Another Delay for Parts of “Suitability” Rule
April 28, 2008
The Financial Industry Regulatory Authority (FINRA) has asked the Securities and Exchange Commission (SEC) to delay the effective date of paragraphs (c) and (d) of Rule 2821 until after the SEC has approved or rejected a “substantive rule change” to Rule 2821 that FINRA intends to request in the near future.
The effective date for the two paragraphs will be at least 180 days after the SEC acts on the new, unfiled, request. The other three sections of the rule will take effect as scheduled on May 5, 2008. The effective date of paragraph (c) had already been postponed until August 4, 2008. Compliance with paragraph (d) had been scheduled for May 5.
Paragraph (c) of Rule 2821 requires that within seven days after a customer signs a variable annuity application, a registered principal of a broker/dealer must review the sale for "suitability." In practice, that often means making sure that the client is not too old for a deferred annuity, has sufficient assets outside of the annuity, and isn’t paying too high a commission.
Paragraph (d) requires FINRA member firms to monitor their registered representatives for signs of churning variable annuity contracts through excessive 1035 exchanges.
FINRA did not describe the anticipated “substantive rule change.” It “is not included in this proposed rule change, but will be the subject of a separate filing with the SEC,” FINRA’s recent announcement said. Paragraph (c), in its current form, remains problematic because it disallows the common industry practice of putting client premiums in a “suspense” account at the insurer before the broker/dealer has determined the suitability of the sale.
Rule 2821 was first proposed in 2004, but was amended three times over the next three years in response to industry requests before it was approved by the SEC in 2007.
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