©2005 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[19078]
August 9, 2005
TO: SEC RULES MEMBERS No. 90-05
VARIABLE INSURANCE PRODUCTS ADVISORY COMMITTEE No. 8-05
RE: NASD NOTICE TO MEMBERS REGARDING EQUITY-INDEXED ANNUITIES
The NASD has issued a Notice to Members (“NTM”)1 providing formal guidance
regarding sales of equity-indexed annuities (“EIAs”).2 Specifically, the NTM addresses the
responsibility of firms to supervise the sale by their associated persons of EIAs that are not
registered under the federal securities laws. The NTM states that the guidance is in response to
concerns about marketing, supervision, disclosure and investor protection issues associated
with EIAs.
The NTM states that while some EIAs are registered with the SEC as securities, many
are not, based on a determination that they are insurance products that qualify for exemption
under the Securities Act of 1933. The NTM does not take a position on whether a particular EIA
is a security and states that the question of whether a particular EIA is an insurance product or a
security depends upon the particular facts and circumstances concerning the instrument offered
or sold, and is determined on a case-by-case basis.
The NTM states that due to the uncertainty as to whether a particular unregistered EIA
may be a security, as well as the potential regulatory violations and investor protection issues
that would arise by the marketing and sale of unregistered EIAs that are deemed to be
securities, the NASD has determined to recommend several supervisory measures for firms.
Specifically, firms should consider maintaining a list of acceptable unregistered EIAs and
prohibiting their brokers from selling any other unregistered EIA without the firm’s written
confirmation that the sale is acceptable. Firms also should consider whether additional
supervisory procedures would help protect the firm’s customers, for example, requiring that all
sales of unregistered EIAs are processed through the firm. Finally, firms should provide
brokers selling any unregistered EIA through the firm with the proper training to ensure they
understand the EIA’s features and the extent to which the EIA meets the needs of a particular
1 NASD Notice to Members No. 05-50 (August 2005). The Notice to Members can be found on the NASD’s website at
http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_014821.pdf.
2 Equity-indexed annuities are financial instruments in which the issuer, usually an insurance company, guarantees a
stated interest rate and some protection from loss of principal, and provides an opportunity to earn additional
interest based on the performance of a securities market index.
2
customer. The NTM reminds firms that under any circumstances, NASD suitability rules apply
to any recommendation that a customer liquidate or surrender a registered security for the
purpose of purchasing an unregistered EIA.
Ari Burstein
Associate Counsel