Market Connection Compliance Recapped

Our August 9 Market Connection teleconference with Douglas I. Friedman, J.D., CLU and Heather C. Downey, J.D., LLM highlighted current compliance issues. They discussed the process their law firm employs to review the COSS needs analysis and advanced marketing software for compliance with state regulations, NASD advertising rules, and general liability issues (such as accuracy of written explanatory information, but not the numerical information). Chris Kite, MBA, Vice President of Strategic Relations at COSS, recaps the key points from this Market Connection call here.

IRS Circular 230 has been out for a long time, but became effective on June 20. It has stirred questions about its effect on the life insurance business. Some people are adding footnotes to communications such as:

THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY PENALTY THAT MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE.

However, this type of footnote is probably not needed for our reports. Our reports already say they are not tax advice and note that the client should talk to his or her tax advisor. An insurance agent should not be giving tax advice. This type of footnote seems to say the agent is giving advice that he or she should not be giving. If we add this type of note to everything, it tends to lose its meaning. One participant noted that a company with registered financial advisors is now adding such a footnote to their communications. It did not seem to apply to the typical and intended use of our reports.

When Doug and Heather review the COSS software, they want to be sure the reports do not overstate benefits or understate risks. They look at whether the text and options illustrated are reasonable. They do not test the calculations for accuracy. COSS has its own procedures for this testing.

Doug spoke about the impact of valuation rules on supplemental illustrations, looking at Section 79 and Section 83. Typically, a policy has been valued at its cash value, but the market has product designs and circumstances where the market value can be substantially higher. The life settlement market should have a growing impact on how policies are valued in particular circumstances. Doug also briefly discussed the impact of new rules for non-qualified deferred compensation (section 409A), and the continued viable status of premium financing as an advanced planning tool.

Questions and comments can be sent to Doug and Heather at doug@fdatty.com. Doug will speak on recent developments in advanced markets and offer a compliance bulletin on Wednesday, September 14 at the COSSConference.