July 3, 1991
TO: CONTRACTUAL PLANS COMMITTEE NO. 8-91
RE: OUTCOME OF NASAA INVESTMENT COMPANY MEETING
__________________________________________________________
As you know, the NASAA Investment Company Registration/
Trading Practices Committee ("Committee") met on Saturday, June
29th in Boston to solicit industry input regarding the
Committee's proposed recommendations with respect to state
regulation of contractual plans. (See Memorandum to Contractual
Plans Committee No. 7-91, dated June 26, 1991.)
The Committee indicated that it would be finalizing its
report and recommendations after the open portion of the meeting.
The proposed recommendations would be in the form of NASAA
Guidelines ("Guidelines") and submitted to the NASAA Board of
Directors for approval. After approval by the NASAA Board, the
proposed Guidelines would be published for public comment and
submitted to NASAA membership for adoption and approval at the
NASAA Fall Conference in October. It is the Committee's belief
that if the proposed Guidelines are adopted by NASAA membership,
it will be unnecessary for each state to formally adopt the
Guidelines. Thus, it is possible that the Guidelines could be
effective immediately upon adoption, or shortly thereafter.
Proposals Considered by the Committee
The initial proposals discussed by the Committee were very
similar to the amended proposed administrative rules issued by
the New Mexico Securities Division earlier this year, i.e.,
requiring a refund of all sales loads in excess of 15% at any
time to an investor, requiring execution of a specified
disclosure document by the investor, requiring that all proceeds
of a contractual plan investment be placed in a dedicated fund
and requiring the investment objective of the underlying
portfolio to be long term capital growth. (See Memorandum to
Contractual Plan Committee No. 1-91, dated January 24, 1991.)
The Institute strongly opposed the proposal that would
permit any investor surrendering at any time to receive a refund
of all sales loads in excess of 15% of payments as being
1*/ The Committee stated it was basing this particular
recommendation on action recently taken by the state of
Washington. Apparently, one plan sponsor agreed to this
refund provision as a condition of registration.
unnecessary for the protection of investors and a disruption of
the careful balancing of interests that was devised by Congress
when amending Section 27 of the 1940 Act in 1970. 1*/ The
Institute further stated that the Committee should focus its
efforts on correcting existing sales practice abuses rather than
recommending provisions directly in conflict with the federal
regulatory structure. The Institute also reiterated its
opposition to the Committee's initial proposals for the reasons
set forth in its comment letter to the New Mexico Securities
Division. (See Memorandum to Contractual Plans Committee No. 2-
91, dated March 1, 1991.)
In addition to the foregoing, the Committee proposed the
following:
1. Creation of an "Accredited Investor" Definition - This
proposal would permit certain "accredited investors" to continue
to be regulated under the federal regulatory provisions. The
definition of accredited investor would be tied to military rank
and a minimum monthly investment of $275. A similar definition
would be created for civilians. Non-accredited investors would
be subject to the NASAA Guidelines.
2. Persistency - This proposal would subject a fund to
disparate regulatory schemes based upon persistency in each
state. For example, funds with persistency figures above a
certain percentage would fall within the federal guidelines;
however, funds below that particular percentage would be subject
to the NASAA Guidelines.
3. Automatic Liquidation of Accounts - This proposal would
provide automatic liquidation of an investor's account if the
investor failed to affirmatively notify the fund of the
investor's intent to continue with the plan after receipt of the
27(e) notice.
4. Prohibited Communications - This would prohibit the
agent from contacting an investor for thirty days prior to the
expiration of the investor's right to surrender the plan
certificate and receive a refund of the sales load in excess of
15%.
5. Mandatory Notification to All Investors of Refund
Rights - This would require that plan sponsors send the 27(d)
notice to all investors, regardless of whether the investor had
missed a payment during the first 18 months of the plan.
6. Limiting Sales Commission to 9% Per Payment - This
proposal is similar to the restrictions currently in effect in
California and Wisconsin and would effectively prohibit the sale
of all contractual plans in the states.
After a spirited discussion with respect to the merits of
each of the foregoing proposals, an additional proposal (offered
by the distributor of several contractual plans) was also
considered by the Committee. This proposal would extend the
refund provision from the current 18 months to 30 months; thus,
investors would be entitled to receive a refund of any sales load
in excess of 15% for the first 30 months of the plan.
Likely Committee Recommendations
Based upon the discussion regarding each of the proposals
during the meeting, the Institute believes that the following
provisions will be included in the Committee's report and
proposed Guidelines:
1. all proceeds of a plan investment must be placed in
a dedicated fund;
2. the underlying fund must have an investment
objective of long term capital growth;
3. a disclosure document must be executed by the
investor at the time of sale;
4. all investors must receive notice of his/her refund
rights;
5. an investor will be entitled to receive a refund of
any sales load in excess of 15% for 30 [36] months;
6. submission of persistency figures by each plan
sponsor on an annual basis; and
7. application of "suitability" standards to
contractual plan investors.
It is expected that the Committee will have its report and
proposed Guidelines finalized by the end of July. We will
distribute the Committee's report as soon as it becomes
available.
Patricia Louie
Assistant General Counsel