***ACTION ALERT***
IMMEDIATE ACTION REQUESTED

TO: All NAIFA Members                                                                          

FROM: NAIFA President, C. Robert Brown, CLU, LUTCF

Subject: NAIFA Members Should Urge SEC to NOT Approve Proposed NASD Rule Imposing Specific Suitability Requirements for Deferred Variable Annuities

Background: In June 2004, the NASD requested comment on a proposed new NASD rule that would impose specific suitability and principal review requirements in connection with the sale of deferred variable annuities (VAs). (The initial proposal would have also required those marketing variable annuities to present the customer with a "risk disclosure document", separate and apart from the VA's prospectus. This requirement was subsequently deleted from the proposal.) In August 2004, NAIFA filed formal comments with the NASD opposing the new rule. In addition, over 1,000 NAIFA members responded to a NAIFA Action Alert and submitted comments to the NASD in opposition to the proposal. NAIFA members accounted for over 80 percent of the comments submitted to the NASD regarding this proposal!

To become final, NASD rules must be submitted to the SEC for approval. The SEC may not revise the proposal; it must either approve or disapprove the rule as proposed by the NASD. In July 2005 the NASD filed the most current version of the proposed rule with the SEC, and the SEC has asked for public comments on the proposal.

It is now time for NAIFA members to alert the SEC to NAIFA's concerns regarding the proposed rule.

NAIFA's Position: NAIFA firmly believes that people who engage in unscrupulous or misleading sales practices should be aggressively prosecuted and subject to appropriate and meaningful sanctions. However, imposing a specific suitability requirement for the sale of variable annuities would duplicate requirements that are already in force. NASD rules already contain a general suitability rule that applies to all sales of securities, including variable annuities. If regulators believe there are abusive practices in the VA marketplace, appropriate enforcement of the existing NASD suitability rule is the solution rather than the adoption of a new rule. In addition, there is no logical reason to single out variable annuities for individual treatment; if the NASD proceeds to adopt a specific suitability rule for variable annuities, logic would dictate that it also adopt specific suitability rules in other areas, such as mutual funds and real estate limited partnerships.

The proposal also contains detailed requirements regarding the review of transactions by a principal of the firm. Specifically, the principal must essentially confirm that the client actually has a need for the specific product and that there is not some other product that will serve the customer's needs just as well. Such a requirement will lead to constant second guessing of the salesperson's advice, and the fact that "hindsight is always 20/20" will result in significant increases in litigation.

Finally, we believe that the NASD proposal is a "solution in search of a problem." The available data simply does not support the NASD's claims that the amount of sales and marketing abuses in the variable annuity marketplace require the adoption of specific suitability rules governing variable annuity sales. In recent years NASD disciplinary actions concerning variable annuities and the people who sell VAs have constituted roughly 8 percent of the NASD's total annual disciplinary actions, despite the fact that registered representatives working for broker/dealers affiliated with life insurers--i.e., variable products salespeople—make up over 50 percent of the total population of registered representatives.

What You Can Do: You are strongly urged to submit comments to the SEC urging the SEC to disapprove the NASD's proposal to impose specific suitability requirements on sales of deferred variable annuities. ALL COMMENTS MUST BE SUBMITTED BY AUGUST 11, 2005. You may submit comments electronically by visiting http://capwiz.com/naifa, selecting "SEC Action Alert" and filling out the requested information. The sample comments below will automatically be forwarded to the SEC.

In the alternative, three copies of your written comments should be mailed to:
Jonathan G. Katz
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington , DC 20549-9303

All written comments should reference File Number SR-NASD-2004-183.

Sample Comments: It always has a greater impact if you use your own words when submitting comments. The following sample language can be used as the basis for your comment letter or, if you prefer, as the text of your e-mail:

I am a licensed insurance professional and variable product salesperson. I am writing to you because the principal review requirements and redundant suitability standards contained in NASD proposed Rule 2821 are unnecessary, will provide no meaningful additional protection to consumers and will adversely impact my business. I urge the SEC to disapprove the proposal.

I firmly believe that people who engage in misleading sales practices should be aggressively prosecuted and subject to appropriate sanctions. However, proposed Rule 2821 duplicates requirements that are already in place. NASD rules already contain suitability requirements that apply to all sales of securities, including variable annuities. If regulators really want to protect consumers, appropriate enforcement of the existing suitability rule rather than adopting a new rule is the answer.

Furthermore, the requirement for review by a principal found in the proposed rule appears to present a bias against these products. In addition, these requirements will lead to constant second guessing of my advice and recommendations (based upon less first hand information than was available to me) as well as significant increases in merit less litigation.

Finally, I believe that the proposal is a "solution in search of a problem"—I do not think the available data supports the NASD's claims that the level of sales problems in the variable annuity marketplace calls for the adoption of the proposed rule. The NASD has not statistically quantified the scope of the problem it is allegedly seeking to solve with the proposed rule. Furthermore, over 95 percent of the comments received by the NASD regarding the proposal opposed the new rule, and the NASD has not adequately responded to the concerns raised by the vast majority of commentators. For these reasons, I urge the SEC to disapprove NASD proposed Rule 2821. Thank you for your consideration of my views on this matter.

Questions: If you have any additional questions, please contact Gary Sanders at 703-770-8192, gsanders@naifa.org. For technical questions regarding sending your message to the NASD, please email frontline@naifa.org.