Comment Letter on Annuity Contract Exchanges Unclear, Insurers Say

After a recent SEC interpretation on variable annuity exchanges, advisers still don't know how the rule will be enforced or whether it will become an important guideline during the agency's routine examinations, according to a story reported on Financial Planning Interactive.

Fearing that insurance agents were focusing too much on exchanging variable annuity contracts solely for increased commissions, the Securities and Exchange Commission produced a comment letter to clarify Section 11 of the Investment Company Act's 'retail exception' in late June.

Section 11 prohibits exchanges of variable annuity contracts for upgraded contracts with the same insurer, unless the agent receives approval from the SEC or follows the procedure in Rule 11a-2. Yet 'offers made by a principal underwriter to an individual investor in the course of its retail business' are excused from complying in the retail exception.

'The letter is important because it provides guidance in what has been a really gray area of the SEC law -- the extent to which broker-dealers can engage in evaluating clients' portfolios and determine whether to upgrade their annuities contracts,' said Tim Conner, vice president and general counsel for the American Council of Life Insurers.

On its face, the interpretation only applies to insurance companies and underwriters, but brokers and agents will probably get the brunt of it. Conner said insurance companies must now monitor its communications to determine whom -- the seller or the consumer -- was the motivating factor in the transaction. The upgrade can only occur if the client inquires about or if the seller makes sure that other alternatives are mentioned.

And the SEC's interpretation restricts advisers and clients more if they want to continue a relationship with an existing insurance company. 'There's a new generation of annuity contracts, and any financial planner or registered rep has a duty to ask themselves on behalf of the client if these contracts really do make sense,' Conner said.

Although industry trade groups mark the interpretation as ground breaking, planners said they're already following the rules. 'Once a client pays me for a transaction, they should not have to pay me for the second one. We should work out the compensation on the front-end,' said Larry Boord, a commissions-based registered investment adviser with Boord & Associates in Worthington, Ohio.

'We don't do that much switching,' Boord said, who uses Guardian products. 'It's rarely in the clients' best interests to switch insurance products.'

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