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 Cost/Benefit Disclosure to Investors 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