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
Universal Citation: 20 MO Code of State Regs 700-1.147
Current through Register Vol. 49, No. 6, March 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.
(2) No person shall materially aid any other person in any violation or failure to comply with any standard set forth in this rule.
(3) Interpretation of this rule shall be guided by judicial and administrative opinions and decisions construing substantially similar requirements of the FINRA or its predecessor or successor organizations. Any person in compliance with substantially similar requirements of the FINRA shall be deemed to be in compliance with the provisions of this rule.
*Original authority: 374.040, RSMo 1939, amended 1967; 374.045, RSMo 1967, amended 1993, 1995; 375.013, RSMo 1993, amended 1995; 375.143, RSMo 2007; and 376.309, RSMo 1963, amended 1969, 1983, 1992, 1993, 2007.
Disclaimer: These regulations may not be the most recent version. Missouri may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
