Sales Activities - FINRA Conduct Rule 2820


Variable Contracts
Rule 2820 applies exclusively to the activities of members in connection with variable contracts, to the extent such activities are subject to regulation under the federal securities laws. Certain definitions are the same under this rule as under Rule 2830 for investment companies, including compensation, cash compensation, non-cash compensation and affiliated person. Other important definitions under this rule include:

  • Purchase payment refers to consideration paid at the time of each purchase under the variable contract.

  • Variable contracts refer to contracts providing for benefits or values which may vary according to the investment experience of any separate or segregated account or accounts maintained by an insurance company.

  • Offeror refers to an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person of such entities.

Be sure to be familiar with the following under Rule 2820:

Receipt of Payment
No member can participate in the offering or in the sale of a variable contract on any basis other than at a value to be determined following receipt of payment and in accordance with the provisions of the contract, and, if applicable, the prospectus, which falls under the Investment Company Act of 1940. Payments need not be considered as received until the contract application has been accepted by the insurance company, except that by mutual agreement it may be considered to have been received for the risk of the purchaser when actually received.

Transmittal
Every member who receives applications and/or purchase payments for variable contracts must transmit all such applications - and at least that portion of the purchase payment required to be credited to the contract - promptly to the issuer.

Selling Agreements
No member who is a principal underwriter as defined in the Investment Company Act of 1940 may sell variable contracts through another broker-dealer unless (1) such broker-dealer is a member, and (2) there is a sales agreement in effect between the parties. Such sales agreement must provide that the sales commission be returned to the issuing insurance company if the variable contract is tendered for redemption within seven business days after acceptance of the contract application.

Redemption
No member shall participate in the offering or in the sale of a variable contract unless the insurance company, upon receipt of a request in proper form for partial or total redemption in accordance with the provisions of the contract, undertakes to make prompt payment of the amounts requested and payable under the contract in accordance with the terms thereof, and, if applicable, the prospectus.

Member Compensation
No associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a non-member company pays compensation directly to associated persons of the member, as long as:

  • The arrangement is agreed to by the member;

  • The member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the Commission that applies to the specific fact situation of the arrangement;

  • The receipt by associated persons of such compensation is treated as compensation received by the member for purposes of the Rules of the Association; and

  • All recordkeeping requirements are satisfied. Members are required to maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.

No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind. Also, they may not directly or indirectly accept any compensation or offer any compensation other than as described in the prospectus, except under the following conditions:

  • An occasional meal, event ticket or other entertainment that is not preconditioned on achievement of a sales goal, and not excessive or frequent enough to appear improper;

  • Payment or reimbursement of expenses to attend training or educational meetings offered by a member or offeror;

  • Gifts that do not exceed an annual amount, which is fixed periodically by the FINRA and that are not preconditioned on the achievement of a sales goal


Look Out!
Many of the rules for variable contracts and investment companies are the same, but watch for differences regarding sales charges, definition of offeror and selling dividends.

FINRA Conduct Rule 2830
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