Firm Responsibilities for Sales of Pension Income Stream Products
Pension income stream products typically involve an up-front lump sum payment to a pension recipient in exchange for the rights to that recipient’s future pension income payments. The Financial Industry Regulatory Authority (FINRA) in a recent notice provides guidance on the responsibilities of firms regarding supervision of the sale of pension income stream products by their associated persons.
In “Pension Income Stream Products,” FINRA discusses
not only those sales, but also the characteristics of, and investor protection issues presented by, pension income stream products, as well as those products’ legal status.
FINRA reminds firms that they must independently assess whether a product is a security, especially when they determine how to treat an associated person’s participation in the sale of such a product. “This is critical regarding a product such as a pension income stream product, which is marketed and sold to the general public and exhibits many characteristics of a security under recent case law,” says FINRA.
FINRA says it is aware that when firms assess an associated person’s pension income stream activities away from it, some have not treated the income stream products as securities for purposes of the applicability of FINRA Rule 3280 — which addresses private securities transactions of an associated person — and have treated them instead as outside business activities under FINRA Rule 3270, which concerns the outside business activities of registered persons. In the notice, FINRA says that a firm is obliged to evaluate a proposed activity in order to determine whether it is properly characterized as an outside business activity as a private securities transaction under these rules.
FINRA says that firms that allow associated persons to participate in the sale of pension income stream products “are well-advised to adopt special procedures and training of associated persons with respect to the products” due to the potential for investor protection issues and regulatory violations arising in the marketing and sale of pension income stream products.
When firms develop special procedures or training, FINRA says, “it is important for associated persons to understand the features of these types of products and the extent to which a particular product meets the needs of a customer.” FINRA also notes that firms may prohibit the sale of all pension income stream products or maintain a list of those their associated persons may market or sell.
“In addition,” says FINRA, “firms should ensure that their procedures comply with applicable state securities laws regarding pension income stream products.” And it says that “a number of state securities regulators have found that pension income stream products are securities under state securities laws.”
And FINRA adds that it “expects each associated person to comply with the procedures adopted by his or her firm regarding pension income stream products.”