Missouri Code of State Regulations › Title 20 - DEPARTMENT OF COMMERCE AND INSURANCE › Division 700 - Insurance Licensing › Chapter 1 - Insurance Producers › Section 20 CSR 700-1.147 - Reasonable Supervision in Variable Life Sales

Current through Register Vol. 49, No. 14, July 15, 2024
PURPOSE: This amendment makes this rule only
				  applicable to the offer, sale, or exchange of variable life products. This rule
				  implements the requirements of sections 375.141.1(8) and 375.143, RSMo, with
				  respect to the demonstration of incompetence, untrustworthiness, or financial
				  irresponsibility by producers in the offer, sale, or exchange of variable life
				  products. The department is amending this rule by removing all language that
				  relates to annuity recommendations. The department's proposed rule, 20 CSR
				  400-5.900 Suitability in Annuity Transactions, is replacing the language
				  contained in this rule.
PURPOSE: This rule effectuates and aids in the
				  interpretation of section 375.141.1(8)RSMo, with respect to the demonstration
				  of incompetence, untrustworthiness, or financial irresponsibility by producers
				  in the offer, sale, or exchange of variable life products.
(1) Grounds for the discipline or
				disqualification of producers shall include, in addition to other grounds
				specified in section
				375.141,
				RSMo, failure to comply with or violation of the following professional
				standards of conduct:
(A) Individual
				Producers. Each individual producer licensed to sell variable life products
				shall be supervised by a member of the Financial Industry Regulatory Authority
				(FINRA), which member shall also be licensed as a business entity producer with
				the director (supervising member);
(B) Supervising Members.
1. Supervisory system.
A. Each supervising member shall establish
				and maintain a system to supervise the activities of each individual producer
				that is reasonably designed to achieve compliance with applicable state
				insurance laws and regulations, federal securities laws and regulations, and
				with applicable FINRA rules. Final responsibility for proper supervision shall
				rest with the supervising member. A supervising member's supervisory system
				shall provide, at a minimum, for the following:
(I) The establishment and maintenance of
				written procedures as required by paragraphs (1)(B)2. and 3. of this
				rule;
(II) The designation, where
				applicable, of an appropriately qualified and registered FINRA principal(s)
				with authority to carry out the supervisory responsibilities of the supervising
				member for variable life producers;
(III) The designation of an office of
				supervisory jurisdiction (OSJ) of each location that meets the definition
				contained in FINRA Rule 3110(f), effective July 31, 2015. The supervising
				member shall also designate such other OSJs as it determines to be necessary in
				order to supervise its producers and employees in accordance with the standards
				set forth in this rule, taking into consideration the following factors:
(a) Whether the individual producers or
				employees engage in retail sales or other activities involving regular conduct
				with public customers;
(b) Whether
				a substantial number of individual producers conduct sales activities at, or
				are otherwise supervised from, such location;
(c) Whether the location is geographically
				distant from another OSJ of the supervising member;
(d) Whether the individual producers are
				geographically dispersed; and
(e)
				Whether the investment or insurance activities at such location are diverse
				and/or complex;
(IV) The
				designation of one (1) or more appropriately qualified and registered FINRA
				principal(s) in each OSJ, including the main office, and one (1) or more
				appropriately FINRA qualified and licensed producers in each non-OSJ branch
				office (as defined in FINRA Rule 3110(f), effective July 31, 2015) with
				authority to carry out the supervisory responsibilities assigned to that office
				by the supervising member;
(V) The
				assignment of each individual producer to an appropriately FINRA qualified and
				licensed producer who shall be responsible for supervising that person's
				activities;
(VI) Reasonable efforts
				to determine that all supervisory personnel are qualified by virtue of
				experience or training to carry out their assigned responsibilities;
(VII) The participation of each producer,
				either individually or collectively, no less than annually, in an interview or
				meeting conducted by persons designated by the supervising member at which
				compliance matters relevant to the activities of the individual producer(s) are
				discussed. Such interview or meeting may occur in conjunction with the
				discussion of other matters and may be conducted at a central or regional
				location or at the individual producer's place of business.
2. Written procedures.
A. Each supervising member shall establish,
				maintain, and enforce written procedures to supervise the variable life
				business in which it engages and to supervise the activities of individual
				producers that are reasonably designed to achieve compliance with applicable
				state insurance laws and regulations, federal securities laws and regulations,
				and with applicable FINRA rules.
B.
				The supervising member's written supervisory procedures shall set forth the
				supervisory system established by the supervising member pursuant to
				subparagraph (1)(B)1.A. above, and shall include the titles,
				registration/licensure status and locations of the required supervisory
				personnel and the responsibilities of each supervisory person as these relate
				to the types of business engaged in, applicable insurance laws and regulations,
				applicable federal securities laws and regulations, and applicable FINRA rules.
				The supervising member shall maintain on an internal record the names of all
				persons who are designated as supervisory personnel and the dates for which
				such designation is or was effective. Such record shall be preserved by the
				supervising member for a period of not less than three (3) years, the first two
				(2) years in an easily accessible place.
C. A copy of a supervising member's written
				supervisory procedures, or the relevant portions thereof, shall be kept and
				maintained in each OSJ and at each location where supervisory activities are
				conducted on behalf of the supervising member. Each supervising member shall
				amend its written supervisory procedures as appropriate within a reasonable
				time after changes occur in applicable state insurance laws and regulations,
				applicable federal securities laws and regulations, and applicable FINRA rules,
				and as changes occur in its supervisory system, and each supervising member
				shall be responsible for communicating amendments to the individual producers
				it supervises.
3.
				Internal inspections.
A. Each supervising
				member shall conduct a review, at least annually, of the businesses in which it
				engages, which review shall be reasonably designed to assist in detecting and
				preventing violations of, and achieving compliance with, applicable state
				insurance laws, applicable federal securities laws and regulations, and with
				applicable FINRA rules. Each supervising member shall review the activities of
				each office, which shall include the periodic examination of customer accounts,
				to detect and prevent irregularities or abuses.
(I) Each supervising member shall inspect at
				least annually every office of supervisory jurisdiction and any branch office
				that supervises one (1) or more non-branch locations.
(II) Each supervising member shall inspect at
				least every three (3) years every branch office that does not supervise one (1)
				or more non-branch locations. In establishing how often to inspect each
				non-supervisory branch office, the firm shall consider whether the nature and
				complexity of the variable life sales activities for which the location is
				responsible, the volume of business done, and the number of individual
				producers assigned to the location require the non-supervisory branch office to
				be inspected more frequently than every three (3) years. If a supervising
				member establishes a more frequent inspection cycle, the supervising member
				must ensure that at least every three (3) years, the inspection requirements
				enumerated in subparagraph (1)(B)3.B. have been met. The non-supervisory branch
				office examination cycle, an explanation of the factors the supervising member
				used in determining the frequency of the examinations in the cycle, and the
				manner in which a supervising member will comply with subparagraph (1)(B)3.B.
				if using more frequent inspections than every three (3) years, shall be set
				forth in the supervising member's written supervisory and inspection
				procedures.
(III) Each supervising
				member shall inspect on a regular periodic schedule every non-branch location.
				In establishing such schedule, the firm shall consider the nature and
				complexity of the variable life activities for which the location is
				responsible and the nature and extent of contact with customers. The schedule
				and an explanation regarding how the supervising member determined the
				frequency of the examination schedule shall be set forth in the supervising
				member's written supervisory and inspection procedures.
(IV) Each supervising member shall retain a
				written record of the dates upon which each review and inspection is
				conducted.
B. An office
				inspection and review by a supervising member pursuant to subparagraph
				(1)(B)3.A. must be reduced to a written report and kept on file by the
				supervising member for a minimum of three (3) years, unless the inspection is
				being conducted pursuant to part (1)(B)3.A.(III) and the regular periodic
				schedule is longer than a three- (3-) year cycle, in which case the report must
				be kept on file at least until the next inspection report has been written. The
				written inspection report must also include, without limitation, the testing
				and verification of the supervising member's policies and procedures, including
				supervisory policies and procedures in the following areas:
(I) Safeguarding of customer funds;
(II) Maintaining of books and
				records;
(III) Supervision of
				customer accounts serviced by branch office managers;
(IV) Transmittal of funds between customers
				and individual producers;
(V)
				Validation of customer address changes; and
(VI) Validation of changes in customer
				account information.
If a supervising member does not engage in all of the
				  activities enumerated above, the supervising member must identify those
				  activities in which it does not engage in the written inspection report and
				  document in the report that supervisory policies and procedures for such
				  activities must be in place before the supervising member can engage in
				  them.
C. An
				office inspection by a supervising member pursuant to subparagraph (1)(B)3.A.
				may not be conducted by the branch office manager or any person within that
				office who has supervisory responsibilities or by any individual who is
				supervised by such per-son(s). However, if a supervising member is so limited
				in size and resources that it cannot comply with this limitation (e.g., a
				supervising member with only one (1) office or a supervising member has a
				business model where small or single-person offices report directly to an
				office of supervisory jurisdiction manager who is also considered the office's
				branch office manager), the supervising member may have a principal who has the
				requisite knowledge to conduct an office inspection perform the inspections.
				The supervising member, however, must document in the office inspection reports
				the factors it has relied upon in determining that it is so limited in size and
				resources that it has no other alternative than to comply in this manner. A
				supervising member must have in place procedures that are reasonably designed
				to provide heightened office inspections if the person conducting the
				inspection reports to the branch office manager's supervisor or works in an
				office supervised by the branch manager's supervisor and the branch office
				manager generates twenty percent (20%) or more of the revenue of the business
				units supervised by the branch office manager's supervisor. For the purposes of
				this paragraph only, the term "heightened inspection" shall mean those
				inspection procedures that are designed to avoid conflicts of interest that
				serve to undermine complete and effective inspection because of the economic,
				commercial, or financial interests that the branch manager's supervisor holds
				in the associated persons and businesses being inspected. In addition, for the
				purpose of this paragraph only, when calculating the twenty percent (20%)
				threshold, all of the revenue generated by or credited to the branch office or
				branch office manager shall be attributed as revenue generated by the business
				units supervised by the branch office manager's supervisor irrespective of a
				supervising member's internal allocation of such revenue. A supervising member
				must calculate the twenty percent (20%) threshold on a rolling, twelve- (12-)
				month basis.
4.  Review
				of transactions and correspondence.
A.
				Supervision of individual producers. Each supervising member shall establish
				procedures for the review and endorsement by a FINRA qualified principal in
				writing, on an internal record, of all transactions and for the review by a
				registered principal of incoming and outgoing written and electronic
				correspondence of its individual producers with the public relating to the
				variable life business of such supervising member. Such procedures should be in
				writing and be designed to reasonably supervise each individual producer.
				Evidence that these supervisory procedures have been implemented and carried
				out must be maintained and made available to the director upon
				request.
B. Review of
				correspondence. Each supervising member shall develop written procedures that
				are appropriate to its business, size, structure, and customers for the review
				of incoming and outgoing written (i.e., non-electronic) and electronic
				correspondence with the public relating to its variable life business,
				including procedures to review incoming, written correspondence directed to
				individual producers and related to the supervising member's variable life
				business to properly identify and handle customer complaints and to ensure that
				customer funds and variable life business are handled in accordance with
				supervising member's procedures. Where such procedures for the review of
				correspondence do not require review of all correspondence prior to use or
				distribution, they must include provision for the education and training of
				associated persons as to the supervising member's procedures governing
				correspondence, documentation of such education and training, and surveillance
				and follow-up to ensure that such procedures are implemented and adhered
				to.
C. Each supervising member
				shall retain correspondence of producers relating to its variable life business
				in accordance with Rules 17a-3 and 17a-4 under the Securities and Exchange Act
				of 1934. The names of the persons who prepared outgoing correspondence and who
				reviewed the correspondence shall be ascertainable from the retained records
				and the retained records shall be readily available to the director, upon
				request.
5.
				Qualifications investigated.
A. Each
				supervising member shall have the responsibility and duty to ascertain by
				investigation the good character, business repute, qualifications, and
				experience of any individual producer prior to assisting in the application of
				such person for a variable life line with the department.
B. Where an applicant for license has
				previously been licensed with the department, the supervising member shall
				review a copy of the Uniform Termination Notice of Securities Industry
				Registration (Form U-5) filed with the FINRA by such person's most recent
				previous FINRA member employer, together with any amendments thereto that may
				have been filed pursuant to Article V, Section 3 of the FINRA's By-Laws. The
				supervising member shall review the Form U-5 as required by this rule no later
				than sixty (60) days following the filing of the application for license or
				demonstrate to the department that it has made reasonable efforts to comply
				with the requirement. In conducting its review of the Form U-5 and any
				amendments thereto, a supervising member shall take such action as may be
				deemed appropriate.
6.
				Supervisory control system.
A. General
				requirements.
(I) Each supervising member
				shall designate and specifically identify one (1) or more principals who shall
				establish, maintain, and enforce a system of supervisory control policies and
				procedures that-
(a) Test and verify that the
				supervising member's supervisory procedures are reasonably designed with
				respect to its activities and the activities of its employees, to achieve
				compliance with applicable state insurance laws and regulations, applicable
				federal securities laws and regulations, and with applicable FINRA rules;
				and
(b) Create additional or amend
				supervisory procedures where the need is identified by such testing and
				verification.
(II) The
				designated principal or principals must submit to the supervising member's
				senior management no less than annually, a report detailing each supervising
				member's system of supervisory controls, the summary of the test results and
				significant identified exceptions, and any additional or amended supervisory
				procedures created in response to the test results.
(III) The establishment, maintenance, and
				enforcement of written supervisory control policies and procedures pursuant to
				part (1)(B)6.A.(I) shall include:
(a)
				Procedures that are reasonably designed to review and supervise the customer
				account activity conducted by the supervising member's branch office managers,
				sales managers, regional or district sales managers, or any person performing a
				similar supervisory function.
I. A person who
				is either senior to, or otherwise independent of, the producing manager must
				perform such supervisory reviews. For purposes of this rule, an "otherwise
				independent" person: may not report either directly or indirectly to the
				producing manager under review; must be situated in an office other than the
				office of the producing manager; must not otherwise have supervisory
				responsibility over the activity being reviewed (including not being directly
				compensated based in whole or in part on the revenues accruing for those
				activities); and must alternate such review responsibility with another
				qualified person every two (2) years or less.
II. If a supervising member is so limited in
				size and resources that there is no qualified person senior to, or otherwise
				independent of, the producing manager to conduct the reviews pursuant to item
				(1)(B)6.A.(II)(a)I. above (e.g., a supervising member has only one (1) office
				or an insufficient number of qualified personnel who can conduct reviews on a
				two- (2-) year rotation), the reviews may be conducted by a principal who is
				sufficiently knowledgeable of the supervising member's supervisory control
				procedures, provided that the reviews are in compliance with item
				(1)(B)6.A.(II)(a)I. to the extent practicable.
III. A supervising member relying on item
				(1)(B)6.A.(II)(a)II. above must document in its supervisory control procedures
				the factors used to determine that complete compliance with all of the
				provisions of item (1)(B)6.A.(II)(a)I. is not possible and that the required
				supervisory systems and procedures in place with respect to any producing
				manager comply with the provisions of item (1)(B)6.A.(II)(a)I. above to the
				extent practicable;
(b)
				Procedures that are reasonably designed to review and monitor the following
				activities:
I. All transmittals of funds
				(e.g., wires or checks, etc.) from customers to third party accounts (i.e., a
				transmittal that would result in a change of beneficial ownership); from
				customer accounts to outside entities (e.g., banks, investment companies,
				etc.); from customer accounts to locations other than a customer's primary
				residence (e.g., post office box, "in care of" accounts, alternate address,
				etc.); and between customers and registered representatives, including the
				hand-delivery of checks;
II.
				Customer changes of address and the validation of such changes of address;
				and
III. Customer changes of
				investment objectives and the validation of such changes of investment
				objectives;
(c) The
				policies and procedures established pursuant to subpart (1)(B)6.A.(II)(b) must
				include a means or method of customer confirmation, notification, or follow-up
				that can be documented. If a supervising member does not engage in all of the
				activities enumerated above, the supervising member must identify those
				activities in which it does not engage in its written supervisory control
				policies and procedures and document in those policies and procedures that
				additional supervisory policies and procedures for such activities must be in
				place before the supervising member can engage in them; and
(d) Procedures that are reasonably designed
				to provide heightened supervision over the activities of each producing manager
				who is responsible for generating twenty percent (20%) or more of the revenue
				of the business units supervised by the producing manager's supervisor. For the
				purposes of this part only, the term "heightened supervision" shall mean those
				supervisory procedures that evidence supervisory activities that are designed
				to avoid conflicts of interest that serve to undermine complete and effective
				supervision because of the economic, commercial, or financial interests that
				the supervisor holds in the associated persons and businesses being supervised.
				In addition, for the purpose of this part only, when calculating the twenty
				percent (20%) threshold, all of the revenue generated by or credited to the
				producing manager or the producing manager's office shall be attributed as
				revenue generated by the business units supervised by the producing manager's
				supervisor irrespective of a supervising member's internal allocation of such
				revenue. A supervising member must calculate the twenty percent (20%) threshold
				on a rolling, twelve- (12-) month basis.