Financial Industry Regulatory Authority (FINRA) is the chief financial regulator for the financial industry. FINRA fines doubled in 2014 compared to the previous year. “FINRA’s large increase in fines cannot be ignored,” said Brian Rubin, co-author of the Sutherland study. “Even though FINRA has not brought cases of the same magnitude as some of the SEC’s enforcement actions, firms and individuals must still sit up and take notice of the kind of year FINRA had and the messages sent through its enforcement cases.”
FINRA Rule 2210: Communications with the Public or between analysts and clients, resulted in the second-highest amount of fines in 2014, as 31 cases resulted in $17.2 million in total fines. This increase of 514%, from $2.8 million last year, was largely attributed to the $15 million Citigroup case, Rubin remarked that “advertising issues will always be an important issue for FINRA and as new products are brought into the marketplace or as old products act in unanticipated ways, firms can expect to see an increase in cases and fines in this area.”
Many practitioners are still comparing illustrations of hypothetical policy values for some limited number of products as the means of determining product suitability. This practice has been deemed "misleading" by securities regulators.
Securities regulations “strictly prohibit” comparing illustrations of hypothetical life insurance policy values for the purpose of determining policy suitability or competitiveness because such comparisons omit material facts and are “misleading” as follows:
- 2210 Communications with the Public, Section (d)(1)(A) states communications “shall be based on principles of fair dealing and good faith, must be fair and balanced, … and may [not] omit any material fact … if the omission, in the light of the context of the material presented, would cause the communications to be misleading.” Section (d)(2)(B) defines that material facts in “comparison[s] … between investments or services must disclose material differences between them, including … costs and expenses …”. However, comparisons of hypothetical policy cash values and death benefits do not disclose any differences in cost of insurance charges (COIs), fixed administration expenses (FAEs), cash‑value‑based “wrap fees” (e.g., VUL M&Es) and/or premium loads. Because comparisons of hypothetical policy values omit material facts explicitly specified by the Rules, how can you demonstrate they are fair and balanced, and support activities of fair dealing and good faith? Click here for more information about Rule 2210.
- IM-2210-1 Guidelines to Ensure That Communications With the Public Are Not Misleading goes on to clarify the regulation by explaining that “statements are not misleading within the context in which they are made” and instead must provide “balanced treatment of risks and potential benefits”. The context of the comparative analysis found in many policy review reports is (supposedly) to establish the suitability or competitiveness (or lack thereof) of a particular policy. However, it is our stance that implicit in any comparative analysis based on illustrations of hypothetical policy values is the presumption that both products possess identical likelihood of achieving projected cash values and/or death benefits. In that different products involve different risks that projected cash values and/or death benefits may or may not be achieved, such policy comparisons can fail to provide a “balanced treatment of risks and potential benefits”, and are thus could be deemed “misleading” within the context of policy suitability or (lack of) competitiveness. Click here for more information about IM-2201-1.
- For these reasons, IM-2210-2 Communications with the Public About Variable Life Insurance concludes in Section (b)(5)(C) that “it is inappropriate [emphasis added] to compare a variable life insurance policy with another product based on hypothetical performance as this type of presentation goes beyond the singular purpose of illustrating how the performance of the underlying investment accounts could affect the policy cash value and death benefit.” In support of this conclusion, Section (b)(5)(A)(i) clearly states that “illustrations may not [emphasis added] be used to project or predict [future] results as such forecasts are strictly prohibited by the Rules”. Because any comparison of projected cash values and/or death benefits for the purpose of determining which product is more suitable inherently presumes that such cash values and/or death benefits are accurate predictions of their future results, we contend that such comparisons are prohibited by the Rules. Click here for more information about Rule IM-2201-2.
These regulations are intended to ensure that “communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service” and may not [emphasis added] “omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communications to be misleading.” Registered representatives should take note that even their communications regarding fixed insurance may be subject to regulatory review.
Policy Review systems/services offered by manufacturers, distributors, agents and/or brokers that generally involve “apples-to-apples” comparisons of illustrations of hypothetical policy values for some limited number of products are, in our opinion, exactly the comparisons that may be deemed “misleading”. Hypothetical illustrations are a comingling of undisclosed policy charges and unsubstantiated performance assumptions, and do not separately measure policy expenses (as required under Section 7 of the Prudent Investor Act) separate from the reasonableness of performance expectations (as required under Section 2 of the Prudent Investor Act), they are clearly not comprised of all required or customary characteristics, and are thus not complete. These systems/services also lack completeness that results from the comingling of data that generally-accepted prudent practices require to be measured separately, lack reference to independent 3rd-party measures for average price and performance, and lack objectivity due to the artificial limitations on the number of insurers included in their sample population.
The good news is that Veralytic reports are compliant with the chief regulatory body of the financial services industry for use with all types of life insurance, and do include and consider underlying cost and performance disclosures. Veralytic research is derived from various independent sources to include thousands of actual insurance company pricing representations for hundreds of different products and actual performance data for invested assets underlying policy cash value, and reveals the overall suitability of a given life insurance product relative its peer-group and based on 5 of the major factors of suitability as to 1) financial strength and claims-paying ability, 2) actual cost-competitiveness (i.e., measured separately from performance assumptions), 3) pricing stability, 4) cash value liquidity, and 5) actual historical performance of invested assets underlying policy cash values.
Veralytic provides the empirical pricing and performance research essential to any complete investigation of life insurance policy suitability (as defined by the chief regulatory body of the financial services industry or the Prudent Investor Act) and which can then lead to independent and objective suitability determinations. While due care is an emerging field, and while there is room for a difference of opinion in some areas, Veralytic goes well beyond overly-simplified comparisons of comingled and hypothetical policy values to better protect and/or compete against those misleading Policy Review systems or services.
Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r clients) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic Reports under our NO-RISK trial subscription.