NASD NTM 05-50 Has Some Positive Potential

Instability, uncertainty, disruption and opportunity describe the post-NTM environment. NTM refers to the National Association of Securities Dealers Notice to Members 05-50, issued in August 2005.

Many in the financial industry have responded negatively to the NTM, which conveys guidelines for broker-dealer member firms to follow in supervising equity-indexed annuity sales. However, some positive implications exist, too, including a potentially unprecedented growth opportunity.

Clearly, NTM 05-50 challenged all industry players from individual registered reps to the largest insurance companies in unexpected ways. For example:

o Independent marketing organizations quickly have become galvanized to the importance of strengthening their long-standing rep relationships.

o EIA manufacturers now must serve and satisfy broker-dealers, a vital new constituency. Their future success will depend on breadth/quality of product line, wholesaling capabilities and marketing services.

o Insurers offering consumer-oriented products and competent wholesaling will be in a stronger position for success. However, those relying on existing variable annuity wholesalers may face real challenges in terms of additional product education needs and marketing support. Those at risk of losing the most EIA business are specialty fixed annuity manufacturers that have no distribution agreements with broker-dealers.

o Many registered reps are reeling over the potential loss of lucrative, long-term relationships with IMOs, many of which provide critically important value-based services such as lead generation programs, seminar systems and sales/marketing presentation tools (not just access to annuity products). Some reps are probably anxious, and maybe angry, about destabilization of the existing practice model. Some also may worry about compensation changes and having fewer EIA products available.

o B-Ds may be in the most precarious situation. It’s arguably not possible to segment liability arising out of a complaint from a client who has purchased both registered investment products and non-registered fixed products from an advisor. Most clients don’t know which entity supervises which product. They only know the rep sold them the product(s) to meet a need and that they now have a problem. So, a B-D’s potential liability doesn’t stop with the securities and investment business the rep transacts. For this reason, it makes sense for the B-D to supervise EIAs.

To turn these changes to their advantage, B-Ds should never forget that reps are selfishly attracted to value. They migrate to the products, services and support they feel will enhance productivity and help them grow business relationships.