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Variable Annuities and Variable Life Insurance Regulation
(2nd Edition)

by Clifford E. Kirsch

Last Updated: June 2013

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ISBN Number: 9781402418990
Page Count: 1536
Number of Volumes: 1
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At a time when the SEC, FINRA and state authorities are putting increasing regulatory pressure on the securities industry, Variable Annuities and Variable Life Insurance Regulation remains today’s most comprehensive and accessible guide to the many federal and state rules governing these instruments. Every key area is addressed to clarify your professional duties and compliance responsibilities, from product design, approval, administration and distribution, to marketing, inspections, and special investment products, including private placements and offshore investment products.

Additional material in the new second edition of Variable Annuities and Variable Life Insurance Regulation includes discussion of Rule 22e-3 under the Investment Company Act, which is intended to reduce the vulnerability of investors to the harmful effects of a run on the fund, and minimize the potential for disruption to the securities markets • the DOL regulations that require, effective for plan years beginning on or after November 1, 2011, plan administrators to provide certain disclosures to participants in participant-directed individual account plans regarding the plan’s investment options and fees and expenses paid by participants and the plan • and Section 201(a) of the JOBS Act, which requires the SEC, within the ninety days following the JOBS Act’s passage, to revise Rule 506 of Regulation D to permit offers and sales of securities through the use of a general solicitation, provided that all of the ultimate purchasers are accredited investors.

Updated at least once a year, Variable Annuities and Variable Life Insurance Regulation is a vital reference for securities professionals and attorneys, compliance officers, federal and state regulators, general practitioners, and investors.


		Table of Contents
	Chapter 1:	An Introduction to Variable Insurance Products
§ 1:1 : Background—Variable Annuities and Variable Life Insurance1-3 § 1:2 : Variable Annuities in Today’s Marketplace1-3 § 1:2.1 : Generally1-3 § 1:2.2 : Variable Annuities in the Retail Marketplace1-4 [A] : Generally1-4 [B] : Insurance and Other Guarantee Features1-5 [C] : Variable Annuity Share Classes1-8 [D] : Unique Investment Features1-10 § 1:2.3 : Annuities Sold in the Retirement Marketplace1-10 § 1:3 : Variable Life Insurance in Today’s Marketplace1-11 § 1:3.1 : Generally1-11 § 1:3.2 : Variable Life Insurance in the Retail Marketplace1-12 § 1:3.3 : Life Insurance Sold to Individuals through Employers and Associations1-12 § 1:3.4 : Life Insurance Sold to Businesses (Corporate Owned Life Insurance)1-12 § 1:4 : Legal Structure1-13 § 1:5 : Regulatory Treatment of Variable Products1-15 § 1:5.1 : Generally1-15 § 1:5.2 : Product Design and Approval1-16 [A] : State Insurance Requirements Regarding Product Design and Approval1-16 [B] : Federal Securities Laws Regarding Product Design and Approval1-17 [B][1] : Background1-17 [B][2] : Private Offering Exception1-18 [B][3] : Retirement Plan Exemption1-18 [C] : State Securities Laws1-19 § 1:5.3 : Product Administration1-20 § 1:5.4 : Product Distribution1-21 [A] : Background1-21 [B] : FINRA Regulation1-23 [B][1] : Generally1-23 [B][2] : Requirements Governing the Suitability of Variable Annuity Transactions1-24 [B][2][a] : NASD’s Suitability Rule Applying to Recommended Transactions—Conduct Rule 23101-24 [B][2][b] : Guidance Concerning Variable Annuity Exchanges1-25 [B][3] : Controls Over Marketing Material: Review, Content, and Filing Requirements1-26 [B][4] : Requirement to Adopt and Implement a Supervisory System Over Sales Activity1-26 [B][4][a] : Written Supervisory Procedures1-26 [B][4][b] : Chain of Supervision1-27 [B][4][c] : Approval of Transactions1-27 [B][4][d] : Approval of Correspondence1-27 [B][4][e] : Annual Compliance Meetings with Representatives1-27 [B][4][f] : Office Designations1-27 [B][4][g] : Inspections1-27 [B][4][h] : “Outside” Activities of a Representative1-28 [B][4][i] : Continuing Education Requirements1-28 [B][5] : Requirement to Establish an Effective Compliance Program1-28 [B][6] : Controls Over Compensation1-29 [B][7] : Examinations and Enforcement1-29 [C] : Group Variable Annuities—Regulation Under FINRA Rules1-30 § 1:5.5 : Marketing1-31 [A] : Generally1-31 [B] : SEC Rules1-31 [C] : FINRA Rules1-32 § 1:6 : The Structure of This Book1-33
	Chapter 2:	Status of Insurance Products Under the Securities Act of 1933
§ 2:1 : Overview2-2 § 2:2 : Section 3(a)(8): Exclusion for “Non-Securities”2-4 § 2:2.1 : The Statute2-4 § 2:2.2 : Supreme Court Cases2-5 [A] : SEC v. VALIC2-5 [B] : SEC v. United Benefit2-7 § 2:2.3 : Rule 151 Safe Harbor2-11 § 2:2.4 : Lower Court Cases Interpreting Section 3(a)(8) and Rule 1512-13 [A] : Olpin v. Ideal National Insurance Co.2-13 [B] : Peoria Union Stockyards Co. v. Pennsylvania Mutual Life Insurance Co.2-15 [C] : Otto v. VALIC2-15 [D] : Associates in Adolescent Psychiatry, S.C. v. Home Life Insurance Co.2-17 [E] : Berent v. Kemper Corp.2-18 [F] : Malone v. Addison Insurance Marketing, Inc.2-18 § 2:2.5 : Vacated Rule 151A Proposal2-19 § 2:2.6 : Section 989J of the Dodd-Frank Act2-22 § 2:3 : Section 3(a)(2): Exemption for Contracts Funding Qualified Plans2-24 § 2:4 : Section 4(2): Exemption for Private Offerings2-25 § 2:5 : The Securities Act—Status of Annuity Contracts2-25 § 2:5.1 : Traditional Fixed Annuities2-25 § 2:5.2 : Excess Interest Annuity Contracts2-26 [A] : Nature of the Issuer2-27 [B] : Investment Risks Retained2-27 [B][1] : Link to Separate Account Performance2-27 [B][2] : Guarantee of Non-forfeiture Rates2-28 [B][3] : Market Value Adjustments2-29 [B][4] : Frequency of Declaration of Excess Rates2-31 [C] : Marketing2-31 [D] : Mortality Risks Assumed2-33 § 2:5.3 : Indexed Annuities2-34 [A] : Nature of the Issuer2-37 [B] : Investment Risks Retained2-37 [B][1] : Link to Separate Account Performance2-38 [B][2] : Guarantee of Non-forfeiture Rates2-38 [B][3] : Market Value Adjustments2-39 [B][4] : Frequency of Declaration of Index-Based Credits2-39 [C] : Marketing2-40 [D] : Mortality Risks Assumed2-41 [E] : State Regulation2-41 § 2:5.4 : Variable Annuities2-42 § 2:6 : The Securities Act—Status of Life Insurance Contracts2-43 § 2:6.1 : Traditional Term Life Insurance Contracts2-43 § 2:6.2 : Whole Life Insurance Contracts2-43 § 2:6.3 : Universal Life Insurance Contracts2-44 § 2:6.4 : Indexed Universal Life Insurance Contracts2-44 § 2:6.5 : Variable Universal and Variable Whole Life Insurance Contracts2-45
	Chapter 3:	Status of Insurance Companies and Insurance Company Separate Accounts Under the Investment Company Act
§ 3:1 : Introduction3-2 § 3:2 : What Is an Investment Company?3-4 § 3:2.1 : Section 3(a)(1)(A): The Orthodox Investment Company3-4 [A] : Meaning of “Issuer”3-5 [B] : Meaning of “Engaged Primarily”3-7 § 3:2.2 : Section 3(a)(1)(B): The Face-Amount Certificate Company3-7 § 3:2.3 : Section 3(a)(1)(C): The Inadvertent Investment Company3-8 § 3:2.4 : Exclusions for Certain Holding Companies3-9 [A] : Sections 3(b)(1) and 3(b)(2)3-9 [A][1] : Meaning of “Engaged Primarily” for Purposes of Section 3(b)3-10 [B] : Section 3(c)(6)3-12 § 3:2.5 : Section 3(b)(3)3-12 § 3:2.6 : Exclusions for Various Other Companies3-13 § 3:3 : Status on Insurance Companies—Definitions3-13 § 3:3.1 : Insurance Company3-13 § 3:3.2 : Meaning of “Primary and Predominant Business Activity”3-13 [A] : Foreign Insurance Companies3-15 § 3:4 : Status of Variable Annuity Separate Accounts3-16 § 3:4.1 : History3-16 [A] : The Prudential Decision3-16 [B] : Difficulties with the Prudential Decision: The Legal Identity of the Separate Account3-17 [C] : Difficulties with the Prudential Decision: Regulation As Periodic Payment Plans Under the Investment Company Act3-19 § 3:4.2 : Current Regulation of Variable Annuity Separate Accounts3-20 [A] : Investment Company Classification3-21 [A][1] : Open-End Management Companies3-22 [A][2] : Unit Investment Trusts3-22 [A][2][a] : Registration of Variable Annuity Separate Accounts Organized As Unit Investment Trusts3-25 [B] : Rules Applying to Regulation of Variable Annuity Separate Accounts3-25 [B][1] : Rule 11a-23-26 [B][2] : Rule 14a-23-26 [B][3] : Rules 15a-3, 16a-1, 32a-23-27 [B][4] : Rule 22d-23-27 [B][5] : Rule 22e-13-28 [C] : Exemptive Relief Applicable to Variable Annuities3-28 [C][1] : Section 26(b) Relief3-29 § 3:5 : Status of Variable Life Insurance Separate Accounts3-29 § 3:5.1 : History3-29 § 3:5.2 : Regulation of Variable Life Insurance Company Separate Accounts3-31 [A] : Rule 6e-23-31 [B] : Rule 6e-3(T)3-34 [C] : Exemptive Relief—Mixed and Shared Funding Relief3-34 § 3:6 : Other Separate Accounts3-39
	Chapter 4:	Tax Treatment of Variable Contracts
§ 4:1 : Introduction4-2 § 4:2 : Tax Definition of “Variable Contract”4-2 § 4:3 : Contractholder Tax Treatment4-4 § 4:3.1 : General Contractholder Tax Rules4-4 [A] : Life Insurance Contracts4-4 [B] : Annuity Contracts4-11 [C] : Modified Endowment Contracts4-21 [D] : Long-Term Care Insurance Combination Products4-23 § 4:3.2 : Special Contractholder Tax Rules Applicable to Variable Contracts4-24 [A] : Diversification Rules (I.R.C. § 817(h))4-24 [A][1] : General Diversification Test4-26 [A][2] : Safe Harbor Test4-26 [A][3] : Alternative Test for Variable Life Contracts4-26 [A][4] : Rules of Application4-27 [A][5] : Consequences of Nondiversification4-32 [B] : Investor Control4-33 § 4:4 : Insurance Company Tax Treatment4-37 Appendix 4A : Selected Sections of the Internal Revenue Code and Treasury RegulationsApp. 4A-1 Appendix 4B : Treasury Regulation § 1.817-5App. 4B-1
	Chapter 5:	ERISA Issues
§ 5:1 : Introduction5-2 § 5:2 : ERISA5-2 § 5:2.1 : Which Programs Are Covered5-3 § 5:2.2 : Exclusions from Coverage: Governmental and Church Plans5-7 § 5:3 : Implications of ERISA Coverage5-8 § 5:4 : Reporting and Disclosure5-10 § 5:4.1 : Overview and Schedule A5-10 § 5:4.2 : Schedule C5-12 § 5:4.3 : Service Provider Disclosures Under ERISA § 408(b)(2)5-14 § 5:4.4 : Participant-Level Disclosures5-15 § 5:5 : Fiduciary Responsibilities5-16 § 5:5.1 : Overview5-16 § 5:5.2 : Fiduciary Status and Plan Assets5-16 § 5:5.3 : The “Plan Assets” Issue5-18 § 5:6 : Application of the Fiduciary Responsibility Rules to Variable Annuity Contracts5-20 § 5:7 : Prohibited Transaction Restrictions5-22 § 5:8 : Statutory Exemption for Investment Advice5-26 § 5:8.1 : General Requirements for Computer Models5-27 § 5:8.2 : Authorization, Disclosure, and Other Requirements5-29 § 5:8.3 : Relief for Plan Sponsors5-31 § 5:9 : Conclusion5-32
	Chapter 6:	Variable Insurance Product Design
§ 6:1 : Overview6-2 § 6:2 : Federal Regulatory Framework6-4 § 6:2.1 : Pre-1996 Federal Regulation6-4 § 6:2.2 : The Reasonableness Standard6-5 § 6:2.3 : Unused Rulemaking Authority6-6 § 6:2.4 : Mechanics of the Reasonableness Representation6-7 [A] : Location and Language of Reasonableness Representation6-7 [B] : Supporting Memorandum6-7 § 6:2.5 : Legislative History6-8 § 6:2.6 : SEC Staff Guidance6-9 § 6:2.7 : Factors to Consider in Assessing Reasonableness6-9 [A] : “Services Rendered”6-10 [B] : “Expenses Expected to Be Incurred”6-10 [C] : “Risks Assumed”6-10 [D] : Aggregate Charges Within Range of Industry Practice6-11 [E] : Reasonable Profit6-11 [F] : Innovation6-12 [G] : General Economic Factors and Industry Trends6-12 [H] : Other Regulatory Requirements6-12 [I] : Pre-NSMIA Standards6-13 [J] : Other Considerations6-13 § 6:2.8 : Underlying Fund Fees and Charges6-13 § 6:2.9 : Litigation Involving the Reasonableness Standard6-15 § 6:2.10 : Specific Contracts Fees and Charges6-15 [A] : Mortality and Expense Risk Charges6-16 [B] : Administrative Charges6-16 [C] : Cost of Insurance Charges6-17 [D] : Sales Charges6-17 [E] : DAC Taxes6-18 § 6:3 : Variable Annuity Product Design6-18 § 6:3.1 : Overview6-18 § 6:3.2 : Specific Design Features6-19 [A] : Death Benefits6-19 [B] : Payout Options6-19 [C] : Living Benefits6-20 [D] : Long-Term Care Benefits6-21 [E] : Sales Charges6-21 [F] : Purchases and Redemptions6-22 [G] : Partial Withdrawals6-22 [H] : Nonforfeiture Law6-23 [I] : Free Look Period6-23 [J] : Other State Law Features6-24 § 6:4 : Variable Life Product Design6-24 § 6:4.1 : Overview6-24 § 6:4.2 : Specific Design Features6-26 [A] : Minimum Death Benefits and Grace Periods6-26 [B] : Purchases and Redemptions6-28 [C] : Partial Withdrawals6-28 [D] : Mandatory Policy Provisions6-29 [D][1] : Mandatory Disclosure6-29 [D][2] : Contestability Provisions6-29 [D][3] : Free Look Period6-29 [D][4] : Other Mandatory Provisions6-29
	Chapter 7:	The Funding Vehicle
§ 7:1 : Regulation Under the Investment Company Act7-2 § 7:2 : Unique Federal Tax Status of Underlying Mutual Funds7-3 § 7:3 : Mixed and Shared Funding7-4 § 7:4 : Rule 12b-1 Plans7-7 § 7:5 : Participation Agreements7-10 § 7:5.1 : Purchases and Redemptions7-10 § 7:5.2 : Prospectuses and Sales Literature7-11 § 7:5.3 : Mixed and Shared Funding Provisions7-11 § 7:5.4 : Other Typical Provisions7-11 § 7:6 : Substitution of Underlying Funds Held by UIT Accounts7-12 § 7:6.1 : Section 26(c) Applications7-13 § 7:7 : Mutual Fund Redemption Fees7-17 § 7:8 : Rule 22e-3: Exemption for Liquidation of Money Market Funds7-20 § 7:9 : Special Exemptions for Underlying Funds7-22 § 7:10 : Fund Summary Prospectus7-24 § 7:11 : State Regulation of Underlying Funds7-26
	Chapter 8:	SEC Registration
§ 8:1 : Introduction8-2 § 8:2 : Drafting Considerations8-3 § 8:2.1 : Requirement That Prospectuses Be Written in Plain English8-3 § 8:2.2 : SEC Staff Insurance Products Industry Comment Letters8-5 § 8:3 : Mechanics of the Registration Process for New Products8-5 § 8:3.1 : Filing the Initial Registration Statement8-5 § 8:3.2 : Staff Review Process8-6 § 8:3.3 : Going Effective8-6 § 8:3.4 : Registration Fees8-7 § 8:4 : Prospectus Delivery and Updating Requirements8-7 § 8:4.1 : Requirement to Keep Prospectus Current8-8 § 8:4.2 : Delivery of Updated Prospectus8-8 § 8:4.3 : Discontinued Contracts8-9 [A] : Generally8-9 [B] : Group Contracts8-10 § 8:4.4 : Delivery of One Prospectus to Investors Who Share an Address—Householding8-10 § 8:4.5 : Electronic Delivery of Prospectuses8-12 § 8:5 : Mechanics of Updating the Prospectus8-12 § 8:5.1 : Post-Effective Amendments8-13 [A] : Generally8-13 [B] : Text of Rule 4858-15 § 8:5.2 : Stickers8-20 [A] : Generally8-20 [B] : Text of Rule 4978-21 § 8:5.3 : The Yearly Update Season8-22 § 8:6 : Forms N-3 and N-4—Registration Forms for Variable Annuities8-22 § 8:6.1 : Form N-4 Requirements8-23 § 8:7 : The Variable Annuity Profile8-35 § 8:8 : Form N-6—Registration Form for Variable Life Insurance8-36 § 8:8.1 : Form N-6 Requirements8-37 § 8:9 : Form N-1A—Registration Form for Underlying Funds8-48 § 8:9.1 : Delivery of Fund Prospectus8-48 § 8:10 : Registering a Marketing Value Adjustment Contract8-49 § 8:10.1 : Generally8-49 § 8:10.2 : MVA Contracts and Exchange Act Reporting8-49 § 8:11 : Special Topics8-50 § 8:11.1 : Marketing Prior to an Effective Registration Statement8-50 [A] : Legal Framework8-50 [A][1] : Permissible Marketing Activity During the Waiting Period8-51 [A][1][a] : Oral Offers8-51 [A][1][b] : Written Offers8-52 § 8:11.2 : Rule 38a-1 and the Registration Process8-52 Appendix 8A : Form N-4App. 8A-1 Appendix 8B : Form N-6App. 8B-1 Appendix 8C : Industry Comment LettersApp. 8C-1 Appendix 8D : Form N-4 Registration Statement Due Diligence GridApp. 8D-1
	Chapter 8A:	State Regulation of Variable Products
§ 8A.1 : Introduction8A-2 § 8A.1 : State Standards for Contracts on a Variable Basis8A-2 § 8A.3 : Alternatives to 50-State Filing and Approval8A-3 § 8A.3.1 : “Unique Product Features or Design”8A-3 [A] : “Unique Product Features or Design”8A-4 [B] : The “Certification Memo”8A-5 [C] : Regulatory Acknowledgement8A-5 § 8A.3.2 : Interstate Product Regulation Compact8A-6 [A] : The Compact8A-6 [B] : Variable Compact Products8A-7 [C] : IIPRC Procedures8A-10 [D] : Compact Benefits8A-11 [E] : Noted Compact Product Exceptions8A-12 [E] : Compact Product Uniformity8A-12 § 8A.4 : Unique Products8A-13 § 8A.4.1 : Innovative Variable Products Developed Post-1996 Amendments to the Investment Company Act of 19408A-13 [A] : Regulatory Issues Associated with New Product Designs8A-14 [B] : Disclosure Requirements Under GLBs8A-14 [C] : Reserve Liabilities for GMDB Riders8A-15 § 8A.4.2 : Synthetic Guaranteed Investment Contract Forms8A-17 § 8A.5 : Practical Tips for Policy Form Filing8A-19 § 8A.6 : Conclusion8A-20
	Chapter 9:	Issues Related to Product Administration
§ 9:1 : Introduction9-1 § 9:2 : Variable Annuity Processing Issues9-2 § 9:2.1 : Two-Day/Five-Day Rule9-2 § 9:3 : Group Variable Annuities9-4 § 9:3.1 : Principal Mutual No-Action Letter9-5 § 9:4 : Variable Life Processing Issues9-6 § 9:5 : Processing of Premium Payments by the Insurer9-8 § 9:6 : Allocation of Premiums During the Free Look Period9-9 § 9:7 : Impact of Underlying Fund Redemption Fees9-11
	Chapter 10:	Redemption Fee Rule
§ 10:1 : Overview10-1 § 10:2 : Administrative History10-2 § 10:2.1 : Proposal10-2 § 10:2.2 : Adoption10-2 § 10:2.3 : Amendments10-3 § 10:2.4 : Compliance Date10-3 § 10:2.5 : Funds Covered by the Rule10-4 § 10:3 : Redemption Fee10-5 § 10:3.1 : Board Determination10-5 § 10:3.2 : Features of Any Redemption Fee10-6 § 10:3.3 : Factors for Board Consideration10-9 § 10:4 : Shareholder Information Agreements10-10 § 10:5 : Industry Standardization Efforts10-14 § 10:6 : Implementation of Shareholder Agreement Requirement10-15 § 10:7 : Variable Insurance Products Funds10-18 § 10:8 : Conclusion10-21
	Chapter 11:	Separate Account Compliance Programs
§ 11:1 : Background11-1 § 11:1.1 : Text of Rule 38a-111-2 § 11:1.2 : Coverage11-5 § 11:2 : Adoption and Implementation of Written Policies and Procedures11-5 § 11:2.1 : Required Scope of Written Policies and Procedures11-6 § 11:2.2 : Oversight of Service Providers’ Polices and Procedures11-7 § 11:3 : Approval of Written Policies and Procedures11-8 § 11:4 : Annual Review11-9 § 11:5 : Chief Compliance Officer11-9 § 11:6 : Record Keeping11-10 § 11:7 : Special Issues Related to Variable Products11-11 § 11:7.1 : Satisfying the Oversight Responsibility Provisions11-11 § 11:7.2 : Determining Who Is a Service Provider11-11 § 11:7.3 : Living with a Separate Account Compliance Program11-12
	Chapter 12:	Insurer Exchange Programs
§ 12:1 : Introduction12-3 § 12:2 : Text of Relevant Provisions12-3 § 12:2.1 : Section 11—Offers to Exchange Securities12-3 § 12:2.2 : Rule 11a-2—Offers of Exchange by Certain Registered Separate Accounts or Others the Terms of Which Do Not Require Prior Commission Approval12-4 § 12:3 : Section 11 of the Investment Company Act12-7 § 12:3.1 : Overview12-7 § 12:3.2 : Coverage of Section 1112-8 [A] : Exchange of Investment Company Security for Another Investment Company Security12-8 [A][1] : Reallocation of Sub-Account Assets12-8 [A][2] : Section 11 Coverage Summary12-9 [B] : Internal Versus External Exchange Offers12-9 [C] : Covered Parties: Separate Account; Principal Underwriters12-10 [D] : Timing of Exchanges12-11 § 12:3.3 : Exceptions to Section 1112-12 [A] : Treatment of Retail Transactions: “The Retail Exception”12-12 [B] : Rule 11a-212-14 [B][1] : Conditions of Rule 11a-2—Variable Life Insurance Contracts12-15 [B][2] : Conditions of Rule 11a-2—Variable Annuity Contracts12-15 [B][3] : Conditions of Rule 11a-2-Reallocation of Sub-Account Assets12-17 [C] : Exemptive Orders12-17 [C][1] : Hartford Life Insurance Company—New Contingent Deferred Sales Charge12-19 § 12:4 : Insurance Law Considerations12-20 § 12:4.1 : State Regulation of Policy Replacements12-21 [A] : NAIC Model Unfair Trade Practices Act12-21 [B] : NAIC Replacement of Life Insurance and Annuities Model Regulation12-22 [B][1] : Exceptions for Certain Exchange Offers12-23 § 12:4.2 : Relationship to Section 11 Exchange Offers12-23 [A] : Comparison of Section 11 with State Insurance Rules12-23
	Chapter 13:	SEC Regulation of Product Distribution
§ 13:1 : Introduction13-2 § 13:2 : Broker-Dealer Registration13-3 § 13:2.1 : Registration of an Insurance Company/Insurance Company Subsidiary—Exchange Act Release No. 838913-4 § 13:2.2 : Registration of an Insurance Agency13-5 § 13:3 : Record-Keeping Requirements13-6 § 13:3.1 : Required Records13-6 § 13:3.2 : Preservation of Records13-14 [A] : Time Period13-14 [B] : Location13-14 [C] : Requirements to Maintain Records at an Office13-15 § 13:3.3 : Insurance Company Subsidiary Registered As a Broker-Dealer13-16 § 13:4 : Financial Reporting13-17 § 13:4.1 : Financial Statements13-17 § 13:4.2 : FOCUS Reports13-17 § 13:5 : Net Capital Requirements13-17 § 13:5.1 : Required Level of Net Capital13-18 § 13:5.2 : Restrictions on Withdrawals of Equity Capital13-19 § 13:6 : Customer Protection Rule13-19 § 13:7 : SIPC Membership13-20 § 13:8 : Payment of Commissions13-20 § 13:8.1 : Payment of Commissions to Captive Agents13-20 § 13:8.2 : Payment of Commissions to an Insurance Agency13-21 § 13:9 : Compensation Practices13-21 § 13:10 : Confirmation Requirements13-22 § 13:10.1 : Immediate Confirmation Requirements: Rule 10b-10(a)13-23 § 13:10.2 : Quarterly Confirmation Requirements: Rule 10b-10(b)13-24 § 13:10.3 : SEC Exemptive Authority13-25 § 13:10.4 : Special Considerations Applicable to Variable Products13-26 § 13:11 : Settlement of Transactions13-26 § 13:12 : Duty to Supervise13-27 § 13:12.1 : Who Is Subject to Sanctions for Failing to Supervise?13-28 [A] : Who Is a Supervisor?13-28 [A][1] : Personnel in the Management Chain13-29 [A][2] : Compliance and Legal Personnel13-29 § 13:12.2 : Discharging Supervisory Responsibility13-30 [A] : Designing and Implementing Adequate Procedures13-30 [B] : Meaningful Follow-Up13-31 § 13:13 : Duty to Supervise Remote Offices13-32 § 13:14 : Investment Advisory Activity13-34 § 13:14.1 : Definition of an Investment Adviser13-35 [A] : “Engaging in the Business”13-36 [B] : Providing “Advisory” Services Concerning Securities13-37 [C] : Advice or Reports Provided for “Compensation”13-38 § 13:14.2 : Broker-Dealer Exclusion from the Advisers Act13-38 [A] : The Nature of the Exclusion13-39 [B] : Availability of the Exclusion to Registered Representatives13-41 [C] : Conducting Advisory Activity Outside the Exclusion13-42 [D] : Proposed SEC Rulemaking13-42
	Chapter 14:	State Securities Regulation of Product Distribution
§ 14:1 : Introduction14-1 § 14:2 : State Securities Jurisdiction over the Sale of Variable Products14-2 § 14:2.1 : Variable Product Notice Filings14-3 § 14:2.2 : 2002 Uniform Securities Act14-3 § 14:3 : State Securities Regulation of the Sale of Mutual Fund and Other Securities Products14-4 § 14:4 : Registration Issues14-4 § 14:4.1 : Firm14-4 § 14:4.2 : Branch Offices14-4 § 14:4.3 : Personnel14-5 § 14:5 : Substantive Regulation14-6 § 14:6 : Record-Keeping Requirements and Inspections14-6
	Chapter 15:	FINRA Regulation of Product Distribution
§ 15:1 : Introduction15-8 § 15:1.1 : Origin of the NASD15-9 [A] : Industry Interest in a Self-Regulatory Organization15-9 [B] : Legislation Authorizing National Securities Associations15-9 [C] : NASD Registration As a National Securities Association15-10 [D] : Subsequent Amendments to the Maloney Act15-10 § 15:1.2 : Rules Governing FINRA As a National Securities Association15-11 [A] : Powers and Duties15-11 [B] : SEC Oversight of Self-Regulatory Organizations15-11 [B][1] : SEC Approval of Rules and Rule Changes15-12 [B][2] : SEC Examinations of SROs15-13 [B][3] : SEC Review of Disciplinary Actions and Other Determinations15-13 § 15:1.3 : FINRA Operational Structure15-14 [A] : Original Structure15-14 [B] : Re-Examination of the NASD’s Structure15-15 [B][1] : Rudman Report15-15 [B][2] : Justice Department Settlement15-16 [B][3] : SEC Consent Order and Section 21(a) Report15-16 [C] : Plan of Allocation—1996 to 200215-17 [D] : Divisional Structure15-20 [E] : FINRA: Consolidation of the NASD and Certain NYSE Operations15-21 § 15:1.4 : FINRA Rule Material and Guidance15-22 [A] : FINRA By-Laws15-22 [B] : NASD Rules15-23 [C] : Interpretive Material15-24 [D] : Other Guidance15-24 [D][1] : Interpretive Letters and Exemptions15-24 [D][2] : Notices to Members and Regulatory Notices15-25 [D][3] : NASD Regulatory & Compliance Alert15-25 [D][4] : Other FINRA Publications15-26 [D][5] : FINRA Website15-26 § 15:1.5 : Other Functions Performed by FINRA15-26 [A] : Central Registration Depository (CRD) System and Investment Adviser Registration Depository15-27 [B] : Review of Investment Company Advertising Material15-28 [C] : Continuing Education Program15-28 [D] : Investor Education15-29 [E] : Arbitration and Mediation15-30 § 15:2 : Historical Overview of FINRA Regulation of Broker-Dealers Selling Variable Contracts15-30 § 15:2.1 : Early NASD Regulation of Members Selling Variable Contracts15-30 [A] : Voluntary Membership15-31 [B] : Establishment of the Variable Contracts Committee15-32 [C] : Variable Contracts Rule15-32 [D] : Examination Requirements15-34 [E] : Dealing with Non-Members15-35 § 15:2.2 : Later Developments15-36 [A] : Mandatory Membership Requirement15-36 [B] : Regulation of Member Activity in Qualified Contracts15-37 [C] : Defined Variable Annuities Rule15-38 § 15:3 : FINRA Membership15-39 § 15:3.1 : Applying for Membership15-40 [A] : Membership Application15-40 [B] : Designation of Executive Representative15-41 [C] : Designation of Offices15-41 [D] : Minimum Number of Principals15-42 [E] : Limits on Member Names and Organizational Forms15-43 [F] : Additional Registrations15-44 § 15:3.2 : FINRA Membership Admission Process15-45 [A] : District Office Review15-45 [B] : Membership Interview15-45 [C] : Standards for Admission15-46 [D] : Restrictions and Conditions15-46 [E] : Membership Agreement15-46 [F] : Appeal Process15-47 § 15:3.3 : Impact of Other Business Activities15-48 [A] : Mutual Fund Sales15-49 [B] : Retail Brokerage Activities15-49 [C] : Retail Investment Advisory Operations and Financial Planning Services15-50 [D] : Mutual Fund Investment Advisory Operations15-51 [E] : Insurance Products15-51 [F] : Certificates of Deposit and Other Bank Products15-52 [G] : Activities in Foreign Jurisdictions15-53 [H] : 529 Plans15-54 § 15:3.4 : Subsequent Filings and Changes Relating to Membership or Permissible Operations15-54 [A] : Changes in Form BD15-55 [B] : Changes in Member Name or Executive Representative15-55 [C] : Changes in Office Locations or Supervisors15-55 [D] : Changes in Restrictions15-55 [E] : Changes in Ownership, Control, or Operations15-56 [F] : Changes in Status Under the Customer Protection Rule15-57 [G] : Business Continuity Plans15-58 § 15:3.5 : Termination of Membership15-58 § 15:4 : Registration of Principals and Representatives15-59 § 15:4.1 : Registration Requirements15-59 [A] : Definition of “Associated Person”15-59 [B] : Definition of “Principal”15-60 [C] : Definition of “Representative”15-60 [D] : Definition of “Engaged in the Investment Banking or Securities Business”15-61 [E] : Exemptions15-62 [E][1] : Clerical Employees15-62 [E][2] : Directors and Corporate Officers15-63 [E][3] : Home Office and Service Center Employees15-64 [E][4] : Foreign Finders15-65 § 15:4.2 : Qualification and Registration Process15-65 [A] : FINRA Qualification Requirements15-65 [B] : Examinations and Categories of Registration15-66 [C] : Application and Approval15-68 [D] : Other Registration Issues15-68 [D][1] : Minimum Number of Principals15-68 [D][2] : Change in Principal Status15-69 [D][3] : Registration Renewals15-69 § 15:4.3 : Background Investigation and Hiring Practices15-69 [A] : Duty to Review Form U-4 and Form U-5 History15-70 [B] : Best Hiring Practices15-70 [C] : Non-Registered Persons15-71 § 15:4.4 : Employment Issues15-72 [A] : Employee Versus Independent Contractor15-72 [B] : Associated Person Agreements15-73 [C] : Dual Registration15-73 [D] : FINRA Arbitration Procedures15-73 § 15:4.5 : Continuing Obligations and Requirements Applicable to Registered Persons15-74 [A] : Duties and Obligations15-74 [B] : Reporting Obligations15-75 [C] : Continuing Education Requirements15-75 [C][1] : Regulatory Element15-75 [C][2] : Firm Element15-77 [D] : Disclosures to Associated Persons15-79 § 15:4.6 : Termination of Registration15-79 § 15:4.7 : Transferring Registration from One Member to Another15-80 § 15:5 : Overview of Supervision Requirements15-80 § 15:5.1 : The Supervision Rule15-80 [A] : Written Supervisory Procedures15-81 [B] : Chain of Supervision15-82 [B][1] : Qualified Supervisors15-83 [B][2] : Principal/Representative Ratios15-84 [B][3] : Compliance Officers15-85 [C] : Approval of Transactions15-85 [D] : Approval of Correspondence15-86 [E] : Internal Inspections15-88 [F] : Annual Compliance Meetings with Representatives15-89 § 15:5.2 : Office Designations15-91 [A] : Office of Supervisory Jurisdiction15-92 [B] : Branch Office15-93 [C] : Non-Branch Locations15-93 [D] : Proposed Amendments to Branch Office Definition15-95 § 15:5.3 : Use of Compliance Manuals and Other Procedures15-95 [A] : Manuals15-95 [B] : Exception and Activity Reports15-96 [C] : Compliance Audits and Other Sampling Techniques15-97 § 15:5.4 : Outside Activities15-97 [A] : Dual Registration15-98 [B] : Accounts with Other Institutions15-98 [C] : Other Activities15-99 [C][1] : Private Securities Transaction15-100 [C][2] : Outside Business Activities15-101 [C][3] : Applicability to Investment Adviser Activities15-101 [C][4] : Applicability to Viaticals and Life Settlements15-102 [C][5] : Applicability to Promissory Notes and Other Instruments15-103 § 15:5.5 : Special Supervisory Situations15-103 [A] : Guidance for Supervision of Remote Locations15-103 [B] : Guidance for Supervision of Certain Registered Persons15-104 [B][1] : Identifying Problem Representatives15-105 [B][2] : Guidelines15-105 [C] : Guidance for Telemarketing Activities15-106 § 15:5.6 : Anti-Money Laundering Compliance Programs15-107 [A] : Customer Identification Requirements15-109 § 15:5.7 : Supervisory Controls15-109 § 15:5.8 : CEO Certification and Designation of Chief Compliance Officer15-110 § 15:5.9 : Outsourcing15-110 § 15:6 : Sales and Advertising Practices15-111 § 15:6.1 : Variable Contracts Rule15-111 [A] : Distribution and Selling Agreements15-111 [B] : Compliance with Pricing Rule15-111 [C] : Sales Charges15-112 [D] : Sales Compensation15-112 [E] : Comparison with the Investment Company Rule15-112 [F] : Proposed Amendments15-113 § 15:6.2 : The Deferred Variable Annuities Rule15-113 § 15:6.3 : The Suitability Rule15-116 [A] : Recommendation15-116 [B] : Customer Profile15-117 [C] : Institutional Investors15-119 [D] : Guidance for Variable Contracts15-120 [E] : Know-Your-Customer Rule15-123 § 15:6.4 : Advertising and Customer Communications15-124 [A] : Rules Governing Communications15-124 [B] : Review, Approval, and Record-Keeping Requirements15-125 [B][1] : Advertisements and Sales Literature15-125 [B][1][a] : Research Reports and Reprints15-125 [B][1][b] : Seminars and Radio Talk Shows15-126 [B][1][c] : Correspondence15-126 [B][1][d] : Institutional Sales Materials15-127 [B][1][e] : Electronic Communications15-127 [B][2] : Internal Review and Approval Procedures15-128 [B][3] : FINRA Filing and Approval Requirements for Investment Company Material15-129 [B][3][a] : What Is Investment Company Material?15-130 [B][3][b] : Timing of Filing15-130 [B][3][c] : Record-Keeping Requirements15-131 [C] : Variable Contract Guidelines15-131 [C][1] : Variable Annuity Tax Deferral Illustrations15-132 [C][2] : Personalized Variable Life Hypothetical Illustrations15-132 [C][3] : Fund Performance15-133 [D] : Other Content Standards for Communications15-133 [D][1] : General Fairness and Balance Standards15-134 [D][2] : Rankings Disclosure15-134 [D][3] : Dollar Cost Averaging and Other Periodic Investment Plans15-135 [D][4] : Testimonials15-135 [D][5] : References to Tax-Advantaged Status15-135 [D][6] : Comparisons15-136 [D][7] : Use of Index Returns15-136 [E] : Specific Disclosures Required15-136 [E][1] : Member Name15-136 [E][1][a] : Business Cards and Stationery15-137 [E][1][b] : Use of Logos15-138 [E][2] : Date of First Use15-138 [E][3] : Bank Disclosure15-138 § 15:6.5 : Other Business Conduct and Sales Practice Rules15-139 [A] : Sales Presentations15-139 [B] : Cold Calling and Telemarketing Practices15-141 [C] : Bank Broker-Dealer Rule15-142 [D] : General Standards of Business Conduct15-143 § 15:7 : Compensation15-145 § 15:7.1 : Rules Specifically Applicable to Variable Contract Compensation Arrangements15-145 [A] : Current Rules15-145 [A][1] : Dealing Only with Members15-145 [A][2] : Limits on Sales Charges15-145 [A][3] : Refunds and Commission-Netting Practices15-146 [A][4] : Regulation of Cash and Non-Cash Compensation15-146 [A][4][a] : Associated Person Receipt of Compensation15-148 [A][4][b] : Prohibition on Non-Cash Compensation15-149 [A][4][c] : Record-Keeping Requirements15-151 [A][4][d] : Applicability to Exempted Securities15-152 [B] : Proposed Rule Changes15-152 § 15:7.2 : General Rules Governing Compensation15-152 [A] : Payments to Non-Members15-152 [B] : Payments to Associated Persons15-153 [C] : Payments to Another Member’s Associated Person15-153 [D] : Payments to Former Registered Persons15-155 [E] : Assignments by Associated Persons15-155 [F] : Referral Fees and Transaction-Based Compensation15-156 [G] : Payments to Customers15-157 § 15:7.3 : Sales Practices Issues Involving Compensation Arrangements15-157 [A] : Guidance Concerning Mutual Fund Sales Practices15-158 [B] : Tully Committee15-158 [C] : FINRA Study on Compensation15-159 § 15:8 : Customer Accounts and Complaints15-160 § 15:8.1 : Establishment and Maintenance of Customer Accounts15-160 [A] : Customer Accounts and Files15-160 [B] : Customer Agreements15-162 [C] : Acceptance of Accounts15-162 [D] : Approval of Transactions and Correspondence15-163 [E] : Release of Confidential Information15-163 [F] : Customer Account Transfer15-164 § 15:8.2 : Customer Complaints15-165 [A] : Resolution of Customer Complaints15-165 [B] : Settlement Agreements15-165 [C] : Reporting Requirements15-165 § 15:8.3 : Handling Customer Funds, Applications, and Requests15-166 § 15:8.4 : Customer Disclosures and Provision of Information15-167 [A] : Confirmations15-168 [B] : Control Relationship15-168 [C] : Notice of Public Disclosure Program15-168 [D] : Customer Account Statements15-169 [E] : Other Information for Customers15-169 § 15:9 : FINRA Record-Making, Record-Keeping, and Reporting Requirements15-170 § 15:9.1 : FINRA Record-Making and Record-Keeping Requirements15-170 [A] : SEC Records15-170 [B] : Customer Account Records15-171 [C] : Transaction Records15-171 [D] : Correspondence Files15-171 [E] : Advertising Files15-172 [F] : Due Diligence Files15-172 [G] : Customer Complaint Files15-172 [H] : Do-Not-Call Lists15-172 [I] : Associated Person Files15-173 [J] : Training, Supervision, and Continuing Education Files15-173 [K] : Foreign Finders and Other Compensation Payments15-174 [L] : Outside Activities Records15-174 [M] : FINRA Manual15-174 [N] : Application Materials and Bad Acts15-174 [O] : Reports and Filings15-174 § 15:9.2 : Reporting Requirements15-174 [A] : Bad Act Reporting Requirements15-175 [B] : Quarterly Complaints Reporting Requirements15-176 [C] : Changes in Form BD or Membership Application Information15-176 [D] : Annual Assessment Reports and Renewal Fees15-176 [E] : Form U-4 and Form U-5 Filings15-177 [F] : Registered Person Reporting Requirements15-177 § 15:10 : Citations for NASD Rules15-177
	Chapter 16:	Suitability
§ 16:1 : Background16-3 § 16:2 : FINRA Regulatory Framework16-3 § 16:2.1 : General Rules Applying to All Securities16-3 [A] : The Suitability Rule16-3 [A][1] : Text of Old Suitability Rule—NASD Rule 2310 (Effective Through July 9, 2012)16-3 [A][2] : Text of New Suitability Rule—FINRA Rule 2111 (Suitability) (Effective July 9, 2012)16-4 [A][3] : Overview16-7 [A][3][a] : Old NASD Conduct Rule 2310 (Effective Through July 9, 2012)16-7 [A][3][b] : FINRA Rule 2111 (Suitability) (Effective July 9, 2012)16-8 [A][3][b][i] : Recommendations to Customers16-9 [A][3][b][ii] : Investment Strategies16-11 [A][3][b][iii] : Reasonable-Basis; Customer-Specific; Quantitative Suitability16-11 [A][3][b][iv] : Customer’s Investment Profile16-12 [A][3][b][v] : Institutional Investors16-13 [A][3][c] : FINRA Rule 2090 (Know Your Customer) (Effective July 9, 2012)16-14 [A][4] : General Interpretative Questions Regarding the Application of the Suitability Rule to Variable Products16-15 [A][4][a] : Duty Runs to FINRA Members16-16 [A][4][b] : Duty Runs to Transactions Involving a “Recommendation”16-16 [A][4][c] : Application of the Suitability Rule to Third-Party Sales16-16 [B] : Other Relevant FINRA Rules16-18 [B][1] : Supervisory Systems16-18 [B][2] : Customer Account Requirements16-18 § 16:2.2 : FINRA Rulemaking and Related Guidance Specific to Variable Product Sales16-18 [A] : Reminder That Sales of Variable Contracts Are Subject to FINRA Suitability Requirements: 199616-19 [B] : Sale of Variable Annuities: 199916-19 [C] : Sale of Variable Life Insurance: 200016-20 [D] : Replacement of Annuities’ Impact on Contract Value and Death Benefit—Regulatory & Compliance Alert: 200216-21 [E] : Application of Suitability Rule to Transactions Where Registered Product Is Sold to Purchase Unregistered Product—Regulatory & Compliance Alert: 2002; Notice to Members 05-5016-21 [F] : SEC/NASD Joint Report: 200416-21 [G] : FINRA Rule 2330—Supervision and Suitability of Annuity Transactions16-22 [G][1] : Text of FINRA Rule 233016-23 [G][2] : Coverage16-28 [G][3] : Recommendation Requirements16-29 [G][4] : Principal Review and Approval16-30 [G][5] : Supervisory Procedures and Training16-30 § 16:2.3 : Recent FINRA Enforcement and Examination Focus on Variable Products16-31 [A] : Recent Enforcement Cases16-31 [B] : Exam Initiatives16-32 [B][1] : Variable Annuity Distributor Pilot16-32 [B][2] : Focus on Guarantees16-33 § 16:3 : SEC Regulatory Framework16-33 § 16:3.1 : Anti-Fraud Provisions16-34 § 16:3.2 : Broker-Dealer Books and Records Rule16-34 § 16:4 : State Regulatory Framework16-34 § 16:4.1 : NAIC Model Variable Life Insurance Regulation16-34 § 16:4.2 : NAIC Suitability in Annuity Transactions Model Regulation16-35 [A] : Customer Information16-35 [B] : Supervisory Program16-36 [C] : Records16-36 § 16:4.3 : 2010 Amendments16-36 § 16:4.4 : Insurer Supervisory Programs16-37
	Chapter 17:	Replacement of Insurance Products
§ 17:1 : Introduction17-3 § 17:2 : Background17-5 § 17:2.1 : Definition of a Replacement17-5 § 17:2.2 : Early Regulation of Replacements17-7 [A] : State Regulation17-7 [B] : Federal Regulation17-9 § 17:2.3 : Bonus Annuities17-10 § 17:2.4 : Recent Developments17-12 § 17:3 : Federal Regulation of Replacements17-16 § 17:3.1 : Suitability17-17 § 17:3.2 : Duty of Fair Dealing17-21 § 17:3.3 : Disclosure17-22 § 17:3.4 : Supervision17-25 § 17:4 : State Regulation17-28 § 17:4.1 : State Replacement Regulation17-29 [A] : NAIC Model Regulations17-29 [A][1] : Life Insurance and Annuities Replacement Model Regulation17-30 [A][1][a] : Scope and Application17-31 [A][1][b] : Duties of Producers17-33 [A][1][c] : Duties of Insurers That Use Producers17-34 [A][1][d] : Duties of Replacing Insurers That Use Producers17-35 [A][1][e] : Duties of the Existing Insurer17-36 [A][1][f] : Duties of Insurers with Respect to Direct Response Solicitations17-37 [A][1][g] : Violations and Penalties17-38 [B] : Suitability in Annuity Transactions Model Regulation17-40 [B][1] : Scope and Application17-41 [B][2] : Suitability17-42 [B][3] : Supervision17-43 [B][4] : Insurance Producer Training17-44 [B][5] : Compliance; Mitigation; Penalties17-45 [B][6] : State Reaction to the Suitability in Annuity Transactions Model17-46 [C] : Model Unfair Trade Practices Act17-47 § 17:4.2 : State Statutes and Regulations17-49 [A] : New York State Insurance Department Regulation 6017-49 [A][1] : Scope and Application17-51 [A][2] : Duties of Producers17-52 [A][3] : Duties of All Insurers17-54 [A][4] : Duties of Replacing Insurers17-54 [A][5] : Existing Insurers17-56 [A][6] : Prohibited Acts17-57 [A][7] : Market Conduct Exams and Disciplinary Action17-58 [B] : California17-60 [C] : Florida17-64 [D] : Illinois17-66 [E] : Pennsylvania17-67 § 17:4.3 : State Securities Laws17-68
	Chapter 18:	Broker-Dealer and Adviser Uniform Standard of Care
§ 18:1 : Introduction18-2 § 18:2 : Chronology—Regulatory Response to Convergence of Broker-Dealer and Advisory Services18-2 § 18:3 : Standard of Care Imposed Under the Current Regulatory Structure18-5 § 18:4 : Treatment of Broker-Dealers Under the Investment Advisers Act18-6 § 18:4.1 : Generally18-6 § 18:4.2 : RAND Report18-7 § 18:5 : Harmonizing the Broker-Dealer and Investment Adviser Standard of Care18-8 § 18:6 : Legislative Proposals18-9 § 18:6.1 : Investor Protection Act of 200918-9 § 18:6.2 : House Proposal18-9 § 18:6.3 : Senate Banking Committee Proposal18-10 § 18:6.4 : Dodd-Frank Wall Street Reform and Consumer Protection Act of 201018-11 [A] : The SEC Study18-13 [B] : SEC#x2019;s Request for Cost/Benefit Data18-16 [B][1] : Assumptions About a Possible Uniform Fiduciary Standard18-17 [B][2] : Possible Uniform Fiduciary Standard18-18 [B][3] : Possible Alternatives to a Uniform Standard18-19 [B][4] : Key Industry Concerns18-20 [B][5] : Information About Changes Made in Response to 2007 Wrap Fee Account Rule Case18-21 [B][6] : Information About Further Regulatory Harmonization18-21 § 18:7 : Practical Implications to Consider18-22 § 18:8 : Other Initiatives18-23 § 18:8.1 : Separate Department of Labor Proposed Rule—Definition of the Term “Fiduciary”18-23 § 18:8.2 : The GAO’s Financial Planner Study18-24
	Chapter 19:	Advertising
§ 19:1 : Overview19-3 § 19:2 : Content Requirements19-4 § 19:2.1 : SEC Content Requirements19-4 [A] : Background19-4 [B] : Permissible Types of Marketing Material19-5 [B][1] : Advertisements19-6 [B][1][a] : Omitting Prospectuses: Rule 482 Advertisements19-6 [B][1][b] : Generic Advertisements19-7 [B][2] : Supplemental Sales Literature19-7 [C] : Standards19-8 § 19:2.2 : FINRA Content Requirements19-8 [A] : FINRA Communication Categories19-9 [A][1] : Retail19-10 [A][2] : Institutional Communications19-10 [A][2][a] : Internal Communications19-11 [A][2][b] : “Reason to Believe” Standard19-11 [A][3] : Correspondence19-12 [A][3][a] : Prior Definition of Correspondence19-12 [B] : Requirements As to Content19-13 [B][1] : General Content Standards Applicable to All Communications with the Public19-13 [B][2] : Predictions and Projections19-14 [B][3] : Testimonials19-14 [B][4] : Use and Disclosure of Member’s Name19-14 [B][5] : Comparisons19-16 [B][6] : Performance Figures19-16 [B][7] : Tax19-17 [B][7][a] : Tax-Deferral Illustrations19-17 [B][8] : Specific Content Standards Applicable to Variable Life and Variable Annuity Products19-18 § 19:2.3 : State Content Requirements19-20 [A] : Applicability: Definition of Advertising19-20 [B] : Requirements As to Content19-21 [B][1] : General Standards19-21 [B][2] : Specific Disclosure Requirements19-21 [B][3] : Identity of Insurer and Policies19-22 § 19:3 : Internal Review and Record-Keeping Procedures19-22 § 19:3.1 : SEC Internal Review Requirements19-22 § 19:3.2 : FINRA Internal Review and Record-Keeping Requirements19-22 [A] : Institutional Sales Material19-23 [B] : Correspondence19-24 [C] : Material Used by Intermediary Firms19-24 [D] : Other Exceptions: Market Letters, Online Posts, and Administrative Communications19-24 § 19:3.3 : State Internal Review and Record-Keeping Requirements19-25 § 19:4 : Filing Requirements19-25 § 19:4.1 : Requirements to File Sales Material with the SEC19-25 § 19:4.2 : FINRA Filing Requirements19-26 [A] : FINRA Review Procedure19-26 [B] : Exceptions to the Filing Requirements19-26 [B][1] : Institutional Sales Material and Correspondence19-26 [B][1][a] : For “Internal Use Only”19-27 [B][2] : Prospectuses19-27 [B][3] : Updates of Previously Filed Material19-28 [B][4] : Unregistered Group Variable Annuities19-28 [B][5] : Advisory Services19-28 [B][6] : Listing of Available Securities19-29 [B][7] : Traditional Products19-29 [B][8] : Extemporaneous Statements at Seminars19-29 [B][9] : Independently Prepared Reprints19-29 [B][10] : Online Communications19-30 [B][11] : Templates19-30 § 19:4.3 : State Filing Requirements19-30 § 19:5 : Specific Types of Variable Products Sales Literature19-30 § 19:5.1 : Performance Advertising19-30 [A] : Variable Annuity Performance Advertising19-31 [A][1] : Fund Performance Predating the Fund’s Inclusion in a Variable Product19-32 [A][2] : Related Performance19-33 [A][2][a] : Inclusion of Related Performance Information in a Prospectus19-33 [A][2] : Inclusion of Related Performance in Advertising and Sales Literature19-34 [B] : Variable Life Performance19-31 § 19:5.2 : Variable Annuity Tax-Deferral Illustrations19-38 § 19:5.3 : Interactive Computer Software Programs That Compare Variable Annuities to Mutual Funds19-39 § 19:5.4 : Foreign Language Marketing Material19-40 § 19:5.5 : Bonus Annuity Products19-40 § 19:5.6 : Variable Annuity Illustrations19-41 [A] : Background19-41 [B] : Recent Regulatory Developments19-44 § 19:5.7 : Dollar Cost Averaging Programs19-45 § 19:5.8 : Rankings19-45 § 19:6 : Recent Developments Related to FINRA’s Variable Product Advertising Rules19-47 § 19:6.1 : Variable Product Advertising Rule Filing19-47 [A] : Regulatory Notice 08-3919-47 [B] : Guarantee Claims and Riders19-48 [C] : Historical Performance19-48 [C][1] : Variable Annuities19-48 [C][2] : Variable Life19-48 [C][3] : Pre-Dated Performance19-49 [C][4] : Combined Performance19-49 [D] : Illustrations Based on Assumed Rates of Return19-50 [D][1] : Generally19-50 [D][2] : Assumed Rate of Return19-50 [D][3] : Varying Assumed Rates of Return19-51 [D][4] : Reflecting Fund Expenses in Illustrations19-51 [E] : Illustrations Based on Historical Performance19-51 [F] : Definitions19-52 [G] : IM-2210-1 Tax-Deferred Illustrations19-52 [H] : Current Status19-53
	Chapter 20:	Variable Life Insurance Illustrations
§ 20:1 : Overview20-2 § 20:1.1 : The Different Types of Illustrations20-2 [A] : Non-Personalized Illustrations20-2 [B] : Personalized Illustrations20-2 [B][1] : The Basic Illustration20-2 [B][2] : The Conceptual Illustration20-3 § 20:2 : Overview of the Regulatory Structure20-3 § 20:2.1 : The SEC Framework20-3 § 20:2.2 : The FINRA Framework20-3 [A] : Filing Requirement20-4 [B] : Rule Proposal20-4 § 20:2.3 : The State Framework20-4 § 20:3 : Regulation of the Underlying Assumptions20-4 § 20:3.1 : Cash Flow: Premium Payments, Loans, and Withdrawals20-5 § 20:3.2 : Charges20-6 [A] : Contract Charges20-6 [B] : Fund Charges20-6 [B][1] : Fund-Specific Illustrations20-7 § 20:3.3 : Investment Returns20-8 [A] : Prospectus Illustrations20-8 [A][1] : Historical Illustrations20-9 [B] : Personalized Illustrations20-9 [B][1] : Historical Illustrations20-10 § 20:4 : Required Disclosures20-10 § 20:5 : Requirement to Use an Illustration20-11 § 20:6 : Special Topics20-11 § 20:6.1 : Internal Rate of Returns20-11 § 20:6.2 : Comparisons20-12
	Chapter 21:	Marketing on the Internet
§ 21:1 : Introduction21-4 § 21:2 : SEC Pronouncements21-5 § 21:2.1 : SEC Analytical Framework21-5 [A] : Basic Premise21-5 [B] : Additional Considerations21-5 [B][1] : Consent21-6 [B][1][a] : Requirements21-6 [B][1][b] : Negative Consents21-10 [B][1][c] : Third-Party Reliance21-11 [B][2] : Notice21-11 [B][3] : Access21-12 [B][4] : Evidence of Delivery21-14 § 21:2.2 : SEC Regulation21-14 [A] : Advertisements21-14 [A][1] : Types of Advertisements21-14 [A][2] : Legends21-15 [B] : Sales Literature21-15 [B][1] : Prospectus Delivery Requirement21-15 [B][2] : Mixed Media21-16 [B][3] : Unsolicited Materials21-17 [B][4] : Applications21-17 [C] : Prospectuses21-18 [C][1] : General Requirements21-18 [C][1][a] : Format of Prospectus21-18 [C][1][b] : Internet Legend21-18 [C][2] : Preliminary Prospectuses21-19 [C][3] : Definitive Prospectuses21-20 [C][4] : Profile Prospectuses21-20 [C][4][a] : Electronic Delivery of Profiles21-21 [C][4][b] : Industry Response21-23 [C][5] : Updates and Amendments21-24 [C][6] : Information Incorporated by Reference into Prospectus21-24 [D] : Reports and Proxies21-25 [E] : Revised Materials21-25 § 21:2.3 : Recent Pronouncements21-26 [A] : Single Document Delivery or “Householding”21-26 [A][1] : Use of Electronic Means21-26 [B] : Electronic “Road Shows”21-27 [B][1] : e-Media21-28 [B][2] : Net Roadshow I21-29 [B][2][a] : Website Delivery21-29 [B][2][b] : Supporting Arguments21-30 [B][3] : Bloomberg L.P.21-31 [B][3][a] : Audio, Video, and Internet Delivery21-31 [B][3][b] : Supporting Arguments21-32 [B][4] : Net Roadshow II21-32 [C] : Private Offerings21-33 [C][1] : Lamp Technologies, Inc.21-34 [C][1][a] : Nature of Website21-34 [C][1][b] : Procedural Safeguards21-35 [C][2] : IPONET21-35 [C][2][a] : Nature of Website21-35 [C][2][b] : Procedural Safeguards21-36 [D] : Third-Party Service Providers21-36 [D][1] : Broker/Dealer Status21-36 [D][1][a] : Charles Schwab & Co., Inc.21-36 [D][1][b] : Angel Capital Electronic Network21-38 [D][1][c] : Progressive Technology, Inc.21-39 [D][1][d] : Oil-N-Gas21-40 [D][2] : Responsibility for Third-Party Content21-40 [E] : Use of Electronic Means in Issuer’s Discretion21-41 [F] : Plain English21-42 § 21:3 : NASD Pronouncements21-42 § 21:3.1 : Overview21-42 § 21:3.2 : Suitability21-43 [A] : Possible Higher Duty Where Internet Involved21-43 [B] : Special Care for Widely Disseminated Communications21-44 § 21:3.3 : Supervision21-44 [A] : Supervisory Procedures Must Cover Online Activities21-44 [B] : Supervisory Procedures for Incoming and Outgoing Correspondence21-45 [B][1] : Factors to Consider in Developing Procedures21-45 [B][2] : Specific Provisions21-46 [B][3] : Record Retention21-46 § 21:3.4 : Communications with the Public21-47 [A] : Websites21-47 [B] : Hyperlinks21-47 [B][1] : Ongoing Hyperlinks to Internet Sites21-47 [B][2] : Hyperlinks to Educational Material21-49 [B][3] : Hyperlinks to a Home Page21-49 [C] : Bulletin Boards21-49 [D] : Email21-50 [D][1] : Group Email21-50 [D][2] : Individual Email21-50 [E] : Chat Rooms and Electronic Conversations21-50 [F] : Broker/Dealer Only Materials21-51 [G] : Research Reports21-51 [H] : Business Cards21-51 § 21:3.5 : Filing Requirements21-51 [A] : Updated Websites21-51 [B] : Newsbriefs21-51 [C] : Definitive Copies21-52 [D] : Expedited Review21-52 [E] : Generic References21-52 § 21:4 : Emerging Issues21-52 § 21:4.1 : Hyperlinks21-52 [A] : “Naked” Underlying Fund Performance21-53 [B] : “Clone Fund” Performance21-54 § 21:4.2 : “Push” Technology21-54 § 21:5 : Conclusion21-55
	Chapter 22:	SEC Insurance Product Exams
§ 22:1 : Introduction22-2 § 22:2 : History of the Variable Products Inspection Program22-3 § 22:2.1 : Background22-3 § 22:2.2 : Office of Compliance Inspections and Examinations22-4 § 22:2.3 : SEC and FINRA Joint Variable Product Examinations22-5 § 22:2.4 : SEC, FINRA, and NASAA Free Lunch Seminar Sweep Examinations22-9 § 22:3 : OCIE Variable Products Inspection Focus22-10 § 22:4 : The Mechanics of Variable Products Inspections22-13 § 22:4.1 : Inspection Site22-14 [A] : Home Office Versus Off-Site22-14 [B] : Third-Party Service Provider22-15 [C] : Sales Office22-15 § 22:4.2 : Frequency of Variable Product Inspections22-15 § 22:4.3 : Inspection Targets22-16 § 22:4.4 : Notice Period22-17 § 22:4.5 : Requests for Documentation22-17 [A] : Phase I Request for Information for Variable Product Sponsors22-18 [A][1] : Customer Transactions22-18 [A][2] : Replacement Transactions22-19 [A][3] : Financed Transactions22-20 [B] : Phase II Request for Information for Variable Product Sponsors22-20 [B][1] : Legal, Back-Office Administration, and Customer Transaction Files22-21 [B][2] : Accounting Documents22-22 [B][3] : Market Conduct and Sales Practices22-22 [B][4] : Rule 38a-1 Program Documentation22-24 [C] : Request for Information for Broker-Dealers That Solicit Variable Products22-24 [C][1] : Financial and Corporate Books and Records22-24 [C][2] : Sales Practice Information Request22-25 [C][3] : Variable Annuity Information Request22-26 § 22:4.6 : Duration of Inspection22-27 § 22:4.7 : Inspection Follow-Up22-27 [A] : Evaluation and Reporting Components22-27 [B] : Deficiency Letter and Response to Inspection Findings22-28 § 22:5 : An In-Depth Look at Variable Product Back-Office (Administration) Inspections22-28 § 22:5.1 : Opening Interview/Outline of Review Points22-28 § 22:5.2 : Compliance Policies and Procedures and Designated CCO Manuals22-34 § 22:5.3 : Transaction Processing and “As of” Pricing22-34 § 22:5.4 : NAV and AUV Computations22-36 § 22:5.5 : Walk-Through22-37 § 22:6 : An In-Depth Look at Variable Product Market Conduct and Sales Practice Inspections22-39 § 22:6.1 : General22-39 § 22:6.2 : Supervisory and Market Conduct Compliance Procedures Manual22-40 § 22:6.3 : Supervisory and Compliance Systems22-40 § 22:6.4 : Sales Office Activity22-41 § 22:6.5 : Sales Office Component22-41 § 22:6.6 : Opening Interview/Outline of Review Points22-42 § 22:6.7 : Request for Documentation22-46 § 22:7 : Frequently Cited Exam Deficiencies22-47 § 22:8 : Conclusion22-47 Appendix 22A : Examination Request ListApp. 22A-1
	Chapter 23:	FINRA Examination and Disciplinary Programs
§ 23:1 : Introduction23-2 § 23:1.1 : Statutory Authority23-3 [A] : Examination Authority Granted to Self-Regulatory Organizations23-3 [B] : Allocation of Regulatory Responsibility Among SROs23-3 [C] : Scope of FINRA Examination Authority23-4 § 23:1.2 : Types of Examinations23-5 [A] : Cycle Exams23-5 [A][1] : Conduct of the Exam23-7 [B] : Cause Exams23-10 [C] : Branch Exams23-10 [D] : Market Regulation Exams23-11 [E] : Sweep Exams23-11 [F] : New Member Exams23-11 [G] : Letter Exams23-12 [H] : Advertising Spot-Check Exams23-12 [I] : Product-Based Exams23-12 [J] : SEC Quality Exams23-13 § 23:1.3 : Rights and Responsibilities Vis-à-Vis Members and FINRA23-13 [A] : FINRA Right to Information and Inspection23-13 [B] : Duty to Comply23-13 § 23:2 : FINRA Disciplinary Program23-14 § 23:2.1 : Generally23-14 § 23:2.2 : Disciplinary Program23-15 [A] : Delegation of Responsibility to FINRA23-15 [B] : Enforcement Department Investigation23-17 [C] : Authorization of Proceedings23-18 [D] : Hearings23-18 [E] : Issuance and Review of Decisions23-20 § 23:2.3 : Resolution of Disciplinary Proceedings23-21 § 23:2.4 : Sanctions23-21 § 23:2.5 : SEC Review23-22 § 23:2.6 : Statutory Disqualifications23-23 § 23:2.7 : Conclusion23-23
	Chapter 24:	State Insurance Department Market Conduct Examinations
§ 24:1 : Overview24-1 § 24:1.1 : Statutory Authority24-2 § 24:1.2 : National Association of Insurance Commissioners (NAIC)24-2 § 24:2 : The Mechanics of the Examination24-3 § 24:2.1 : Types of Examinations24-3 § 24:2.2 : Areas Reviewed24-4 § 24:3 : Conduct of Examinations24-6 § 24:3.1 : The “Call Letter”24-6 § 24:3.2 : Examination Technique24-7 § 24:3.3 : Books and Records24-7 § 24:3.4 : Confidentiality24-7 § 24:4 : Examination Report24-8 § 24:5 : Challenges and Reform Efforts24-9
	Chapter 25:	Private Placement Variable Life Insurance
§ 25:1 : Introduction25-3 § 25:1.1 : Structure25-4 § 25:1.2 : Insurance Regulation25-4 § 25:1.3 : Tax Treatment25-5 § 25:1.4 : Fees and Charges25-5 § 25:1.5 : Distribution25-6 § 25:2 : Regulatory Treatment of PPVLI Products25-6 § 25:3 : The Securities Act of 193325-8 § 25:3.1 : Exemptions25-8 § 25:3.2 : Rule 506 Offerings25-9 [A] : Accredited Investors25-9 [A][1] : Natural Persons25-10 [A][2] : Corporations, Limited Liability Companies, Partnerships, and Business Trusts25-11 [A][3] : Common Law and Similar Trusts25-13 [A][4] : Employee Benefit Plans—Rule 501(a)(1)25-14 [A][5] : “Formed for the Specific Purpose”25-15 [B] : Regulation D—Conditions25-16 [B][1] : Integration25-16 [B][2] : Information25-18 [B][2][a] : Offerings to Accredited Investors25-18 [B][2][b] : Offerings to Non-Accredited Investors25-19 [B][2][c] : Offerings to Both Accredited and Non-Accredited Investors25-20 [B][2][d] : Disclosures Generally25-20 [B][3] : Manner of Offering25-21 [B][4] : Resale Restrictions25-24 [B][5] : Notice of Offering25-24 [C] : Rule 506—Specific Terms25-25 § 25:3.3 : State Securities Law Registration and Filing25-27 § 25:4 : Investment Company Act of 194025-27 § 25:4.1 : Exclusions Under the Investment Company Act25-28 [A] : Section 3(c)(1) Separate Accounts25-28 [A][1] : “Look-Through” Provisions25-29 [A][2] : Anti-Circumvention Principles25-32 [A][3] : Integration25-35 [A][4] : Estates and Donees25-36 [A][5] : General Considerations25-36 [B] : Section 3(c)(7) Separate Accounts25-37 [B][1] : Qualified Purchasers25-37 [B][1][a] : Natural Persons25-39 [B][1][b] : Corporations, Partnerships, and Other Entities25-40 [B][1][c] : Common Law and Similar Trusts25-41 [B][1][d] : Pension Plans and IRAs25-43 [B][2] : “Formed for the Specific Purpose”25-43 [B][3] : Estates and Donees25-44 [B][4] : Anti-Circumvention Principles25-44 [B][5] : Integration25-44 [B][6] : Investments25-44 [C] : Section 12(d)(1)—Anti-Pyramiding25-45 § 25:4.2 : Fees and Expenses25-45 § 25:5 : Securities Exchange Act of 193425-46 § 25:5.1 : Section 12(g) Registration25-46 § 25:5.2 : Antifraud Provisions25-46 § 25:6 : Commodities Exchange Act25-47 § 25:7 : Tax Considerations25-48 § 25:7.1 : Diversification25-48 § 25:7.2 : Investor Control25-48 § 25:8 : Insurance Agencies and Other Distributors25-49 § 25:8.1 : Broker-Dealer Registration25-49 § 25:8.2 : FINRA Regulation25-51 § 25:8.3 : Investment Adviser Registration25-51 § 25:8.4 : Commodity Trading Advisor Regulation25-53 § 25:9 : Funding Vehicles25-53
	Chapter 26:	Asset Allocation Programs and Funds of Funds in Variable Insurance Products
§ 26:1 : Introduction26-2 § 26:2 : Asset Allocation Programs26-2 § 26:2.1 : Background26-2 § 26:2.2 : SEC Staff Guidance on Asset Allocation Programs in Variable Products26-4 [A] : Generally26-4 [B] : Investment Company Act Issues26-5 [C] : Investment Advisers Act Issues26-6 § 26:2.3 : ImplementationIssuesUnder theSEC’sGuidance26-7 [A] : Selection of Investment Adviser for Program26-7 [B] : Role of Broker-Dealer26-9 [C] : Updates to Static Asset Allocation Models26-10 [D] : Notice Required by Opt-Out Programs26-10 § 26:2.4 : ERISA Concerns Regarding Selection of Mutual Funds in Asset Allocation Programs26-11 § 26:3 : Funds of Funds26-16 § 26:3.1 : Generally26-16 § 26:3.2 : Statutory Restrictions and Exceptions Under Section 12 of the Investment Company Act26-16 § 26:3.3 : SEC Exemptive Relief for Funds of Funds in Variable Products26-18 [A] : Generally26-18 [B] : Compliance with Section 17(e)26-21 [C] : Mixed and Shared Funding Issues26-24 § 26:3.4 : Funds of Funds Exemptive Rules26-26 [A] : Generally26-26 [B] : Rule 12d1-1 (Money Market Fund Cash Sweep Arrangements)26-27 [C] : Rule 12d1-2 (Expanded Investment in Other Types of Issuers for Affiliated Funds of Funds)26-28 § 26:3.5 : Disclosure Requirements for Funds of Funds in Variable Products26-28 § 26:3.6 : Proposed Rules Regarding Funds Investing in ETFs26-29 § 26:3.7 : Use of Target-Date Funds in Variable Annuities26-31
	Appendix A:	Statutory Material
		Table of Authorities
		Index

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