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Much of the controversy stems from an earlier draft of the notice that circulated throughout the industry. Now, the NASD studiously backs off from opining on whether EIAs are or should be regulated as securities and what properties would make a particular contract more or less likely to be considered a security.
However, the NASD states in the notice that, because of uncertainty regarding the regulatory treatment of EIAs as either securities or insurance, member firms "must [emphasis added] adopt special procedures under Rule 3030 with respect to these products." The earlier draft stated that broker/dealers should adopt such procedures.
"In particular, firms must require that their associated persons promptly notify the firm in writing when they intend to sell unregistered EIAs," the notice reads. "Moreover, all recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity or variable life contract must be suitable, including where such liquidations or surrender are for the purpose of funding the purchase of an unregistered EIA."
Furthermore, the NASD recommends that firms consider expanding their supervision of registered representatives to include requiring all unregistered EIA sales to occur through the broker/dealer. In that event, the firm could then monitor the sales materials and sales practices as they do for registered products. Any firm that allows unregistered EIAs to be sold through the firm must provide "proper training to understand the EIA's features and the extent to which the EIA meets the needs of a particular customer."
