Speech by SEC Staff:
Keynote Address
by
Paul F. Roye
Director, Division of Investment Management
U.S. Securities and Exchange Commission
Practicing Law Institute
Understanding Securities Products of Insurance Companies
2002 Conference
New York, New York
January 10, 2002
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any employee or Commissioner. This speech expresses the authors views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
I. Introduction
Thank you and good morning. It is a pleasure to be here with you again at this conference focused on understanding the securities products of insurance companies. A review of the conference schedule indicates that an interesting and informative program has been planned for you over the next two days. In my view, variable insurance product regulation is one of the more interesting and all-encompassing areas of the federal securities laws. In the variable products area you are exposed to virtually every major federal securities law. You encounter issues under the Securities Act of 1933 in connection with the offering of interests in variable products and the mutual funds that underlie these products. The Securities Exchange Act of 1934 is implicated in connection with the broker-dealers that distribute variable products and in connection with proxy solicitations. Separate accounts issuing variable products are regulated as investment companies under the Investment Company Act of 1940 and the investment advisers to the underlying funds are regulated under the Investment Advisers Act of 1940. In addition to the federal securities laws, you also have to understand NASD rules as they relate to the distribution of variable products, state insurance law, federal tax law, and also ERISA. As I tell new attorneys in the Division of Investment Management, our insurance products office is a great place to begin your career in the investment management area, because of the broad exposure to issues under the federal securities laws. Hopefully, after this conference you will agree with my assessment of this practice area.
While this conference will provide you a nuts and bolts introduction to the securities regulation of insurance products, I thought it would be useful for you if I discussed some current issues of importance in the insurance products area, including a discussion of enforcement matters. But first, I am obliged to state that the views that I express are my own and do not necessarily reflect the views of the Commission or my colleagues on the Commission's staff.
I think it is fair to say that the variable products industry is characterized by innovative products and rapid growth. In the competitive variable products marketplace, firms are continually seeking to restructure and improve product designs to attract and retain investors. It is reported that just 15 years ago, there were 25 insurance companies offering 45 different variable annuity contracts. Today, there are at least 65 companies with over 500 different variable annuity products. In addition, traditional ways of doing business are changing in response to the needs of investors and technological innovation. Variable products are being designed with a variety of features and enhancements, such as enhanced death and earning benefits, guaranteed living benefits and long-term care benefits. This growth and the rapid pace of innovation bring challenges for the industry (which explains why many of you are here today) and also for us who are responsible for overseeing the regulatory framework for the variable products industry.
II. Regulatory Issues in the Insurance Products Area
A. All Electronic Variable Annuity
Variable products have traditionally been sold in face-to-face settings. However, the internet is emerging as a new distribution medium for variable insurance products. Several firms are building annuity supermarkets to service online investors and financial advisers. These firms are not only providing educational information, but access to variable products; in some cases, allowing investors to compare several annuity contracts side by side. It is possible that by utilizing the cost effectiveness of the internet, annuity providers may be able to reduce the costs of marketing variable products and thereby increase their appeal. Insurance companies for similar reasons are using the internet to service existing annuity customers.
In October 2001, the Commission accelerated the effectiveness of a registration statement for an "electronic-only" variable annuity offered by American Life Insurance Company of New York — the first product of its kind. American Life will not provide paper copies of any document relating to the annuity contract or the underlying funds to an investor or contract owner, except to the extent that there is a technical failure which prevents the insurance company from meeting its delivery obligations electronically. The documents to be delivered electronically include prospectuses for the contract and mutual fund options, shareholder reports, proxy materials, account statements and transaction confirmations. Before an investor may purchase the contract, he or she must consent to electronic delivery of all documents relating to the contract. While other annuity contracts that are offered electronically over the internet will send a paper copy of any contract or underlying fund document upon request, American Life will treat a request for paper as revoking consent to electronic delivery and deem the revocation of consent as a surrender of the contract. The insurance company represented that it is able to charge lower fees than the average variable annuity as a result of this "paperless" delivery of information. Indeed, the contract will be sold without any contract charges or asset-based separate account charges, although contract owners will bear the expenses of the underlying mutual funds.
In declaring the registration statement effective, the Commission stated that its decision to do so reflected the particular facts and circumstances applicable to the registration statement, and that it is currently reviewing whether its previous pronouncements on electronic delivery should be modified.
B. Private Remedies Regarding Contract Fees
As will undoubtedly be discussed during this conference, insurance companies charge various types of fees under variable insurance contracts. Sections 26(e) and 27(i) of the Investment Company Act provide that it is unlawful to sell a variable insurance product, such as a variable life insurance or variable annuity contract, unless the fees established by the contract are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the insurance company sponsoring the contract. In May 2000, Sidney and Johanna Olmsted, holders of Prudential variable annuities, brought a class action suit against the insurance company under Sections 26 and 27 of the Investment Company Act — alleging that they were sold contracts that violated the reasonableness requirement, and seeking to recover the amount of alleged overcharges as damages. The Olmsteds' suit specifically alleged that Prudential's mortality and expense risk charges under the contract were unreasonable.
An insurer assumes a mortality risk when it guarantees annuity payments to contract owners. The amounts of these payments are specifically based on mortality projections. In the event that the actual mortality rates differ from projections, the insurer remains obligated to pay annuity benefits as guaranteed in the contract. Some issuers also assume a mortality risk by agreeing to pay a death benefit if the annuitant dies before a specified time. An insurer can also assume an expense risk when an annuity contract guarantees that administrative charges under the contract will not increase, even if actual administrative costs increase during the life of the contract.
Plaintiffs in this case argued that the consideration for the defendant's charges is largely illusory. This consideration consists of a promise that if the contract owner dies before the beginning of the pay-out period, that defendants will pay the greater of: (a) the value of the investment in the annuity at the time of death or (b) the amount of contributions made by the contract owner during the accumulation period. The plaintiffs contend that the value of a contract that has been held for any length of time is unlikely to be less than the amount of the contributions. Thus, they contend, almost all of the charge is profit to the defendants.
The district court dismissed the case on the ground that there is no implied private right of action for damages under these sections. The plaintiffs appealed to the Second Circuit. The Second Circuit requested that the Commission file a brief amicus curie addressing the issue of whether Sections 26 and 27 of the Investment Company Act provide private rights of actions. No previous case has addressed this question.
In its brief, the Commission stated that the court did not need to reach the issue of whether Sections 26 and 27 of the Investment Company Act created implied private rights of action. Instead, the Commission argued that other provisions of the Investment Company Act expressly give holders of variable insurance products private remedies for unreasonable fees. Specifically, the Commission noted that Section 47(b) of the Investment Company Act permits rescission of any contract that is made or whose performance involves a violation of the Act, as well as restitution of the consideration paid for such a contract, subject to a court's equitable authority. The Commission further noted that Section 47(b)(3) provides that the subsection shall not apply to the lawful portions of a contract to the extent that they may be severed from the unlawful portions of the contract or to preclude recovery against any party for unjust enrichment. Accordingly, the Commission argued that Section 47(b) of the Investment Company Act permits rescission of the portions of the contract that establish an unreasonable price, together with restitution of the excess amounts paid. The Commission asserted that Supreme Court precedent made it clear that private plaintiffs may seek rescission of a contract provision charging excessive fees, citing Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 1 (1979) where the Supreme Court construed Section 215 of the Investment Advisers Act, a provision similar to Section 47(b), to permit rescission and restitution where a contract is contrary to the statute, while at the same time finding no implied right of action for damages under the antifraud provisions of that Act. The Commission further noted that Section 26(f)(2)(A) requires the insurance company expressly to represent in the registration statement for the contract that the fees are reasonable, and a material misrepresentation in a registration statement may give rise to liability under Section 11 of the Securities Act, as well as, depending on the circumstances, liability under Sections 12(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
As a result of the availability and adequacy of the express Section 47(b) remedy, the Commission argued that it was not necessary for the Court to decide whether there were also duplicative implied damage remedies under Sections 26 and 27 and noted that the Supreme Court has been reluctant to recognize implied rights of action under statutes that contain express remedies.
It may be some time before the Second Circuit rules on this issue, but regardless of the outcome of the Olmsteds' appeal, the reasonableness of fees charged for variable insurance products is an important issue that we will continue to monitor.
C. Section 11 Exchanges
A growing number of all new variable contract sales are attributable to contract exchanges. This is driven largely in part by new and diverse bonus programs. As some of you may know, we have been concerned by this trend because these so-called "bonus annuities" may not be in the best interest of the contract holder. Often these annuities come with higher surrender and asset-based charges, as well as longer surrender periods, which may more than offset the bonus itself. The staff is concerned about abusive switching practices and continues its scrutiny of sales practices and suitability in the area of variable annuity contract exchanges — examining the appropriateness of selected sales practices and the suitability of sales to certain contract holders.
In addition, we are also keeping a close eye on the reliance of insurance companies on the "retail exception" in connection with programs to promote internal exchanges. In June of last year, we issued a letter to NAVA, the ACLI and the Insurance Marketplace Standards Association explaining our view of the exception. Section 11 generally prohibits an insurer from offering to exchange contracts for other variable annuity contracts issued by the same insurer or its affiliates, without compliance with Commission rules or an exemptive order. Section 11(a) exempts principal underwriters from these provisions as long as the principal underwriter in the course of its retail business makes the offer. This "retail exception" was intended to cover communications between an individual broker and his or her individual customer and does not cover offers by a principal underwriter to all holders of a class of securities. Nor does the exception apply to any exchange offer by an insurance company. In the June letter, we identified certain factors that insurers should consider when determining whether the retail exception could apply to an exchange offer.
The letter cautions that these factors are not exhaustive. There are other factors that may indicate that an offer is being made to a group or class of contract holders or for other reasons does not come within the retail exception. We also stated that insurers should regularly monitor their exchange activities and communications to shareholders to ensure that they are not engaged in an exchange offer in violation of Section 11 of the Investment Company Act.
D. Substitutions
Over the past few years, the SEC staff has processed a large number of applications requesting approval for the substitution of underlying funds supporting variable products. While in the past, these applications were mainly filed by insurance companies that were facing unforeseen circumstances caused by changes in the underlying fund, we are now seeing quite a few applications filed in connection with changes in the insurance company's strategic business plans. Accordingly, our analysis of these applications has evolved as well, in response to the new facts and circumstances reflected in these applications.
With the adoption of Section 26(b), now 26(c), of the Investment Company Act, Congress required SEC approval of substitutions in order to protect investors in unit investment trusts from inappropriate changes in the nature of their investment. The SEC recommended that Congress adopt Section 26(c) largely because if a UIT shareholder were dissatisfied with the new investment, their only relief would be potentially a costly redemption and/or reinvestment. Now that concern is mitigated somewhat in the context of a separate account offering many investment options with free transferability among subaccounts, but even in that case the concern is not eliminated. Therefore, we look carefully at each application to determine the overall impact the substitution will have on contract owners. Perhaps, the most immediately apparent impact arises from changes in expense levels. When a substitution results in higher overall expenses, we may condition exemptive relief on a cap at the level of the replaced fund's expense ratio for some period of time.
But be assured that we look at more than overall expense ratios. We compare, for example, the investment objectives and policies of the substitute and replaced funds, and we consider the existence and nature of any affiliation between the insurance company and the affected funds, as well as whether Rule 12b-1 or revenue sharing arrangements are in place. We are focusing in particular on situations where the new substitute fund has higher advisory fees or 12b-1 fees that, absent a substitution, could not be imposed without a shareholder vote — and we are in some cases requiring shareholder votes for those types of transactions.
In general, we are seeking to develop a consistent approach to our review and disposition of these applications, and to have consistent standards for the imposition of conditions, such as shareholder votes or expense caps. However, as no two applications present precisely the same facts, we have also sought to be flexible and to adapt our analysis to each application as appropriate, realizing that a rigid or mechanical analytical model will not yield appropriate results in every case.
We are actually easing the regulatory burden of section 26(c) relief in appropriate cases. In August of last year, we granted no-action relief to an insurance company seeking to transfer monies received from the liquidation of an unaffiliated underlying fund to a money market subaccount without first obtaining a section 26(c) order. The liquidation had been approved by the underlying fund's board because of its small asset size, its perceived lack of growth potential and its concern for increasing expenses. The staff considered several factors in making this decision, including the fact that there was no affiliation between the insurance company and either fund involved in the transaction, which suggested that the transaction was not undertaken to enrich the insurance company or the funds' affiliates to the detriment of contract owners. We also considered the fact that notice had been sent to contract owners along with the opportunity for them to select alternative investments, the fact that there was a variety of investment options under the contract with free transfer privileges, and the lower expenses of the money market fund. We also felt that the default allocation to a money market fund was appropriate in this case because money market funds generally are regarded as suitable short-term cash management vehicles. Taken together, the staff determined that the facts and circumstances surrounding the allocation provided enough protection against the abuses that Section 26(c) targeted and, as a result, granted the relief.
In November we issued another no-action letter in this area, in which we agreed not to recommend enforcement action if an insurer moved separate account assets from one class of an underlying fund to another class of the same fund. Specifically, the transaction involved replacing a class of fund shares with a 12b-1 fee and therefore higher total expenses, with a class of shares of the same fund with lower total expenses. I would point out that this letter does not stand for the proposition that different classes of the same fund are not different securities for purposes of Section 26(c). However, we were convinced in the context of the facts presented that the transaction did not involve any of the abuses that Section 26(c) was designed to prevent. The effect of the transaction was to give contract owners an investment in the same fund managed by the same investment adviser at lower cost.
E. Redemption Fees
The staff is aware that arbitrageurs and market-timers cause problems for funds and their long-term shareholders, and we are sympathetic to funds that try to discourage market timers from using their funds as trading vehicles. Market timers can force portfolio managers to either hold excess cash or sell holdings at inopportune times in order to meet redemptions. This can adversely impact a fund's performance, increase trading and administrative costs and harm long-term shareholders. Indeed, the tax deferred status of variable products eliminates one of the disincentives to market timing and short-term trading that otherwise exists for investors in funds, which is the realization of capital gains from the funds on a current basis.
One measure being instituted in response to market timers is the imposition of redemption fees. Studies indicate that the number of fund companies imposing such fees has increased over 80 percent since 1999. We understand that some funds underlying variable product separate accounts are taking steps to impose redemption fees for contract owners who transfer amounts among sub-accounts on a short-term basis according to market timing strategies. This phenomenon raises interesting issues because of the relationship between the underlying funds and the separate accounts that invest in the funds. Because the separate account is the actual owner of the fund shares, the fund is not in a position to impose a fee directly on a contract owner that is engaged in short-term trading among subaccounts. Indeed, the fund generally is unable to ascertain what portion of a net purchase or redemption order from a separate account comprises redemptions from contract owners of units in a subaccount that have been held for a short time. So, although a redemption fee geared to market timing is properly a fund level fee, the proceeds of which remain in the fund, the insurance company nevertheless must be able to determine the amount and enable the fund to collect the fee. Obviously, this raises logistical challenges for the fund and the insurance company in addition to the regulatory and disclosure issues that must be addressed in structuring any fee of this type in the context of variable products.
For example, some underlying funds are offered through separate accounts of several insurance companies that may have different levels of market timing activity by their contract owners, or different technical capabilities, so that some, but not all, of the insurance companies are willing and able to collect a redemption fee imposed by the fund. In response to this situation, we understand that at least one fund complex is taking steps to establish separate classes of shares of its variable products funds. A redemption fee class could be offered exclusively to separate accounts of insurance companies that have agreed, and have the systems in place, to enable the fund to charge a redemption fee to contract owners who transfer in and out of the fund on a short-term basis. The fund could still be offered to other insurance companies whose contract owners do not engage in significant timing activity, or for whom the fee is not practicable, through another class of fund shares that does not charge a redemption fee.
In November of last year, a court upheld the legality of another method by which variable annuities can discourage market timing. A district court ruled that companies could require market timers to conduct exchanges by mail. In this case, the contract holder had made several round-trip trades into an equity account during the first five months the account was open. Round-trip trades are trades into and out of funds within relatively short time periods. The insurance company sent several letters indicating that future trades would have to occur by mail, but for a period of time, the account holder was able to convince the company to let him keep trading. Eventually, the company cut off his telephone, fax and Internet exchange privileges, and the account holder sued. Citing "a very clear and undisputed paper trail which include[d] the prospectus, the deferred annuity contract and correspondence between the parties," the district court stated that the insurance company was within its rights to curtail his exchange activity. The prospectus and annuity contract stated that round-trip trading was prohibited. The court's decision allows the insurance company to impose slower exchange methods — like the U.S. mail — on certain contract holders without imposing the same requirements on all customers.
III. Enforcement Matters
A. Real Time Enforcement
Now let me turn to the subject of enforcement. Our Chairman Harvey Pitt and the staff of the Enforcement Division are committed to "real-time" enforcement of the federal securities laws. Just this week, the Commission announced a partial settlement with the 17-year old perpetrator of an Internet securities scheme that defrauded more than 1,000 investors of more than $1 million. In mid-December of last year, the Commission filed an action almost immediately after discovering the scheme. That quick action has already led to the recovery of approximately $900,000 of the fraudulent proceeds. The case is but one example of the Commission's resolve to move quickly to squelch securities law violations, especially those that involve an ongoing fraud when investor funds are at risk.
B. Framework for Evaluating Cooperation in Enforcement Matters
At the same time, however, the Commission has announced an initiative to encourage registrants to police themselves and to report and correct misconduct when it is discovered-rather than waiting for the Commission to discover and act upon a violation. The Commission articulated a framework for evaluating cooperation in determining whether and how to charge violations of the federal securities laws. Credit for cooperative behavior may range from the extraordinary step of taking no enforcement action at all, to bringing reduced charges, seeking lighter sanctions or including mitigating language in documents the Commission uses to announce and resolve enforcement actions. Firms are therefore encouraged to responsibly assess their compliance programs and to act quickly to remedy problems when they occur. The result will hopefully be more efficient and effective enforcement of the federal securities laws.
C. Failure to Supervise Sub-Adviser
In view of the increasing use of sub-advisers in the insurance products industry, I thought I would direct your attention to administrative proceedings against a fund's investment adviser and its sub-adviser made public on September 28, 2001. The matter arose from a portfolio manager who the Commission found defrauded a mutual fund and an offshore fund, by concealing from the funds and their investment advisers that issuers of securities held by the funds were suffering financial problems. The portfolio manager inflated the value of the troubled securities and caused one of the funds to materially overstate its net asset value.
From July 1994 to April 1998, the portfolio manager caused the funds to purchase from one broker-dealer $32 million in notes through private placements. The Fund had pricing procedures that required the portfolio manager to obtain bid and asked quotes from two brokers for securities that could not be priced by a pricing service. However, with respect to the notes purchased from the broker-dealer, the portfolio manager provided the fund's accountants two fictional bid and asked price quotes, based on discussion with the broker-dealer that sold the notes and without consulting other brokers. In 1995, the broker-dealer took over from the portfolio manager the responsibility of providing prices on the notes to the fund's accountants, continuing to provide two fictional bid and asked quotes for the notes purchased from the broker-dealer. Five of the issuers, which sold a total of $15.7 million par value notes to the registered fund, had severe financial trouble from 1996 through 1998, which resulted in the issuers' defaulting on interest payments, being forced into voluntary bankruptcy and/or having all their assets taken away in foreclosure proceedings.
In 1997 and 1998, the portfolio manager and the broker-dealer principal rolled up the five troubled notes into shell companies controlled by the broker-dealer principal. In these roll-up transactions, the portfolio manager had the funds purchase from the broker-dealer $14 million in notes issued by the shell companies. The shell companies then used a portion of the proceeds to purchase from the registered funds five of the problem notes. The pricing of the five notes and the shell companies' notes failed to reflect the notes' performance and the original issuer's financial condition, and consequently the value of the notes was overstated. As a result of the overpricing, the registered fund materially overstated its NAV. The funds NAV was overstated from at least August 30, 1996 through November 30, 1998, by amounts ranging from $.09 to $.20 per share.
The Commission concluded that the portfolio manager violated section 17(a) of the Securities Act, section 10(b) and Rule 10b-5 under the Securities Exchange Act, section 34(b) of the Investment Company Act, and aided and abetted violations of sections 206(1) and (2) of the Investment Advisers Act, 34(b) of the Investment Company Act and Rule 22c-1 under the Investment Company Act.
The Commission further found that the fund's adviser and sub-adviser failed to reasonably supervise the portfolio manager. The Commission has repeatedly emphasized that the duty to supervise is a critical component of the federal regulatory scheme. The Commission has sanctioned advisers that did not establish and implement procedures reasonably designed to detect and prevent violations of the federal securities laws. Moreover, the Commission has made it clear that supervisors must respond vigorously to indications of possible wrongdoing. Accordingly, supervisors must inquire into red flags and indications of irregularities and conduct adequate follow-up and review, to detect and prevent future violations of the federal securities laws.
The Commission found that the sub-adviser had not established or implemented adequate procedures regarding the purchase, monitoring and pricing of private placement securities. Significantly, the Commission also found that the primary adviser also failed reasonably to supervise the portfolio manager. The Commission emphasized that the written agreement between the adviser and the sub-adviser provided that the sub-adviser's advisory services were subject to the supervision of the primary adviser. The Commission also noted that the primary adviser had indications of irregularities regarding the problem notes, including stale prices and knowledge of proposed roll-up transactions, but did not adequately follow-up and review these irregularities. Furthermore, the primary adviser had not established or implemented procedures for such follow-up and review.
In view of the growth in the variable products area of using sub-advisers, I would urge careful review of this enforcement action and emphasize that primary advisers, many of which are insurance companies or insurance company affiliates, should have adequate procedures in place to monitor and oversee the actions of sub-advisers.
D. Annuity Switching
Earlier, I spoke of the Commission's concern regarding abusive switching in variable annuity accounts. One enforcement matter instituted in 2000 and still pending bears discussing. The Commission instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act, Sections 15(b)(6), 19(h) and 21C of the Securities Exchange Act, and Sections 203(f) and 203(k) of the Investment Advisers Act against Raymond A. Parkins, Jr. Parkins was president of The Parkins Investment Advisory Corporation and The Parkins Investment Security Corporation, a broker-dealer. The Commission alleges that from 1993 through 1996, Parkins, on at least 24 occasions, induced his investment advisory clients to switch their variable annuity investments by providing them with unfounded, false and misleading justifications for the switches, including false and misleading comparisons of the performance of certain variable annuities and false assurances that the switches would increase the diversification of his clients' portfolios. The Commission further alleges that Parkins, in switch recommendation letters he sent to his clients, misrepresented or failed to inform his clients of the sales charges associated with the switches. As a result of Parkins' alleged fraudulent conduct, his clients incurred unnecessary sales charges of more than $168,000, and, in some cases, lost a portion of their investment principal. Parkins Securities received commissions of more than $210,000 on the transactions at issue. Obviously, this is the type of conduct which we must guard against and prevent.
E. NASDR Actions
Finally, I want to discuss recent NASD Regulation Inc. ("NASDR") actions concerning variable annuities involving the issue of suitability. Rule 2310(a) of the NASD Conduct Rules provides that "in recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, described by such customer as to his other security holdings and as to his financial situation and needs." Rule 2310(b) imposes upon a broker the duty to make reasonable efforts to obtain information concerning the customer's financial status, tax status, investment objectives and other relevant information in making a recommendation to a customer. In various notices to members, the NASD has reminded members that they are subject to suitability requirements in connection with the sale of variable products and provided suitability guidelines for the sale of variable annuities and variable life products.
Last month, NASDR announced two separate enforcement actions involving sales of variable annuities and the supervision of sales activities. Two brokerage firms and three individuals were named in disciplinary actions, representing the second set of cases resulting from a series of special examinations focusing on the sale of variable contracts conducted by NASDR during 1999 and 2000.
In the first matter, a broker-dealer settled charges and consented to findings including that it, through its compliance officer, failed to establish, maintain and enforce adequate written supervisory procedures relating to the sale of variable annuities and variable universal life insurance in the areas of suitability of recommendations, review of new business for suitability, training and supervision of principals, and the investigation and reporting of customer complaints. The firm also failed to maintain certain records reflecting the rationale for the exchange of variable products. The firm was censured and fined $100,000, of which $25,000 was assessed jointly and severally against the firm and the compliance officer. The compliance officer was also suspended for 45 days from serving in any principal capacity.
In the other matter, a broker-dealer settled charges and consented to findings including that it failed to: (i) make reasonable efforts to obtain customer information for making suitability determinations; (ii) establish, maintain and enforce adequate written supervisory procedures relating to the manner in which home office principals were to review and approve the suitability of variable product sales in its offices of supervisory jurisdiction and (iii) conduct an adequate supervisory review of the suitability of the allocation of premium payments to various investment portfolios or sub-accounts. The firm was censured and fined $35,000.
These actions represent NASDR's continuing effort to address problem areas in the sale, distribution and marketing of variable products.
IV. Aftermath of September 11th
2001 was a year of substantial change brought about by economic and technological influences. For most people, however, the year's single most significant change occurred on September 11th. The impact of September 11th on all our lives is immeasurable. Never again will we take our security for granted. And never again will we turn a blind eye to the threat of terrorism. Never again will the financial services industry take its communications systems, its record storage facilities and its back office infrastructure for granted.
September 11th heightened our awareness of the importance, indeed the necessity, of having back-up systems and disaster recovery/business continuity plans in place. You should know that our Inspections Office has committed to making contingency planning a focus of future inspections. When they come knocking, our inspections staff will ask for a copy of contingency plans and likely will ask questions about alternative physical facilities, back-up records storage and back-up communications systems. The inspections staff will also focus on the extent to which systems have been tested and evaluated for contingency preparedness.
We understand, however, that there cannot be a "one size fits all" approach to contingency planning. Different firms, depending on size, investment style, location and reliance on technology, have different needs and different capabilities. Each firm should thoughtfully assess what its back-up and contingency needs are and should act to improve disaster recovery and business continuity planning as expeditiously as possible.
IV. Conclusion
I hope my discussion of some of the issues in the investment management area we have been focusing on at the Commission has been helpful and assists you as you seek to develop a better understanding of securities products of insurance companies. Enjoy the rest of the conference. Thank you for listening.
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