On September 7, 2007, the Securities and Exchange Commission announced approval of new NASD Rule 2821 (click here to view the text of New Rule 2821), designed to protect customers against abusive sales practices in the context of deferred variable annuity transactions. Specifically, New Rule 2821 imposes requirements with respect to recommendations (suitability obligations), principal review and approval, supervisory procedures, and training.
First, in the case of new sales, registered representatives must have a “reasonable basis” to believe that: (i) the customer is aware of the product’s features, (ii) the customer would benefit from these features, and (iii) the deferred variable annuity, including its sub-accounts and riders, is suitable. In the case of an exchange, the registered representative must also consider: (i) applicable surrender charges and expenses, (ii) potential loss of benefits, (iii) whether the new product has enhancements that benefit the customer and, (iv) whether the customer exchanged another variable annuity within the last 36 months. The registered representative must document and sign his or her suitability determination.
Second, assuming the proposed sale or exchange passes the registered representative’s suitability assessment, a registered principal must also perform a suitability review and approve the transaction. Notwithstanding this requirement, a registered principal can approve a transaction that is not recommended if, after the registered principal advises the customer of the determination, the customer affirms that he or she wishes to proceed with the transaction. The principal must document and sign his or her determination.
Third, Rule 2821 requires that NASD members implement and administer written supervisory procedures to ensure compliance with the new Rule.
Finally, NASD members must create and document a training plan to ensure compliance with the Rule.
The effective date of Rule 2821 is to be determined.
