1. Spotlight on Variable Annuity L Shares
Dionne C. Fajardo & Robert Jamieson
September 3, 2015

2. 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.

3. 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.

4. 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?

5. 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?

6. 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.

7. 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.

8. Relevant Rules, Notices, and Laws
State Specific Laws and Rules
Securities laws
Insurance laws, e.g. Fla. Stat. §
Fla. Admin. Code 69B
Forms DFS-H and DFS-H1-1981

9. 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

10. Focus of Targeted Exams
Investor Awareness
Appropriate Investment
Marketing
Conflicts of Interest

11. 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

12. FINRA Examination Priorities Letter (2015)
Sale and Marketing
Compensation
Suitability
Communications
Adequacy of disclosures
Training
Procedures

13. 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

14. 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

15. 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

16. How to Address FINRA’s Concerns
Point of Sale Disclosure
Conflict of interest
Comparison of fees
Rationale
Consider Limiting Contract Riders
Update Procedures

17. Procedures Specifically address L Shares Due diligence
Address impact of riders
Principal review and approval
Monitoring
Training

18. 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.”

19. Any Questions?
Dionne C. Fajardo Robert Jamieson