NASD advocates stiff requirements for sales of variable annuities.

Citing consumer complaints and a growing number of enforcement actions, the National Association of Securities Dealers is recommending that the government establish far stiffer disclosure requirements for variable annuities--including making brokers and annuities dealers conduct a written suitability analysis on their customers.

The proposal was sparked by a joint report on the products released the week of June 7 by the NASD and the U.S. Securities and Exchange Commission, which cited instances of brokers recommending variable annuities to seniors and others who couldn't afford them without mortgaging their homes. Variable annuities are hybrid securities and insurance products intended only for long-term investment. Tax consequences and high surrender charges make them unsuitable for short-term investment, or for people who may need to get at their money quickly.

"Given the examination findings, the large number of enforcement cases over the past couple of years and the complexity of these products, we feel we can best protect investors by establishing stronger, more specific rules that apply specifically to variable annuities," NASD Chairman Robert Glauber said in a statement.

Under the proposed NASD rule, a broker who wants to sell a variable annuity product would first have to determine that the customer has been told about their unique and complex nature; that the customer has a long-term, not short-term, investment goal in buying the product; and that an annuity and its underlying subaccounts are still suitable after weighing the customer's liquidity and tolerance for risk.

The broker would also have to provide a short "plain English" disclosure to accompany the product's prospectus. That disclosure would outline potential surrender charges and tax penalties, sales charges, fees, federal tax laws regarding the product, applicable state and local premium taxes, market risk and whether a free-look period applies to the product.

All broker and dealer annuity sales, under the NASD proposal, would have to be reviewed and signed off by a company principal, who must approve in writing the customer's suitability for the purchase. Brokers and dealers must also set up and maintain supervisory procedures and training policies regarding annuities sales.

The American Council of Life Insurers, whose member insurers hold the annuities that the broker-dealers sell, welcomed the report for pointing out the strengths of annuity products, but would have liked to have seen more thorough information about the complaints cited. ACLI President Frank Keating, who has been lobbying for tax breaks for long-term investment vehicles such as annuities, said in a statement that the report will help regulators focus their resources fairly and equitably to prevent marketplace abuses.

"The joint report would have been even more useful if it provided quantification on the incidence of the broker-dealer deficiencies," Keating added. "With that information, broker-dealers could better fulfill the 'risk-based' approach to compliance encouraged by the NASD and the SEC that focuses resources on the most frequent sources of wrongdoing."