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Insurance Annuity Suitability Training Deadline Draws Near; Speaking of Suitability....

Securities Practice Group Legal Update

Insurance Annuity Suitability Training Deadline Draws Near
Christopher A. Grgurich

Given the significant number of individuals in Minnesota who are dually-licensed to sell both insurance and securities and who read our monthly bulletins, we thought the topic of annuity suitability training may be of interest as certain deadlines are fast approaching for those who sell these insurance products in Minnesota.  

In May 2013, the Minnesota legislature passed Minnesota Statute 72A which is commonly referred to as the “new annuity suitability” law. The statute is based in large part on a model statute the National Association of Insurance Commissioners (NAIC) developed several years ago which, over time, has been adopted in various states. The primary purpose of the statute is to codify various factors agents or insurance producers must disclose when selling fixed or indexed annuities in this state. Variable annuities, of course, are specifically excluded from the statute as they are considered securities and regulated as such by respective federal and state agencies. By way of background, in 2007-2008, the Minnesota Attorney General brought a number of lawsuits against insurance companies alleging numerous instances of misrepresentations being made by agents to elderly citizens concerning annuity features and benefits.  A classic and oft-repeated example cited in the complaints filed involved a husband and wife who were convinced to liquidate other investments and place their life savings in an annuity. Problems then arose when the couple would need to liquidate the annuity to pay for medical and other costs and when, in doing so, they incurred hefty surrender charges. Ultimately the lawsuits brought by the Attorney General were settled, but as a result increased scrutiny was placed on these sales ultimately prompting states to adopt new laws governing the sale of these products. 

Interestingly, Minnesota’s Attorney General was not a proponent of the new law presumably because it adds some clarity where little previously existed thereby removing some flexibility for interpretation in enforcement actions. Of course, that’s not to suggest that tremendous flexibility does not still exist. At the very least, however, selling agents and producers now possess a “checklist” of sorts in discussing annuity products with clients. 

One important component of the new law, which went into effect last year, requires all individuals selling annuity insurance products in Minnesota to complete by June 2014 a one-time four hour course, approved by the Minnesota Department of Commerce, which discusses the new law. For those of you impacted by the new rule and who have not yet attended the mandatory training, the National Association of Insurance and Financial Advisors (NAIFA) has been and will continue to offer courses over the next few months so that individuals can obtain their mandatory approved credit. As one of the instructors for that course, I can say that it has been a pleasure presenting for NAIFA, and I am looking forward to our upcoming presentations and discussing these topics with other industry personnel.

Speaking of Suitability....
Mark S. Enslin

Transitioning from annuity suitability to securities suitability, FINRA announced earlier this month that it had levied substantial fines and restitution orders (in excess of $1 million) against two broker-dealers relating to the sales of leveraged and inverse exchange-traded funds (ETFs).   

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers. Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors."

FINRA found that the broker dealers made unsuitable recommendations of non-traditional ETFs because some representatives did not fully understand the unique features and specific risks associated with those products. FINRA was also critical because they did not have in place specific supervisory procedures related to leveraged and inverse ETFs and instead relied on the procedures they used for traditional ETFs.

This case serves as a good reminder on many levels. Broker dealers must have a strong understanding of the products they approve for sale, they must properly train their advisors regarding those products, and – not to be forgotten – they must document both their supervisory procedures and the manner in which they train their advisors on those procedures.

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