TreatiseTreatise

Variable Annuities and Other Insurance Investment Products (Third Edition)

 by Clifford E. Kirsch
 
 Copyright: 2018

 Product Details >> 

Product Details

  • ISBN Number: 9781402430442
  • Page Count: 2032
  • Number of Volumes: 2
  •  

At a time when the SEC, FINRA, and state authorities are putting increasing regulatory pressure on the securities industry, the new Variable Annuities and Other Insurance Investment Products, Third Edition continues to provide comprehensive and accessible guidance to the many federal and state rules governing these instruments, as well as new coverage of other insurance investment products, such as SEC-registered fixed annuities. Every key area is addressed to clarify 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.

This treatise includes discussion of:

  • State insurance licensing requirements for distributors of variable insurance products and state insurance suitability rules, including an update on recent rulemaking activity at the state level to enhance the standard of care under the suitability rules
  • Key design elements that define index-linked variable annuities (ILVAs), the regulatory steps insurers must take in order to offer ILVAs, and recent regulatory initiatives and industry advocacy efforts that could lead to regulatory relief that would both foster the expansion of the current menu of ILVAs available in the market, and provide a springboard for ongoing innovative product development
  • Life settlements, including a review of the unique issue governing life insurance policies and transferable property
Updated at least once a year, Variable Annuities and Other Insurance Investment Products, Third Edition is a vital reference for securities professionals and attorneys, compliance officers, federal and state regulators, general practitioners, and investors.
  Table of Contents
  Introduction
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
  • Table 1-1 : Variable Annuity Riders1-9
    • [C] : Current Product-Related Developments1-9
      • [C][1] : Recent Regulatory-Driven Product Developments1-10
    • [D] : Variable Annuity Share Classes1-11
    • [E] : Unique Investment Features1-11
    • § 1:2.3 : Annuities Sold in the Retirement Marketplace1-14
  • § 1:3 : Variable Life Insurance in Today’s Marketplace1-14
    • § 1:3.1 : Generally1-14
    • § 1:3.2 : Variable Life Insurance in the Retail Marketplace1-15
    • § 1:3.3 : Life Insurance Sold to Individuals Through Employers and Associations1-16
    • § 1:3.4 : Life Insurance Sold to Businesses (Corporate Owned Life Insurance)1-16
  • § 1:4 : Legal Structure and Changes1-17
  • Figure 1-1 : Contributions and Premium Payments1-18
  • § 1:5 : Regulatory Treatment of Variable Products1-19
    • § 1:5.1 : Generally1-19
    • § 1:5.2 : Product Design and Approval1-20
      • [A] : State Insurance Requirements Regarding Product Design and Approval1-20
      • [B] : Federal Securities Laws Regarding Product Design and Approval1-21
        • [B][1] : Background1-21
        • [B][2] : Private Offering Exception1-23
        • [B][3] : Retirement Plan Exemption1-23
      • [C] : State Securities Laws1-23
    • § 1:5.3 : Product Administration1-24
    • § 1:5.4 : Product Distribution1-26
      • [A] : Background1-26
      • [B] : FINRA Regulation1-27
        • [B][1] : Generally1-27
        • [B][2] : Requirements Governing the Suitability of Variable Annuity Transactions1-28
          • [B][2][a] : NASD’s Suitability Rule Applying to Recommended Transactions—FINRA Rule 21111-28
          • [B][2][b] : Guidance Concerning Variable Annuity Exchanges1-29
        • [B][3] : Controls Over Marketing Material: Review, Content, and Filing Requirements1-30
        • [B][4] : Requirement to Adopt and Implement a Supervisory System Over Sales Activity1-31
          • [B][4][a] : Written Supervisory Procedures1-31
          • [B][4][b] : Chain of Supervision1-31
          • [B][4][c] : Approval of Transactions1-31
          • [B][4][d] : Approval of Correspondence1-31
          • [B][4][e] : Annual Compliance Meetings with Representatives1-31
          • [B][4][f] : Office Designations1-32
          • [B][4][g] : Inspections1-32
          • [B][4][h] : “Outside” Activities of a Representative1-32
          • [B][4][i] : Continuing Education Requirements1-32
        • [B][5] : Requirement to Establish an Effective Compliance Program1-33
        • [B][6] : Controls Over Compensation1-33
        • [B][7] : Examinations and Enforcement1-33
      • [C] : Group Variable Annuities—Regulation Under FINRA Rules1-35
    • § 1:5.5 : Marketing1-35
      • [A] : Generally1-35
      • [B] : SEC Rules1-36
      • [C] : FINRA Rules1-37
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: Regulation of Variable Insurance Products Under the Investment Company Act of 1940
  • § 4:1 : Introduction4-2
  • § 4:2 : Conceptual Framework Under the Investment Company Act4-4
    • § 4:2.1 : Generally4-4
    • § 4:2.2 : Separate Accounts Under State and Federal Law4-5
    • § 4:2.3 : Variable Contracts Separate Accounts As Investment Companies and UITs4-12
    • § 4:2.4 : UITs Under Investment Company Act Section 12(d)1(E)—Contract Holder Voting and Underlying Funds4-14
  • § 4:3 : Variable Insurance Contracts and the Investment Company Act4-16
    • § 4:3.1 : Classification of Investment Companies4-16
      • [A] : Open- and Closed-End Funds—Diversified and Non-Diversified Funds4-16
    • § 4:3.2 : Registration of the Variable Separate Account and the Variable Contract Offering4-17
      • [A] : Overview4-17
      • [B] : Underlying Funds—Form N-1A4-19
      • [C] : Variable Contracts—Forms N-4 and N-64-22
      • [D] : Prospectus Updates4-24
    • § 4:3.3 : Organizational and Governance Requirements4-25
      • [A] : Overview4-25
      • [B] : Initial Funding4-25
      • [C] : Custody4-26
      • [D] : Election and Requirements of Board of Directors—Underlying Funds4-27
      • [E] : Approval of Advisory Fees4-31
      • [F] : Capital Structure—Senior Securities and Preferential Rights4-34
    • § 4:3.4 : Affiliated Transactions/Fiduciary Responsibility4-36
      • [A] : Overview4-36
      • [B] : Principal Transactions4-38
      • [C] : Joint Transactions4-39
      • [D] : Agency Transactions4-39
      • [E] : Fiduciary Responsibility4-40
      • [F] : Reasonableness Standard4-42
      • [G] : Fund Selection and Substitution4-44
      • [H] : Insurer Disclosure Liability4-44
    • § 4:3.5 : Valuation, Redemptions, Exchanges, and Distribution4-45
      • [A] : Valuation and the Forward Pricing Rule4-45
      • [B] : Redemptions4-47
      • [C] : Exchanges4-48
      • [D] : Distribution4-50
    • § 4:3.6 : Administrative Considerations4-53
      • [A] : Reporting4-53
      • [B] : Recordkeeping4-55
      • [C] : Independent Accountant4-56
      • [D] : Compliance Programs4-57
    • § 4:3.7 : Other Considerations for Variable Insurance Contracts4-58
      • [A] : Insurance Dedicated Funds—Diversification Requirements of Section 817(h)4-58
      • [B] : Mixed and Shared Funding4-60
      • [C] : Summary Prospectus4-62
  • § 4:4 : Conclusion4-66
Chapter 5: Tax Treatment of Variable Contracts; and Appendices 5A-5B
  • § 5:1 : Introduction5-2
  • § 5:2 : Tax Definition of “Variable Contract”5-2
  • § 5:3 : Contractholder Tax Treatment5-4
    • § 5:3.1 : General Contractholder Tax Rules5-4
      • [A] : Life Insurance Contracts5-4
      • [B] : Annuity Contracts5-11
      • [C] : Modified Endowment Contracts5-25
      • [D] : Long-Term Care Insurance Combination Products5-26
    • § 5:3.2 : Special Contractholder Tax Rules Applicable to Variable Contracts5-27
      • [A] : Diversification Rules (I.R.C. § 817(h))5-28
        • [A][1] : General Diversification Test5-29
        • [A][2] : Safe Harbor Test5-29
        • [A][3] : Alternative Test for Variable Life Contracts5-30
        • [A][4] : Rules of Application5-30
  • Figure 5-1 : Unacceptable Structure5-35
  • Figure 5-2 : Acceptable Structure5-36
    • [A][5] : Consequences of Nondiversification5-36
    • [B] : Investor Control5-37
  • § 5:4 : Insurance Company Tax Treatment5-41
  • Appendix 5A : Selected Sections of the Internal Revenue Code and Treasury RegulationsApp. 5A-1
  • Appendix 5B : Treasury Regulation § 1.817-5App. 5B-1
Chapter 6: ERISA Issues
  • § 6:1 : Introduction6-2
  • § 6:2 : ERISA6-2
    • § 6:2.1 : Which Programs Are Covered6-3
    • § 6:2.2 : Exclusions from Coverage: Governmental and Church Plans6-7
  • § 6:3 : Implications of ERISA Coverage6-8
  • § 6:4 : Reporting and Disclosure6-10
    • § 6:4.1 : Overview and Schedule A6-10
    • § 6:4.2 : Schedule C6-12
    • § 6:4.3 : Service Provider Disclosures Under ERISA § 408(b)(2)6-14
    • § 6:4.4 : Participant-Level Disclosures6-15
  • § 6:5 : Fiduciary Responsibilities6-16
    • § 6:5.1 : Overview6-16
    • § 6:5.2 : Fiduciary Status and Plan Assets6-16
    • § 6:5.3 : The “Plan Assets” Issue6-20
  • § 6:6 : Application of the Fiduciary Responsibility Rules to Variable Annuity Contracts6-23
  • § 6:7 : Prohibited Transaction Restrictions6-24
  • § 6:8 : The Best Interest Contract Exemption6-30
  • § 6:9 : Statutory Exemption for Investment Advice6-31
    • § 6:9.1 : General Requirements for Computer Models6-32
    • § 6:9.2 : Authorization, Disclosure, and Other Requirements6-34
    • § 6:9.3 : Relief for Plan Sponsors6-36
  • § 6:10 : Conclusion6-36
Chapter 7: Variable Insurance Product Design
  • § 7:1 : Overview7-2
  • § 7:2 : Federal Regulatory Framework7-4
    • § 7:2.1 : Pre-1996 Federal Regulation7-4
    • § 7:2.2 : The Reasonableness Standard7-5
    • § 7:2.3 : Unused Rulemaking Authority7-6
    • § 7:2.4 : Mechanics of the Reasonableness Representation7-7
      • [A] : Location and Language of Reasonableness Representation7-7
      • [B] : Supporting Memorandum7-7
    • § 7:2.5 : Legislative History7-8
    • § 7:2.6 : SEC Staff Guidance7-9
    • § 7:2.7 : Factors to Consider in Assessing Reasonableness7-9
      • [A] : “Services Rendered”7-10
      • [B] : “Expenses Expected to Be Incurred”7-10
      • [C] : “Risks Assumed”7-10
      • [D] : Aggregate Charges Within Range of Industry Practice7-11
      • [E] : Reasonable Profit7-11
      • [F] : Innovation7-12
      • [G] : General Economic Factors and Industry Trends7-12
      • [H] : Other Regulatory Requirements7-12
      • [I] : Pre-NSMIA Standards7-13
      • [J] : Other Considerations7-13
    • § 7:2.8 : Underlying Fund Fees and Charges7-13
    • § 7:2.9 : Litigation Involving the Reasonableness Standard7-15
    • § 7:2.10 : Specific Contracts Fees and Charges7-15
      • [A] : Mortality and Expense Risk Charges7-16
      • [B] : Administrative Charges7-16
      • [C] : Cost of Insurance Charges7-16
      • [D] : Sales Charges7-17
      • [E] : DAC Taxes7-17
    • § 7:2.11 : Required Liquidity Determination7-18
  • § 7:3 : Variable Annuity Product Design7-19
    • § 7:3.1 : Overview7-19
    • § 7:3.2 : Specific Design Features7-20
      • [A] : Death Benefits7-20
      • [B] : Payout Options7-21
      • [C] : Living Benefits7-22
      • [D] : Long-Term Care Benefits7-23
      • [E] : Sales Charges7-23
      • [F] : Purchases and Redemptions7-23
      • [G] : Partial Withdrawals7-24
      • [H] : Nonforfeiture Law7-24
      • [I] : Free Look Period7-25
      • [J] : Other State Law Features7-25
  • § 7:4 : Variable Life Product Design7-25
    • § 7:4.1 : Overview7-25
    • § 7:4.2 : Specific Design Features7-27
      • [A] : Minimum Death Benefits and Grace Periods7-27
      • [B] : Purchases and Redemptions7-28
      • [C] : Partial Withdrawals7-29
      • [D] : Mandatory Policy Provisions7-29
        • [D][1] : Mandatory Disclosure7-29
        • [D][2] : Contestability Provisions7-30
        • [D][3] : Free Look Period7-30
        • [D][4] : Other Mandatory Provisions7-30
Chapter 8: The Funding Vehicle
  • § 8:1 : Regulation Under the Investment Company Act8-2
  • § 8:2 : Unique Federal Tax Status of Underlying Mutual Funds8-3
  • § 8:3 : Mixed and Shared Funding8-4
  • § 8:4 : Rule 12b-1 Plans8-10
  • § 8:5 : Participation Agreements8-12
    • § 8:5.1 : Purchases and Redemptions8-12
    • § 8:5.2 : Prospectuses and Sales Literature8-13
    • § 8:5.3 : Mixed and Shared Funding Provisions8-13
    • § 8:5.4 : Other Typical Provisions8-14
  • § 8:6 : Substitution of Underlying Funds Held by UIT Accounts8-14
    • § 8:6.1 : Section 26(c) Applications8-16
  • § 8:7 : Mutual Fund Redemption Fees8-20
  • § 8:8 : Rule 22e-3: Exemption for Liquidation of Money Market Funds8-22
  • § 8:9 : Investment Company Liquidity Risk Management Programs8-25
  • § 8:10 : Special Exemptions for Underlying Funds8-26
  • § 8:11 : Fund Summary Prospectus8-28
  • § 8:12 : State Regulation of Underlying Funds8-30
Chapter 9: SEC Registration; and Appendices 9A-9D
  • § 9:1 : Introduction9-2
  • § 9:2 : Drafting Considerations9-3
    • § 9:2.1 : Requirement That Prospectuses Be Written in Plain English9-3
    • § 9:2.2 : SEC Staff Insurance Products Industry Comment Letters9-5
  • § 9:3 : Mechanics of the Registration Process for New Products9-5
    • § 9:3.1 : Filing the Initial Registration Statement9-5
    • § 9:3.2 : Staff Review Process9-6
    • § 9:3.3 : Going Effective9-6
    • § 9:3.4 : Registration Fees9-7
  • § 9:4 : Prospectus Delivery and Updating Requirements9-7
    • § 9:4.1 : Requirement to Keep Prospectus Current9-8
    • § 9:4.2 : Delivery of Updated Prospectus9-8
    • § 9:4.3 : Discontinued Contracts9-9
      • [A] : Generally9-9
      • [B] : Group Contracts9-10
    • § 9:4.4 : Delivery of One Prospectus to Investors Who Share an Address—Householding9-10
    • § 9:4.5 : Electronic Delivery of Prospectuses9-12
  • § 9:5 : Mechanics of Updating the Prospectus9-12
    • § 9:5.1 : Post-Effective Amendments9-13
      • [A] : Generally9-13
      • [B] : Text of Rule 4859-15
    • § 9:5.2 : Stickers9-20
      • [A] : Generally9-20
      • [B] : Text of Rule 4979-21
    • § 9:5.3 : The Yearly Update Season9-22
  • § 9:6 : Forms N-3 and N-4—Registration Forms for Variable Annuities9-22
    • § 9:6.1 : Form N-4 Requirements9-23
  • § 9:7 : The Variable Annuity Profile9-35
  • § 9:8 : Form N-6—Registration Form for Variable Life Insurance9-36
    • § 9:8.1 : Form N-6 Requirements9-37
  • § 9:9 : Form N-1A—Registration Form for Underlying Funds9-48
    • § 9:9.1 : Delivery of Fund Prospectus9-48
  • § 9:10 : Registering a Marketing Value Adjustment Contract9-49
    • § 9:10.1 : Generally9-49
    • § 9:10.2 : MVA Contracts and Exchange Act Reporting9-49
  • § 9:11 : Special Topics9-50
    • § 9:11.1 : Marketing Prior to an Effective Registration Statement9-50
      • [A] : Legal Framework9-50
        • [A][1] : Permissible Marketing Activity During the Waiting Period9-51
          • [A][1][a] : Oral Offers9-52
          • [A][1][b] : Written Offers9-52
    • § 9:11.2 : Rule 38a-1 and the Registration Process9-54
  • Appendix 9A : Form N-4App. 9A-1
  • Appendix 9B : Form N-6App. 9B-1
  • Appendix 9C : Industry Comment LettersApp.9C-1
  • Appendix 9D : Form N-4 Registration Statement Due Diligence GridApp. 9D-1
Chapter 10: State Contract Issues; and Appendix 10A
  • § 10:1 : Regulation of Variable Products10-2
  • § 10:2 : State Standards for Contracts on a Variable Basis10-2
  • § 10:3 : Alternatives to 50-State Filing and Approval10-4
    • § 10:3.1 : Certification Filings on a State-by-State Basis10-4
      • [A] : “Unique Product Features or Design”10-4
      • [B] : The “Certification Memo”10-5
      • [C] : Regulatory Acknowledgement10-6
    • § 10:3.2 : Interstate Product Regulation Compact10-6
      • [A] : The Compact10-6
      • [B] : Variable Compact Products10-8
      • [C] : IIPRC Procedures10-11
      • [D] : Compact Benefits10-11
      • [E] : Noted Compact Product Exceptions10-12
      • [F] : Compact Product Uniformity10-12
  • § 10:4 : Unique Products10-13
    • § 10:4.1 : Innovative Variable Products Developed Post-1996 Amendments to the Investment Company Act of 194010-13
      • [A] : Regulatory Issues Associated with New Product Designs10-14
      • [B] : Disclosure Requirements Under GLBs10-15
      • [C] : Reserve Liabilities for Guaranteed Minimum Death Benefit (GMDB) Riders10-16
    • § 10:4.2 : Synthetic Guaranteed Investment Contract (GIC) Forms10-18
  • § 10:5 : Practical Tips for Policy Form Filing10-19
  • § 10:6 : Conclusion10-21
  • Appendix 10A : Summary of Five-Year Review Comments and PSC Recommendations for Uniform Standards in Phases 2, 3, and 4 of the Five-Year ReviewApp. 10A-1
Chapter 11: Issues Related to Product Administration
  • § 11:1 : Introduction11-1
  • § 11:2 : Variable Annuity Processing Issues11-2
    • § 11:2.1 : Two-Day/Five-Day Rule11-2
  • § 11:3 : Group Variable Annuities11-4
    • § 11:3.1 : Principal Mutual No-Action Letter11-5
  • § 11:4 : Variable Life Processing Issues11-6
  • § 11:5 : Processing of Premium Payments by the Insurer11-8
  • § 11:6 : Allocation of Premiums During the Free Look Period11-9
  • § 11:7 : Impact of Underlying Fund Redemption Fees11-11
Chapter 12: Redemption Fee Rule
  • § 12:1 : Overview12-1
  • § 12:2 : Administrative History12-2
    • § 12:2.1 : Proposal12-2
    • § 12:2.2 : Adoption12-2
    • § 12:2.3 : Amendments12-3
    • § 12:2.4 : Compliance Date12-3
    • § 12:2.5 : Funds Covered by the Rule12-4
  • § 12:3 : Redemption Fee12-5
    • § 12:3.1 : Board Determination12-5
    • § 12:3.2 : Features of Any Redemption Fee12-6
    • § 12:3.3 : Factors for Board Consideration12-9
  • § 12:4 : Shareholder Information Agreements12-10
  • § 12:5 : Industry Standardization Efforts12-14
  • § 12:6 : Implementation of Shareholder Agreement Requirement12-15
  • § 12:7 : Variable Insurance Products Funds12-18
  • § 12:8 : Conclusion12-21
Chapter 13: Insurer Exchange Programs
  • § 13:1 : Introduction13-3
  • § 13:2 : Text of Relevant Provisions13-3
    • § 13:2.1 : Section 11—Offers to Exchange Securities13-3
    • § 13:2.2 : Rule 11a-2—Offers of Exchange by Certain Registered Separate Accounts or Others the Terms of Which Do Not Require Prior Commission Approval13-4
  • § 13:3 : Section 11 of the Investment Company Act13-7
    • § 13:3.1 : Overview13-7
    • § 13:3.2 : Coverage of Section 1113-8
      • [A] : Exchange of Investment Company Security for Another Investment Company Security13-8
        • [A][1] : Reallocation of Sub-Account Assets13-8
        • [A][2] : Section 11 Coverage Summary13-9
      • [B] : Internal Versus External Exchange Offers13-9
      • [C] : Covered Parties: Separate Account; Principal Underwriters13-10
      • [D] : Timing of Exchanges13-11
    • § 13:3.3 : Exceptions to Section 1113-12
      • [A] : Treatment of Retail Transactions: “The Retail Exception”13-12
      • [B] : Rule 11a-213-14
        • [B][1] : Conditions of Rule 11a-2—Variable Life Insurance Contracts13-15
        • [B][2] : Conditions of Rule 11a-2—Variable Annuity Contracts13-15
        • [B][3] : Conditions of Rule 11a-2-Reallocation of Sub-Account Assets13-17
      • [C] : Exemptive Orders13-17
        • [C][1] : Hartford Life Insurance Company—New Contingent Deferred Sales Charge13-19
  • § 13:4 : Insurance Law Considerations13-20
    • § 13:4.1 : State Regulation of Policy Replacements13-21
      • [A] : NAIC Model Unfair Trade Practices Act13-21
      • [B] : NAIC Replacement of Life Insurance and Annuities Model Regulation13-22
        • [B][1] : Exceptions for Certain Exchange Offers13-23
    • § 13:4.2 : Relationship to Section 11 Exchange Offers13-23
      • [A] : Comparison of Section 11 with State Insurance Rules13-23
Chapter 14: SEC Regulation of Product Distribution
  • § 14:1 : Introduction14-2
  • § 14:2 : Broker-Dealer Registration14-3
    • § 14:2.1 : Registration of an Insurance Company/Insurance Company Subsidiary—Exchange Act Release No. 838914-3
    • § 14:2.2 : Registration of an Insurance Agency14-4
  • § 14:3 : Registration As a Transfer Agent14-6
  • § 14:4 : Recordkeeping Requirements14-8
    • § 14:4.1 : Required Records14-8
    • § 14:4.2 : Preservation of Records14-16
      • [A] : Time Period14-16
      • [B] : Location14-16
      • [C] : Requirements to Maintain Records at an Office14-16
    • § 14:4.3 : Recordkeeping—Insurance Company Subsidiary Registered As a Broker-Dealer14-18
  • § 14:5 : Financial Reporting14-18
    • § 14:5.1 : Financial Statements14-18
    • § 14:5.2 : FOCUS Reports14-19
    • § 14:5.3 : Form Custody14-19
  • § 14:6 : Net Capital Requirements14-19
    • § 14:6.1 : Required Level of Net Capital14-19
    • § 14:6.2 : Restrictions on Withdrawals of Equity Capital14-20
  • § 14:7 : Customer Protection Rule14-20
  • § 14:8 : SIPC Membership14-21
  • § 14:9 : Payment of Commissions14-22
    • § 14:9.1 : Payment of Commissions to Captive Agents14-22
    • § 14:9.2 : Payment of Commissions to an Insurance Agency14-22
  • § 14:10 : Broker-Dealer Standard of Care—Proposed Regulation Best Interest14-23
    • § 14:10.1 : Background—Compensation Related Conflicts14-23
    • § 14:10.2 : SEC Regulation Best Interests Proposal14-24
  • § 14:11 : Effecting Transactions14-25
    • § 14:11.1 : Insurance Company’s Role in Effecting Variable Product Transactions14-25
    • § 14:11.2 : Settlement of Transactions14-26
    • § 14:11.3 : Confirmation Requirements14-26
      • [A] : Immediate Confirmation Requirements: Rule 10b-10(a)14-27
      • [B] : Quarterly Confirmation Requirements: Rule 10b-10(b)14-28
      • [C] : SEC Exemptive Authority14-29
      • [D] : Special Considerations Applicable to Variable Products14-29
  • § 14:12 : Duty to Supervise14-30
  • § 14:13 : SEC Exam and Enforcement Authority14-31
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: FINRA Suitability, Supervision, and Sales Practices
  • § 16:1 : Background16-2
  • § 16:2 : FINRA Regulatory Framework16-3
    • § 16:2.1 : General FINRA Rules Applying to All Securities16-3
      • [A] : The Suitability Rule16-3
        • [A][1] : Text of New Suitability Rule—FINRA Rule 2111 (Suitability) (Effective July 9, 2012—Replaced NASD Rule 2310)16-3
        • [A][2] : Discussion of FINRA’s General Suitability Rule16-6
          • [A][2][a] : Old NASD Conduct Rule 231016-6
          • [A][2][b] : FINRA Rule 2111 (Suitability)16-7
            • [B][2][b][i] : Recommendations to Customers16-8
            • [B][2][b][ii] : What Are Investment Strategies?16-9
            • [B][2][b][iii] : Reasonable-Basis; Customer-Specific; Quantitative Suitability16-10
            • [B][2][b][iv] : Customer’s Investment Profile16-11
            • [B][2][b][v] : Institutional Investors16-11
          • [A][2][c] : FINRA Rule 2090 (Know Your Customer) (Effective July 9, 2012)16-13
        • [A][3] : General Interpretative Questions Regarding the Application of FINRA’s General Suitability Rule to Variable Products16-14
          • [A][3][a] : Duty Runs to FINRA Members16-14
          • [A][3][b] : Duty Runs to Transactions Involving a “Recommendation”16-14
          • [A][3][c] : Application of the Suitability Rule to Third-Party Sales16-15
      • [B] : Other Relevant FINRA General Rules16-16
        • [B][1] : Supervisory Systems16-16
        • [B][2] : Customer Account Requirements16-17
    • § 16:2.2 : FINRA Rulemaking and Related Guidance Specific to Variable Product Sales16-17
      • [A] : Reminder That Sales of Variable Contracts Are Subject to FINRA Suitability Requirements: 199616-17
      • [B] : Sale of Variable Annuities: 199916-18
      • [C] : Sale of Variable Life Insurance: 200016-18
      • [D] : Replacement of Annuities’ Impact on Contract Value and Death Benefit—Regulatory & Compliance Alert: 2002; Notice to Members 05-5016-19
      • [E] : Application of Suitability Rule to Transactions Where Registered Product Is Sold to Purchase Unregistered Product—Regulatory & Compliance Alert: 2002; Notice to Members 05-5016-20
      • [F] : SEC/NASD Joint Report: 200416-20
      • [G] : FINRA Rule 2330—Supervision and Suitability of Annuity Transactions16-21
        • [G][1] : Text of FINRA Rule 233016-21
        • [G][2] : Coverage16-27
        • [G][3] : Recommendation Requirements16-27
        • [G][4] : Principal Review and Approval16-28
          • [G][4][a] : Prompt Transmittal Requirement16-29
        • [G][5] : Supervisory Procedures and Training16-30
    • § 16:2.3 : FINRA Enforcement and Examinations16-30
      • [A] : Background16-30
      • [B] : “L” Shares16-32
      • [C] : Guarantees16-32
      • [D] : Exchanges16-33
      • [E] : New York Regulation 6016-33
      • [F] : Supervision of Redemption16-34
      • [G] : Broker-Dealer Access to Variable Annuity Transaction Data16-34
Chapter 17: State Insurance Regulation Applying to the Distribution of Variable Insurance Products
  • § 17:1 : Introduction17-2
  • § 17:2 : State Insurance Licensing Requirements for Distributors of Variable Insurance Products17-2
    • § 17:2.1 : State Regulatory Framework17-2
    • § 17:2.2 : New NAIC Model Licensing Act Approach17-3
  • § 17:3 : State Insurance Suitability17-4
    • § 17:3.1 : State Regulatory Framework17-4
    • § 17:3.2 : NAIC Model Variable Life Insurance Regulation17-5
    • § 17:3.3 : NAIC Suitability in Annuity Transactions Model Regulation17-5
  • Table 17-1 : Model Regulation Developments17-5
    • [A] : Customer Information17-6
    • [B] : Supervisory Program17-6
    • [C] : Records17-6
    • § 17:3.4 : 2010 Amendments17-6
    • § 17:3.5 : Insurer Supervisory Programs17-7
    • § 17:3.6 : State Adoption of the Model Annuity Suitability Regulation17-8
    • § 17:3.7 : NAIC Annuity Suitability (A) Working Group’s Efforts to Revise the Model Annuity Suitability Regulation17-8
    • § 17:3.8 : New York Insurance Regulation 187: Suitability and Best Interests in Life Insurance and Annuity Transactions17-10
      • [A] : Best Interest Duties and Obligations for Insurers17-11
      • [B] : Best Interest Duties and Obligations for Producers17-12
Chapter 18: Replacement of Insurance Products
  • § 18:1 : Introduction18-3
  • § 18:2 : Background18-5
    • § 18:2.1 : Definition of a Replacement18-5
    • § 18:2.2 : Early Regulation of Replacements18-7
      • [A] : State Regulation18-7
      • [B] : Federal Regulation18-9
    • § 18:2.3 : Bonus Annuities18-11
    • § 18:2.4 : Recent Developments18-12
  • § 18:3 : Federal Regulation of Replacements18-17
    • § 18:3.1 : Suitability18-17
    • § 18:3.2 : Duty of Fair Dealing18-22
    • § 18:3.3 : Disclosure18-23
    • § 18:3.4 : Supervision18-25
  • § 18:4 : State Regulation18-29
    • § 18:4.1 : State Replacement Regulation18-29
      • [A] : NAIC Model Regulations18-29
        • [A][1] : Life Insurance and Annuities Replacement Model Regulation18-30
          • [A][1][a] : Scope and Application18-32
          • [A][1][b] : Duties of Producers18-33
          • [A][1][c] : Duties of Insurers That Use Producers18-34
          • [A][1][d] : Duties of Replacing Insurers That Use Producers18-36
          • [A][1][e] : Duties of the Existing Insurer18-37
          • [A][1][f] : Duties of Insurers with Respect to Direct Response Solicitations18-38
          • [A][1][g] : Violations and Penalties18-38
      • [B] : Suitability in Annuity Transactions Model Regulation18-40
        • [B][1] : Scope and Application18-41
        • [B][2] : Suitability18-42
        • [B][3] : Supervision18-44
        • [B][4] : Insurance Producer Training18-45
        • [B][5] : Compliance; Mitigation; Penalties18-46
        • [B][6] : State Reaction to the Suitability in Annuity Transactions Model18-46
      • [C] : Model Unfair Trade Practices Act18-47
    • § 18:4.2 : State Statutes and Regulations18-49
      • [A] : New York State Insurance Department Regulation 6018-49
        • [A][1] : Scope and Application18-51
        • [A][2] : Duties of Producers18-53
        • [A][3] : Duties of All Insurers18-54
        • [A][4] : Duties of Replacing Insurers18-55
        • [A][5] : Existing Insurers18-56
        • [A][6] : Prohibited Acts18-57
        • [A][7] : Market Conduct Exams and Disciplinary Action18-58
      • [B] : California18-61
      • [C] : Florida18-65
      • [D] : Illinois18-67
      • [E] : Pennsylvania18-68
    • § 18:4.3 : State Securities Laws18-69
Chapter 19: Advertising
  • § 19:1 : Overview19-3
  • § 19:2 : Content Requirements19-4
    • § 19:2.1 : SEC Content Requirements19-4
      • [A] : Background19-5
      • [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] : Retail Communications19-10
        • [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] : Bond Fund Volatility Ratings19-14
        • [B][4] : Testimonials19-15
        • [B][5] : Use and Disclosure of Member’s Name19-15
        • [B][6] : Comparisons19-17
        • [B][7] : Performance Figures19-17
        • [B][8] : Tax19-18
          • [B][8][a] : Tax-Deferral Illustrations19-18
        • [B][9] : Specific Content Standards Applicable to Variable Life and Variable Annuity Products19-19
    • § 19:2.3 : State Content Requirements19-21
      • [A] : Applicability: Definition of Advertising19-21
      • [B] : Requirements As to Content19-22
        • [B][1] : General Standards19-22
        • [B][2] : Specific Disclosure Requirements19-22
        • [B][3] : Identity of Insurer and Policies19-23
  • § 19:3 : Internal Review and Recordkeeping Procedures19-24
    • § 19:3.1 : SEC Internal Review Requirements19-24
    • § 19:3.2 : FINRA Internal Review and Recordkeeping Requirements19-24
      • [A] : Institutional Sales Material19-24
      • [B] : Correspondence19-25
      • [C] : Material Used by Intermediary Firms19-25
      • [D] : Other Exceptions: Market Letters, Online Posts, and Administrative Communications19-26
    • § 19:3.3 : State Internal Review and Recordkeeping Requirements19-26
  • § 19:4 : Filing Requirements19-27
    • § 19:4.1 : Requirements to File Sales Material with the SEC19-27
    • § 19:4.2 : FINRA Filing Requirements19-27
      • [A] : FINRA Review Procedure19-27
      • [B] : Exceptions to the Filing Requirements19-28
        • [B][1] : Retail Communications19-28
          • [B][1][a] : Generic Fund Communications19-28
          • [B][1][b] : Backup Material for Investment Company Performance Rankings and Comparisons19-28
          • [B][1][c] : Investment Analysis Tools19-28
          • [B][1][d] : Bond Fund Volatility Ratings19-29
        • [B][2] : Institutional Sales Material and Correspondence19-29
          • [B][2][a] : For “Internal Use Only”19-29
        • [B][3] : Prospectuses19-30
        • [B][4] : Updates of Previously Filed Material19-30
        • [B][5] : Unregistered Group Variable Annuities19-30
        • [B][6] : Advisory Services19-31
        • [B][7] : Listing of Available Securities19-31
        • [B][8] : Traditional Products19-31
        • [B][9] : Extemporaneous Statements at Seminars19-32
        • [B][10] : Independently Prepared Reprints19-32
        • [B][11] : Online Communications19-32
        • [B][12] : Templates19-32
    • § 19:4.3 : State Filing Requirements19-33
  • § 19:5 : Specific Types of Variable Products Sales Literature19-33
    • § 19:5.1 : Performance Advertising19-33
      • [A] : Variable Annuity Performance Advertising19-34
        • [A][1] : Fund Performance Pre-Dating the Fund’s Inclusion in a Variable Product19-34
        • [A][2] : Related Performance19-35
          • [A][2][a] : Inclusion of Related Performance Information in a Prospectus19-36
          • [A][2][b] : Inclusion of Related Performance in Advertising and Sales Literature19-37
            • [B][2][b][i] : Related Performance Distributed to Institutional Investors19-38
        • [A][3] : FINRA Guidance: Back-Tested Index Performance/Institutional Communication19-41
      • [B] : Variable Life Performance19-41
    • § 19:5.2 : Variable Annuity Tax-Deferral Illustrations19-44
    • § 19:5.3 : Investment Analysis Tools19-45
    • § 19:5.4 : Hypothetical Illustration of Mathematical Principles19-45
    • § 19:5.5 : Customized Hypothetical Investment Planning Illustrations19-46
    • § 19:5.6 : Interactive Computer Software Programs That Compare Variable Annuities to Mutual Funds19-46
    • § 19:5.7 : Foreign Language Marketing Material19-47
    • § 19:5.8 : Bonus Annuity Products19-48
    • § 19:5.9 : Variable Annuity Illustrations19-48
      • [A] : Background19-48
      • [B] : FINRA’s Current Position19-51
    • § 19:5.10 : Dollar Cost Averaging Programs19-52
    • § 19:5.11 : Rankings19-52
  • § 19:6 : Recent Developments Related to FINRA’s Variable Product Advertising Rules19-54
    • § 19:6.1 : Variable Product Advertising Rule Filing19-54
      • [A] : Regulatory Notice 08-3919-54
      • [B] : Current Status19-55
    • § 19:6.2 : FINRA Retrospective Rule Review19-55
    • § 19:6.3 : Customized Hypothetical Investment Planning Illustrations19-55
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
    • § 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 : Charges20-5
      • [A] : Contract Charges20-6
      • [B] : Fund Charges20-6
        • [B][1] : Fund-Specific Illustrations20-7
    • § 20:3.3 : Investment Returns20-7
      • [A] : Prospectus Illustrations20-7
        • [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] : Procedural Considerations21-6
        • [B][1] : Consent21-6
          • [B][1][a] : SEC Requirements for Consents21-7
            • [B][1][a][i] : E-SIGN Consent Requirements21-7
            • [B][1][a][ii] : Telephonic Consent21-10
            • [B][1][a][iii] : Rule 16021-10
          • [B][1][b] : Negative Consents21-11
          • [B][1][c] : Third-Party Reliance21-13
        • [B][2] : Notice21-13
        • [B][3] : Access21-15
        • [B][4] : Evidence of Delivery21-16
      • [C] : Clarification of the “Envelope Theory”21-16
      • [D] : Responsibility for Hyperlinked Information on Websites21-17
        • [D][1] : Entanglement and Adoption Theories21-18
          • [D][1][a] : Context of Hyperlink21-18
          • [D][1][b] : Risk of Confusion21-19
          • [D][1][c] : Presentation of Hyperlinked Information21-20
        • [D][2] : Anti-Fraud Liability for Hyperlinked Information21-20
      • [E] : Access to Historical Information21-22
      • [F] : Summary Information21-23
      • [G] : Interactive Website Features21-23
      • [H] : Disclosure Controls and Procedures21-24
      • [I] : Access Equals Delivery Model21-24
      • [J] : Notice and Access Model21-25
    • § 21:2.2 : SEC Regulation21-26
      • [A] : Advertisements21-26
        • [A][1] : Types of Advertisements21-26
        • [A][2] : Legends21-27
      • [B] : Sales Literature21-27
        • [B][1] : Prospectus Delivery Requirement21-27
        • [B][2] : Mixed Media21-28
        • [B][3] : Unsolicited Materials21-29
        • [B][4] : Applications21-29
      • [C] : Prospectuses21-30
        • [C][1] : General Requirements21-30
          • [C][1][a] : Format of Prospectus21-30
          • [C][1][b] : Internet Legend21-30
        • [C][2] : Preliminary Prospectuses21-31
        • [C][3] : Definitive Prospectuses21-32
        • [C][4] : Summary Prospectuses21-32
          • [C][4][a] : Layered Disclosure Approach21-33
          • [C][4][b] : Industry Proposal21-33
        • [C][5] : Updates and Amendments21-33
        • [C][6] : Information Incorporated by Reference into Prospectus21-34
      • [D] : Reports and Proxies21-34
      • [E] : Revised Materials21-34
      • [F] : Single Document Delivery or “Householding”21-34
      • [G] : Electronic “Road Shows”21-36
      • [H] : Private Offerings21-37
        • [H][1] : Lamp Technologies, Inc.21-39
          • [H][1][a] : Nature of Website21-39
          • [H][1][b] : Procedural Safeguards21-39
        • [H][2] : IPONET21-40
          • [H][2][a] : Nature of Website21-40
          • [H][2][b] : Procedural Safeguards21-40
      • [I] : Third-Party Service Providers21-41
        • [I][1] : Broker/Dealer Status21-41
          • [I][1][a] : Charles Schwab & Co., Inc.21-41
          • [I][1][b] : Angel Capital Electronic Network21-42
          • [I][1][c] : Progressive Technology, Inc.21-44
          • [I][1][d] : Oil-N-Gas21-44
        • [I][2] : Responsibility for Third-Party Content21-45
      • [J] : Use of Electronic Means in Issuer’s Discretion21-46
      • [K] : Plain English21-47
    • § 21:2.3 : Use of Social Media21-47
      • [A] : 2012 SEC Actions21-47
        • [A][1] : Investor Alert: Social Media and Investing—Avoiding Fraud21-47
        • [A][2] : Investor Bulletin: Social Media and Investing—Understanding Your Accounts21-48
        • [A][3] : National Examination Risk Alert: Investment Adviser Use of Social Media21-49
        • [A][4] : Order Instituting Proceedings: In the Matter of Anthony Fields, CPA d/b/a Anthony Fields & Associates and d/b/a Platinum Securities Brokers (“Fields”)21-53
      • [B] : SEC Social Media Sweep21-53
  • § 21:3 : FINRA Pronouncements21-56
    • § 21:3.1 : Overview21-56
    • § 21:3.2 : Suitability21-57
      • [A] : Possible Higher Duty Where Internet Involved21-57
      • [B] : Special Care for Widely Disseminated Communications21-58
    • § 21:3.3 : Supervision21-58
      • [A] : Supervisory Procedures Must Cover Online Activities21-58
      • [B] : Supervisory Procedures for Incoming and Outgoing Correspondence21-59
        • [B][1] : Specific Provisions21-59
        • [B][2] : Record Retention21-60
    • § 21:3.4 : Communications with the Public21-60
      • [A] : Websites21-60
      • [B] : Hyperlinks21-61
        • [B][1] : Ongoing Hyperlinks to Internet Sites21-61
        • [B][2] : Hyperlinks to Educational Material21-62
        • [B][3] : Hyperlinks to a Home Page21-63
      • [C] : Use of Social Media21-63
        • [C][1] : Recordkeeping21-63
        • [C][2] : Suitability21-65
        • [C][3] : Supervision21-65
        • [C][4] : Types of Interactive Electronic Forums21-67
        • [C][5] : Third-Party Posts, Links, and Content21-68
        • [C][6] : Personal Communications and Other Devices21-70
      • [D] : FINRA Disciplinary Actions21-70
        • [D][1] : Failure to Supervise21-71
        • [D][2] : Failure to Comply with Advertising Requirements, Including Registered Principal Approval21-73
        • [D][3] : False, Misleading, or Inadequate Disclosures21-76
        • [D][4] : Failure to Safeguard Customer Information21-77
  • § 21:4 : Conclusion21-78
Chapter 22: Separate Account Compliance Programs
  • § 22:1 : Background22-1
    • § 22:1.1 : Text of Rule 38a-122-2
    • § 22:1.2 : Coverage22-5
  • § 22:2 : Adoption and Implementation of Written Policies and Procedures22-5
    • § 22:2.1 : Required Scope of Written Policies and Procedures22-6
    • § 22:2.2 : Oversight of Service Providers’ Policies and Procedures22-7
  • § 22:3 : Approval of Written Policies and Procedures22-8
  • § 22:4 : Annual Review22-9
  • § 22:5 : Chief Compliance Officer22-9
  • § 22:6 : Record Keeping22-10
  • § 22:7 : Special Issues Related to Variable Products22-11
    • § 22:7.1 : Satisfying the Oversight Responsibility Provisions22-11
    • § 22:7.2 : Determining Who Is a Service Provider22-11
    • § 22:7.3 : Living with a Separate Account Compliance Program22-12
  • § 22:8 : SEC Enforcement Activity Related to Compliance Program Deficiencies22-13
Chapter 23: SEC Insurance Product Separate Account Exams; and Appendix 23A
  • § 23:1 : Introduction23-2
  • § 23:2 : History of the Variable Products Inspection Program23-3
    • § 23:2.1 : Background23-3
    • § 23:2.2 : Office of Compliance Inspections and Examinations23-4
    • § 23:2.3 : SEC and FINRA Joint Variable Product Examinations23-5
    • § 23:2.4 : SEC, FINRA, and NASAA Free Lunch Seminar Sweep Examinations23-9
  • § 23:3 : OCIE Variable Products Inspection Focus23-10
  • § Diagram 23-1 : Broader OCIE Examination Focus23-13
  • § 23:4 : The Mechanics of Variable Products Inspections23-13
    • § 23:4.1 : Inspection Site23-14
      • [A] : Home Office Versus Off-Site23-14
      • [B] : Third-Party Service Provider23-15
      • [C] : Sales Office23-15
    • § 23:4.2 : Frequency of Variable Product Inspections23-15
    • § 23:4.3 : Inspection Targets23-16
    • § 23:4.4 : Notice Period23-17
    • § 23:4.5 : Requests for Documentation23-17
      • [A] : Phase I Request for Information for Variable Product Sponsors23-18
        • [A][1] : Customer Transactions23-18
        • [A][2] : Replacement Transactions23-19
        • [A][3] : Financed Transactions23-20
      • [B] : Phase II Request for Information for Variable Product Sponsors23-20
        • [B][1] : Legal, Back-Office Administration, and Customer Transaction Files23-21
        • [B][2] : Accounting Documents23-22
        • [B][3] : Market Conduct and Sales Practices23-22
        • [B][4] : Rule 38a-1 Program Documentation23-24
      • [C] : Request for Information for Broker-Dealers That Solicit Variable Products23-24
        • [C][1] : Financial and Corporate Books and Records23-24
        • [C][2] : Sales Practice Information Request23-25
        • [C][3] : Variable Annuity Information Request23-26
    • § 23:4.6 : Duration of Inspection23-27
    • § 23:4.7 : Inspection Follow-Up23-27
      • [A] : Evaluation and Reporting Components23-27
      • [B] : Deficiency Letter and Response to Inspection Findings23-28
  • § 23:5 : An In-Depth Look at Variable Product Back-Office (Administration) Inspections23-28
    • § 23:5.1 : Opening Interview/Outline of Review Points23-28
    • § 23:5.2 : Compliance Policies and Procedures and Designated CCO Manuals23-34
    • § 23:5.3 : Transaction Processing and “As of” Pricing23-34
    • § 23:5.4 : NAV and AUV Computations23-36
    • § 23:5.5 : Walk-Through23-37
  • § 23:6 : An In-Depth Look at Variable Product Market Conduct and Sales Practice Inspections23-39
    • § 23:6.1 : General23-39
    • § 23:6.2 : Supervisory and Market Conduct Compliance Procedures Manual23-40
    • § 23:6.3 : Supervisory and Compliance Systems23-40
    • § 23:6.4 : Sales Office Activity23-41
    • § 23:6.5 : Sales Office Component23-41
    • § 23:6.6 : Opening Interview/Outline of Review Points23-42
    • § 23:6.7 : Request for Documentation23-46
  • § 23:7 : Frequently Cited Exam Deficiencies23-47
  • § 23:8 : Conclusion23-47
  • Appendix 23A : Examination Request ListApp. 23A-1
Chapter 24: Private Placement Variable Life Insurance
  • § 24:1 : Introduction24-3
    • § 24:1.1 : Structure24-4
    • § 24:1.2 : Insurance Regulation24-4
    • § 24:1.3 : Tax Treatment24-5
    • § 24:1.4 : Fees and Charges24-5
    • § 24:1.5 : Distribution24-6
  • § 24:2 : Regulatory Treatment of PPVLI Products24-6
  • § 24:3 : The Securities Act of 193324-8
    • § 24:3.1 : Exemptions24-8
    • § 24:3.2 : Rule 506 Offerings24-9
      • [A] : Accredited Investors24-9
        • [A][1] : Natural Persons24-10
        • [A][2] : Corporations, Limited Liability Companies, Partnerships, and Business Trusts24-13
        • [A][3] : Common Law and Similar Trusts24-14
        • [A][4] : Employee Benefit Plans—Rule 501(a)(1)24-15
        • [A][5] : “Formed for the Specific Purpose”24-16
      • [B] : Regulation D—Conditions24-18
        • [B][1] : Integration24-18
        • [B][2] : Information24-19
          • [B][2][a] : Offerings to Accredited Investors24-20
          • [B][2][b] : Offerings to Non-Accredited Investors24-20
          • [B][2][c] : Offerings to Both Accredited and Non-Accredited Investors24-21
          • [B][2][d] : Disclosures Generally24-22
        • [B][3] : Manner of Offering24-22
        • [B][4] : Resale Restrictions24-25
        • [B][5] : Notice of Offering24-25
      • [C] : Rule 506(b)—Specific Terms24-26
      • [D] : Rule 506(c)—Reasonable Verification24-28
      • [E] : Rule 506(d)—Bad Actor Disqualification24-29
    • § 24:3.3 : State Securities Law Registration and Filing24-32
  • § 24:4 : Investment Company Act of 194024-33
    • § 24:4.1 : Exclusions Under the Investment Company Act24-33
      • [A] : Section 3(c)(1) Separate Accounts24-33
        • [A][1] : “Look-Through” Provisions24-35
        • [A][2] : Anti-Circumvention Principles24-38
        • [A][3] : Integration24-40
        • [A][4] : Estates and Donees24-42
        • [A][5] : General Considerations24-42
      • [B] : Section 3(c)(7) Separate Accounts24-42
        • [B][1] : Qualified Purchasers24-43
          • [B][1][a] : Natural Persons24-45
          • [B][1][b] : Corporations, Partnerships, and Other Entities24-45
          • [B][1][c] : Common Law and Similar Trusts24-47
          • [B][1][d] : Pension Plans and IRAs24-48
        • [B][2] : “Formed for the Specific Purpose”24-49
        • [B][3] : Estates and Donees24-49
        • [B][4] : Anti-Circumvention Principles24-50
        • [B][5] : Integration24-50
        • [B][6] : Investments24-50
      • [C] : Section 12(d)(1)—Anti-Pyramiding24-51
    • § 24:4.2 : Fees and Expenses24-51
  • § 24:5 : Securities Exchange Act of 193424-51
    • § 24:5.1 : Section 12(g) Registration24-51
    • § 24:5.2 : Antifraud Provisions24-52
  • § 24:6 : Commodity Exchange Act24-52
  • § 24:7 : Tax Considerations24-53
    • § 24:7.1 : Diversification24-53
    • § 24:7.2 : Investor Control24-54
  • § 24:8 : Insurance Agencies and Other Distributors24-55
    • § 24:8.1 : Broker-Dealer Registration24-55
    • § 24:8.2 : FINRA Regulation24-56
    • § 24:8.3 : Investment Adviser Registration24-57
    • § 24:8.4 : Commodity Trading Advisor Regulation24-58
  • § 24:9 : Funding Vehicles24-59
Chapter 25: Asset Allocation Programs and Funds of Funds in Variable Insurance Products
  • § 25:1 : Introduction25-2
  • § 25:2 : Asset Allocation Programs25-2
    • § 25:2.1 : Background25-2
    • § 25:2.2 : SEC Staff Guidance on Asset Allocation Programs in Variable Products25-4
      • [A] : Generally25-4
      • [B] : Investment Company Act Issues25-5
      • [C] : Investment Advisers Act Issues25-6
    • § 25:2.3 : Implementation Issues Under the SEC’s Guidance25-7
      • [A] : Selection of Investment Adviser for Program25-7
      • [B] : Role of Broker-Dealer25-9
      • [C] : Updates to Static Asset Allocation Models25-10
      • [D] : Notice Required by Opt-Out Programs25-10
    • § 25:2.4 : ERISA Concerns Regarding Selection of Mutual Funds in Asset Allocation Programs25-11
  • § 25:3 : Funds of Funds25-16
    • § 25:3.1 : Generally25-16
    • § 25:3.2 : Statutory Restrictions and Exceptions Under Section 12 of the Investment Company Act25-17
    • § 25:3.3 : SEC Exemptive Relief for Funds of Funds in Variable Products25-19
      • [A] : Generally25-19
      • [B] : Compliance with Section 17(e)25-22
      • [C] : Mixed and Shared Funding Issues25-25
    • § 25:3.4 : Funds of Funds Exemptive Rules25-26
      • [A] : Generally25-26
      • [B] : Rule 12d1-1 (Money Market Fund Cash Sweep Arrangements)25-27
      • [C] : Rule 12d1-2 (Expanded Investment in Other Types of Issuers for Affiliated Funds of Funds)25-28
    • § 25:3.5 : Disclosure Requirements for Funds of Funds in Variable Products25-29
    • § 25:3.6 : Proposed Rules Regarding Funds Investing in ETFs25-30
    • § 25:3.7 : Use of Target-Date Funds in Variable Annuities25-31
Chapter 26: Variable Annuities in Retirement Plans; and Appendices 26A-26D
  • § 26:1 : Introduction26-2
  • § 26:2 : Regulatory Environment26-3
    • § 26:2.1 : Internal Revenue Code26-3
    • § 26:2.2 : ERISA26-4
    • § 26:2.3 : Federal Securities Laws26-5
    • § 26:2.4 : State Laws26-6
  • § 26:3 : Overview of Retirement Plans26-7
    • § 26:3.1 : Defined Contribution Plans Compared to Defined Benefit Plans26-7
    • § 26:3.2 : Trust Requirement26-8
  • § 26:4 : Defined Contribution Plan Types26-8
    • § 26:4.1 : Qualified Plans Under Code Section 401(a) (Including 401(k) Plans)26-9
    • § 26:4.2 : Section 403(a) Annuity Plans26-10
    • § 26:4.3 : Section 403(b) Plans26-10
    • § 26:4.4 : Section 457(b) Plans26-12
    • § 26:4.5 : Variable Annuity Contract Designs for Retirement Plans26-13
      • [A] : Deferred Annuities26-13
      • [B] : Immediate Annuities26-14
      • [C] : Individual and Group Annuity Contracts26-14
      • [D] : Allocated and Unallocated Group Annuity Contracts26-16
      • [E] : Forms of Distributions from Retirement Plans26-17
      • [F] : Spousal Rights Requirements26-18
      • [G] : Specific Defined Contribution Plan Provisions26-19
        • [G][1] : Required Distribution Requirements26-20
        • [G][2] : Contribution Limitations26-20
        • [G][3] : Right to a Direct Rollover26-20
        • [G][4] : Distribution Restrictions26-20
        • [G][5] : Distributions Without Consent26-22
        • [G][6] : Hardship Distributions26-22
        • [G][7] : Loans26-23
        • [G][8] : No Assignment26-24
        • [G][9] : Vesting26-24
      • [H] : Specific Requirements for 403(b) Plans26-24
        • [H][1] : Nonforfeitability26-24
        • [H][2] : Limitations on Elective Deferrals26-25
        • [H][3] : Nontransferability26-25
        • [H][4] : Rollover Distributions26-25
        • [H][5] : Limitation on Incidental Benefits26-25
  • § 26:5 : Enrollment Processes26-25
  • § 26:6 : Other Issues Relating to the Use of Annuities in Retirement Plans26-27
    • § 26:6.1 : Selecting an Annuity Provider26-27
    • § 26:6.2 : Qualified Longevity Annuity Contracts26-29
    • § 26:6.3 : Participant Disclosures Related to Variable Annuity Contracts26-31
    • § 26:6.4 : Use of Deferred Annuities in Target Date Funds26-37
  • Appendix 26A : 29 C.F.R. § 2550.404a-5—Fiduciary Requirements for Disclosure in Participant-Directed Individual Account PlansApp. 26A-1
  • Appendix 26B : 29 C.F.R. § 2550.404c-1—ERISA Section 404(c) PlansApp. 26B-1
  • Appendix 26C : SEC No-Action Letter (October 26, 2011)App. 26C-1
  • Appendix 26D : SEC No-Action Letter (February 18, 2015)App. 26D-1
Chapter 29: Registered Index-Linked Insurance Contracts
  • § 29:1 : Introduction29-2
  • § 29:2 : Design of Registered Index-Linked Insurance Contracts29-3
    • § 29:2.1 : A Glance at the Investment Advisers Act Regulatory Framework29-3
    • § 29:2.2 : Key Elements29-4
  • Table 29-1 : Calculation of Investor Rate of Return29-7
  • § 29:3 : Registering an Index-Linked Annuity Contract: Process, Decision Points, and Challenges29-8
    • § 29:3.1 : Background29-8
    • § 29:3.2 : Forms S-1 and S-329-10
      • [A] : Filing on Form S-129-10
        • [A][1] : Rule 12h-729-10
        • [A][2] : Form S-1 Content29-11
      • [B] : Filing on Form S-329-12
        • [B][1] : Eligibility Requirements29-12
        • [B][2] : Exchange Act Reporting29-14
        • [B][3] : Ability to Reduce or Omit Certain Disclosure29-14
      • [C] : Considerations Common to Both Form S-1 and Form S-329-16
        • [C][1] : GAAP29-16
        • [C][2] : Incorporation by Reference and Aging-Out of Financial Statements29-17
        • [C][3] : Registration Fees29-18
        • [C][4] : General Filing Requirements29-18
  • Table 29-2 : Form S-1 and Form S-3—Key Similarities and Differences29-20
  • § 29:4 : Potential Regulatory Relief from Certain Ill-Fitted Requirements for State-Regulated Annuity Contracts Registered on Forms S-1 and S-329-21
  • § 29:5 : Distributing Registered Index-Linked Contracts29-25
    • § 29:5.1 : Registration and Authority to Sell29-25
      • [A] : Series 6 Versus Series 729-25
      • [B] : Application of Corporate Financing Rule29-25
      • [C] : Authority to Offer a New Line of Business29-26
    • § 29:5.2 : Suitability and Supervisory Issues29-26
      • [A] : Complex Product Guidance29-26
      • [B] : Application of FINRA’s Suitability Rules29-26
    • § 29:5.3 : Marketing Material29-27
      • [A] : Approval, Review and Recordkeeping29-27
      • [B] : Filing with FINRA29-27
      • [C] : Hypothetical Illustrations or Examples29-28
  • § 29:6 : Conclusion29-29
Chapter 30: Introduction to Life Settlements; and Appendix 30A
  • § 30:1 : Background30-3
    • § 30:1.1 : Life Insurance30-3
    • § 30:1.2 : Life Insurance Policies as Transferrable Property30-4
    • § 30:1.3 : Life Settlements30-5
  • § 30:2 : The Life Settlement Marketplace30-8
    • § 30:2.1 : Generally30-8
    • § 30:2.2 : Characteristics of Life Insurance Policies30-10
      • [A] : The Insurance Policy—Generally30-10
      • [B] : Types of Insurance Products30-11
        • [B][1] : Term Insurance30-11
        • [B][2] : Permanent Life Insurance30-11
          • [B][2][a] : Whole Life Insurance30-12
          • [B][2][b] : Universal Life Insurance (UL)30-12
          • [B][2][c] : Limited Pay Life Insurance30-13
      • [C] : Parties to the Insurance Contract/Policy30-13
      • [D] : Special Policy Provisions30-15
      • [E] : Contestability30-15
      • [F] : Underwriting by the Insurance Company30-17
      • [G] : Maturity—Collection of the Death Benefit30-19
  • § 30:3 : The Players in the Life Settlement Marketplace30-20
    • § 30:3.1 : Insured/Policy Owner30-20
      • [A] : Generally30-20
      • [B] : Issues and Risks30-21
        • [B][1] : Possible Alternatives30-21
        • [B][2] : Insured’s Identity and Medical Records30-21
        • [B][3] : Insured Contacts and Future Disclosure Obligations30-21
        • [B][4] : Need For Insurance Coverage30-22
        • [B][5] : Policy Replacement Issues30-22
        • [B][6] : Public Assistance30-22
        • [B][7] : Taxation30-22
        • [B][8] : Creditors and Bankruptcy30-22
    • § 30:3.2 : Financial Advisors/Producers/Brokers30-22
    • § 30:3.3 : Life Settlement Providers30-23
    • § 30:3.4 : Investors or “Funders”30-24
      • [A] : Generally30-24
      • [B] : Issues and Risks30-25
        • [B][1] : Suitability for Purchase30-25
        • [B][2] : Lack of Liquidity30-25
        • [B][3] : Pricing Risks and Valuation Issues30-25
        • [B][4] : Time Risks30-25
        • [B][5] : Life Expectancy Reports30-26
        • [B][6] : Premium Optimization30-26
        • [B][7] : Mistakes in Servicing Policies30-26
        • [B][8] : Missing Insureds30-26
        • [B][9] : Possible Insolvency of Insurance Companies30-26
        • [B][10] : Life Insurance Companies’ Aversion to Investment Transactions Involving Life Settlements30-27
        • [B][11] : Impact of Increase in Cost on Life Insurance Policies30-27
        • [B][12] : Insurance Companies’ Contestability of Life Insurance Policies30-27
        • [B][13] : Termination of Policy before Death of Insured30-28
        • [B][14] : Sale Contested By Family Members30-28
        • [B][15] : Stranger Originated Life Insurance Policies30-28
        • [B][16] : Refusal to Pay Benefits on Certain Policies30-28
        • [B][17] : Certain Fraudulent Activities30-28
        • [B][18] : Life Settlements Regulation30-29
    • § 30:3.5 : Life Expectancy Providers30-29
  • § 30:4 : Life Settlement Transaction30-30
  • Figure 30-1 : Individual Policy Acquisition Flow30-30
  • § 30:5 : Regulatory Treatment30-30
    • § 30:5.1 : Generally30-30
    • § 30:5.2 : State Insurance Laws30-34
    • § 30:5.3 : Securities Laws30-34
      • [A] : Federal Level30-34
      • [B] : State Level30-39
  • § 30:6 : Litigation Involving Life Settlements30-41
    • § 30:6.1 : Overview30-41
    • § 30:6.2 : Significant Cases30-43
      • [A] : Grigsby v. Russell30-43
      • [B] : New England Mutual Life Insurance Co. v. Caruso30-43
      • [C] : Kramer v. Phoenix Life Insurance Co.30-44
      • [D] : PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust30-45
      • [E] : Settlement Funding L.L.C. v. AXA Equitable Insurance Co.30-46
      • [F] : Berkshire Settlements, Inc. v. Ashkenazi30-48
      • [G] : The Lincoln Life and Annuity Company of New York v. Berck30-49
      • [H] : Ohio National Life Assurance Corporation v. Davis30-52
      • [I] : Pruco Life Insurance Co. v. Brasner30-52
      • [J] : Sciarretta v. The Lincoln National Life Insurance Company30-53
      • [K] : PHL Variable Insurance Co. v. The Faye Keith Jolly Irrevocable Life Insurance Trust30-54
      • [L] : Principal Life Insurance Co. v. Lawrence Rucker 2007 Insurance Trust30-55
      • [M] : Penn Mutual Life Insurance Co. v. Greatbanc Trust Co.30-56
      • [N] : PHL Variable Insurance Co. v. Virginia L. Lankow Life Insurance Trust30-57
  • § 30:7 : Tax Issues30-57
  • Appendix 30A : Policy Closing ChecklistApp. 30A-1
Chapter 31: Insurance-Linked Securities
  • § 31:1 : Introduction31-2
  • § 31:2 : General Types of ILS31-3
    • § 31:2.1 : ILS Based on Insurable Events31-3
      • [A] : Reinsurance31-3
      • [B] : Components/Issues31-4
        • [B][1] : Threshold Regulatory Issues31-4
          • [B][1][a] : Statutory Definitions of Insurance31-4
          • [B][1][b] : Regulatory Relief31-5
          • [B][1][c] : Regulatory Risk and Offering Restrictions31-7
        • [B][2] : Components and Structuring31-10
          • [B][2][a] : The SPV31-10
          • [B][2][b] : The Indenture31-11
          • [B][2][c] : Allocation of Loss Provisions31-12
          • [B][2][d] : Reinsurance or other Risk-Transfer Agreement31-13
          • [B][2][e] : Offering Materials31-15
          • [B][2][f] : Service Providers31-17
          • [B][2][g] : Other Lines31-18
    • § 31:2.2 : ILS Based on Redundant Reserves31-18
      • [A] : Closed Block Securitization31-18
      • [B] : Redundant Reserve Securitizations More Broadly31-20
  • § 31:3 : NAIC and State Developments31-22
    • § 31:3.1 : Protected Cell Company Model Act31-22
      • [A] : Securitization31-23
      • [B] : Protected Cell31-23
      • [C] : Legal Identity31-24
      • [D] : Directors’ Duty to Maintain Separateness31-25
      • [E] : Bankruptcy Remoteness Issues31-25
    • § 31:3.2 : Special Purpose Reinsurance Vehicle Act31-26
      • [A] : SPRV Insurance Securitization31-26
      • [B] : Forming an SPRV31-27
      • [C] : Limitations on Use31-27
    • § 31:3.3 : Other State Laws31-28
      • [A] : Captive Insurance Generally31-28
      • [B] : The Rise of Special Purpose Captives31-29
      • [C] : Regulatory Activity31-30
Appendix A: Statutory Material
  Table of Authorities
  Index

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