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NASD: B/Ds Must Adopt Special Procedures on EIAs


The NASD last Tuesday issued its long-awaited, controversial notice to members regarding equity index annuities (EIAs), sending ripples through the annuity and brokerage industries.

Notice to Members 08-50, Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities, advises broker/dealers to consider treating all EIAs like securities.

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.

"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," the NASD recommends.

Furthermore, the NASD suggests 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.

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