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Citing disclosure concerns, NASD issues guidance on equity-indexed annuity sales.

Citing concerns about "marketing, supervision, disclosure and investor-protection issues," the National Association of Securities Dealers, in an expected move, has issued formal guidance to registered firms that sell equity-indexed annuities.

The NASD, the main private-sector regulator of the U.S. securities industry, said in a statement that its guidance does not take a position on whether a particular equity-indexed annuity is a security. But the uncertainty over whether certain unregistered equity-indexed annuities may be securities complicates a broker-dealer's supervisory responsibilities, the regulator said.

The life insurance industry argues that an EIA constitutes a "fixed" product and is therefore exempt from federal oversight.

If an EIA is an insurance product, then a firm would have to treat equity-indexed annuity sales by its brokers as an outside business activity, the NASD said. If the equity-indexed annuity is a security, the firm would have to supervise the sale as a private security transaction, the regulator said.

Equity-indexed annuities are complex financial instruments where the issuer, usually an insurance company, guarantees a stated interest rate and some protection from loss of principal, and provides an opportunity to earn additional interest based on the performance of a securities market index, the NASD said. Some EIAs are registered with the U.S. Securities & Exchange Commission as securities, the NASD said. But many EIAs are not, based on a determination that they are insurance products that qualify for exemption under federal securities law.

In 2000, total U.S. equity-indexed annuities sales were $5.5 billion; in 2004, sales stood at $24.3 billion.

Investors in or near retirement are among the most likely to buy index annuities. David Hopewell, an actuary and senior manager at consulting firm Ernst & Young, said earlier this year that investors gained a renewed appreciation the past few years for the risk in the equity markets. Equity indexed annuities "are the only product(s) that (have) intermediate term guarantees," he said

NASD Guidance Highlights

Firms should:

* CONSIDER MAINTAINING a list of acceptable unregistered Equity-Indexed Annuities, and prohibit their brokers from selling any other unregistered EIA without the firm's written confirmation that the sale is acceptable;

* CONSIDER WHETHER more supervisory procedures would help protect the firm's customers. For example, a firm could require that all sales of unregistered EIAs are processed through the firm, meaning the firm must supervise the marketing material, suitability analysis, and other sales practices in the same way it supervises the sale of securities through the firm;

* Provide brokers selling any unregistered EIA through the firm with the proper training to ensure they understand the EIA's features and the extent to which the EIA meets a particular customer's needs.
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Article Details
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Title Annotation:National Association of Securities Dealers
Author:Lysiak, Fran Matso
Publication:Best's Review
Geographic Code:1USA
Date:Sep 1, 2005
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