Seminar Marketing, an Unapproved DBA, and Referral Fees for a 79-Year-Old Annuity Buyer
Marcus is a registered representative with a broker-dealer and a licensed life producer. He books a steakhouse dinner seminar for 60 prospects aged 68 to 82 and plans a mailer reading 'Guaranteed lifetime income. No market risk. Free dinner.' The featured product is a deferred variable annuity with a 7-year surrender charge schedule (7% declining to 1%), a 3.25% annual living-benefit rider fee, and 1.15% fund expenses. Marcus wants to run the event under the name 'Safe Harbor Retirement Solutions,' a DBA his firm has never approved, and to pay the steakhouse owner $750 for each attendee who becomes a client; the owner holds no securities or insurance license. One attendee, a 79-year-old widow, has $250,000 in a CD maturing in 20 days, Social Security income of $1,950 per month, a $30,000 emergency fund, and no other savings. She tells Marcus she wants all of it working and may need money for a granddaughter's tuition in three years.
1. Identify each FINRA and securities-law issue raised by the seminar, the DBA, and the referral arrangement, and state how a principal should respond.
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The mailer is a retail communication under Rule 2210 and needs principal approval before use; 'guaranteed' and 'no market risk' are misleading because the separate account fluctuates and the guarantee is only the insurer's claims-paying ability, not FDIC coverage. The living-benefit rider is not free and its fee is disclosed in the prospectus. Using an unapproved DBA implicates Rule 3270 outside business activities and the firm's branch-name rules; a name suggesting a separate advisory business is not permitted without written approval. Paying $750 per converted attendee to an unlicensed person is transaction-based compensation, which raises Exchange Act Section 15(a) registration issues and possible state insurance rebating problems; unlicensed referral fees are not permissible. As principal I would disapprove the mailer and the DBA, prohibit the per-client payments, preserve the seminar invitation and attendance records, and escalate to compliance. Rule 2330 also requires principal review and approval of the annuity application before submission, and Rule 3110 requires supervision of the seminar itself.
2. Apply FINRA Rule 2330 to the widow. What factors control, and what is the likely conclusion?
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Rule 2330 requires a reasonable basis for the recommendation, customer-specific suitability, disclosure of surrender charges and fees, and principal review before the application is submitted. The customer-specific analysis is unfavorable: a 79-year-old placing essentially all of her liquid savings, $250,000, into a contract with a 7-year surrender charge and a 3.25% rider fee, when she has a three-year tuition need and only $30,000 in reserve. The surrender period exceeds her stated liquidity horizon, and the rider fee is charged whether or not the benefit is used. The likely conclusion is that the full $250,000 sale is unsuitable. A defensible path, if any, would be a limited allocation from the maturing CD, a product with a shorter surrender schedule, or simply keeping the CD, with the alternatives documented. Marcus should also confirm she understands the guarantee depends on the insurer, that withdrawals reduce the benefit base, and that the product requires prospectus delivery.
3. What must Marcus say at the seminar about performance and guarantees, and how should illustrations be presented?
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He must present the rider as an insurer obligation, not a bank deposit or a market-risk eliminator. He should explain that the account value can decline, that the rider fee and fund expenses reduce the value and the income base, that excess withdrawals can reduce or terminate the benefit, and that surrender charges apply for seven years. Performance should be shown as hypothetical, net of all fees, over a range of outcomes including negative ones, with a clear statement that past performance does not predict future results. No projected or back-tested numbers should be presented as expected returns, and no ranking or comparison should imply a guarantee. Prospectuses must be offered, and the invitation should not promise outcomes. Because the audience is senior, he should also cover liquidity, the free-withdrawal amount, and the annuity's tax deferral without implying tax advice. Any slide or handout is a retail communication requiring approval before use.