Cont. 8 Written Procedures and Supervision (Continued) – Evidence of suitability review of recommendations (product level, sub-account level, share class level, riders) – Red flags (e.g., rep only sells one share class, long term riders w/ short term shares, clients with no need for income, long term horizons, etc.) – automated surveillance reports helpful – Continuing Education Training Plan / Needs Analysis – Communication guidelines regarding riders and share classes – Conflicts mitigation – whether compensation structure creates conflicts and how the firm mitigates – Testing – a system to periodically test and verify whether the procedures and controls in this area are adequate – FINRA Rule 3120 – Branch audits might include a review of share class suitability as appropriate – Use of forms and disclosures with client purchases – Records and Blotters or other methods of identifying and reviewing share class recommendations – Hiring – review of representative’s activity in on-boarding process / follow-up

© 2015 FirstMark Regulatory Solutions, Inc. All rights reserved. Key Aspects of Compliance, Cont. 9 New Product Due Diligence (NASD Notice to Members 05-26) – Product Variations - New share classes and riders (or changes to existing) Training – Representatives and Supervisors – New product features: share classes, fees related to each class, suitability profile for each share class, variance in surrender period and charges – Optional features: riders, including charges and features – Examples of client profiles for which specific share classes may and may not be suitable Forms and Disclosures – New account form / VA purchase form prompts for share class and rider selection, along with rationale – Client share class and rider disclosure (often client signs – may be part of new account form) – Clear disclosure of fees (including M&E and surrender charges) associated with the share class – User friendly – blocks certain riders with incompatible share classes, or requires special disclosure to client Communications with the Public – Retail Communications – Ensure that principals reviewing communications are trained in features of VA products being sold, including share classes and riders; review for proper characterization in communications – Electronic communications – consider updating flagging keywords to include triggers related to riders and share classes. Ensure those reviewing electronic communications are trained in share class issues

South Region Compliance Seminar  © 2015 FINRA. All rights reserved. CIG’s Process and Procedures 10 Capital Investment Group