Spotlight on
Variable Annuity L Shares
Dionne C. Fajardo & Robert Jamieson
September 3, 2015
Variable Annuity Share Classes
B Shares: Longer surrender period, typically lowest M&E
fees.
X Shares:“Bonus Shares” or “Premium Enhanced,”
longer surrender period, moderate M&E fees,
up-front bonus investment credit.
L Shares: Shorter surrender period, higher M&E fees.
C Shares: No surrender period, higher M&E fees.
A Shares: Up-front sales charge, typically no surrender
period.
O Shares:No up-front sales charge, surrender period
similar to B-Shares, progressively declining
M&E fees.
Characteristics of L Shares
• No up-front sales charge.
• Shorter surrender period (generally 3-4 years).
• Relatively higher mortality & expense (M&E)
and administration fees.
• Typically higher trail commissions.
• May have higher surrender charges.
• Underlying fund expenses typically similar to
other share classes.
Benefits of L Shares
• Shorter surrender charge period – earlier access to
funds without penalty.
• Flexibility to reposition investments if needs or
goals change, or in response to unexpected life
events.
• Typically lower fees than C-Shares.
• Implementing financial planning strategies, e.g.
laddering.
• Possible that some “lower-cost” L Share variable
annuities may be available?
Concerns Regarding L Shares
“FINRA will particularly
focus on the sale and
marketing of "L share"
annuities as these shares
typically have shorter
surrender periods, but
higher costs.”
- FINRA 2015 Regulatory and Examination
Priorities Letter
• Assessing and documenting
suitability.
• Relatively higher M&E
fees (vs. B-Shares).
• Impact of fees on overall
returns.
• Benefits over other share
classes?
• Commissions influencing
recommendations?
Concerns Regarding L Shares
• L Share vs. Riders.
• Incompatibility with “Premium Enhancement”
vesting.
• Lack of L Share-specific guidance.
• Marketing and disclosure issues.
• Registered representative education and
training.
• L Share variable annuities in IRAs.
Relevant Rules, Notices, and Laws
FINRA Rules
• 2111 – Suitability
• 2330 – Members’ Responsibilities Regarding Deferred Variable
Annuities (formerly NASD Rule 2821)
FINRA Regulatory Notices
• 07-53 – Approval of NASD Rule 2821.
• 09-32 – Amendments to NASD Rule 2821.
• 10-05 – Responsibilities Under FINRA Rule 2330.
• 11-02 – Approval of FINRA Rule 2111.
• 11-25 – Additional guidance regarding FINRA Rule 2111.
• 12-25 – Additional guidance regarding FINRA Rule 2111.
• 13-31 – Examination approaches, common findings, and
effective practices for complying with the suitability rule.
Relevant Rules, Notices, and Laws
• State Specific Laws and Rules
– Securities laws
– Insurance laws, e.g. Fla. Stat. § 627.4554
• Fla. Admin. Code 69B-162-011
• Forms DFS-H1-1980 and DFS-H1-1981
Regulatory Activity
• Periodic guidance and customer “alerts”
regarding variable annuities generally
• Specific statements from SEC in 2014
regarding growing prevalence of L Shares
• FINRA Examination Priorities Letter For 2015
Focus of Targeted Exams
•
•
•
•
Investor Awareness
Appropriate Investment
Marketing
Conflicts of Interest
FINRA Guidance
• Monitoring
– Investors with long-term time horizons
– Representatives’ sales activities
– Inclusion of riders
• Cost/Benefit Disclosure to Investors
• Written Supervisory Procedures
• Training
FINRA Examination Priorities Letter
(2015)
•
•
•
•
•
•
•
Sale and Marketing
Compensation
Suitability
Communications
Adequacy of disclosures
Training
Procedures
Targeted Exam Requests
• List of VA sales data
–
–
–
–
•
•
•
•
Client information
Investment amount
Selling representatives
Commissions
Percentage of VA sales related to L Shares
Percentage of VA revenue derived from L Shares
IRA rollovers to L Share annuities
Interviews with Representatives
Recommendations to Investors
•
•
•
•
Suitable for the investor’s situation
Educate investor regarding share class options
Assure investor awareness of fee differentials
Explain rationale for recommendation
FINRA Unsuitable Scenarios
• Riders Developed for
Long-term Investment:
–
–
–
–
Income Benefit
Withdrawal Benefit
Death Benefit Step-Up
Spousal Continuation
• Premium Enhancements
– May exceed surrender charge
period
• Surrender Charges
How to Address FINRA’s Concerns
• Point of Sale Disclosure
– Conflict of interest
– Comparison of fees
– Rationale
• Consider Limiting
Contract Riders
• Update Procedures
Procedures
•
•
•
•
•
•
Specifically address L Shares
Due diligence
Address impact of riders
Principal review and approval
Monitoring
Training
Industry Activity
• Some firms no longer allow representatives to sell L Share if
contract includes riders.
• Documenting Suitability
• Range of Disclosures
– No discussion of L Shares versus other share classes.
– “Each supplemental benefit is usually associated with a fee that will
reduce the total value of your account, it is important that you
understand these charges before you invest.”
– “The share class selected will determine the fees and surrender charges
associated with your variable annuity, you should familiarize yourself
with all share class options before deciding to invest.”
– “The variable annuity is available in multiple share classes, which
each have difference fees and charges described in the prospectus. The
financial professionals’ commissions may also differ depending upon
the share class selected.”
Any Questions?
Dionne C. Fajardo
Email: dfajardo@wiandlaw.com
Robert Jamieson
Email: rjamieson@wiandlaw.com
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