On April 19, 2016, FINRA released regulatory guidance to member firms regarding sales of pension income stream products. These products typically involve an up-front lump sum payment to a pensioner in exchange for the rights to the pensioner’s future pension payments. FINRA released guidance stressing concerns regarding these products and reiterating applicable FINRA rules that firm should ensure they comply with.
FINRA believes these products are complex and worries that investors may not fully understand their surrounding issues. Investors should be aware of commissions and additional costs and fees they pay. Additionally pension purchasing firms should be aware that often these products are illiquid; an investor may not be able to sell them or only sell them at a loss. Additionally federal laws prohibit the assignment of particular pension benefits. As a result a pensioner is only bound to make future payments to the investor by contract. Because a pensioner may stop making monthly payments at any time, leaving the investor with only a breach of contract claim, the pension purchasing company may also engage in post-sale efforts to ensure payment by the pensioner. Such efforts can include: offering to advance payments to the investor until issues can be resolved, purchasing the product back from the investor, less any payments received by the investor, or engaging the services of a law firm to attempt remediation.
Another issue raised by FINRA is that sometimes Processing companies assert that these products are not securities, to avoid the registration and disclosure requirements of federal and state securities laws. FINRA states clearly that member firms still have an obligation to determine for themselves how they should treat these products. Firms must decide whether they are viewed as private securities transactions (PSTs) governed by FINRA Rule 3280 or as outside business activities (OBA) governed by FINRA Rule 3270. There are significant consequences if a firm incorrectly determines a pension income stream product is not a security. Additionally a number of states have determined that pension income stream products are securities under relevant state laws.
FINRA Rule 3270 requires a registered person to provide written notice to his or her firm prior to participating in an outside business activity subject to the rule. The firms must decide whether the proposed OBA will interfere with or otherwise compromise the advisor’s responsibilities to the firm or its customers or be viewed by customers or the public as part of the firm’s business. The firm must then consider imposing specific conditions or limitations on the OBA.
FINRA Rule 3280 requires that an advisor provide the firm with prior written notice before participating in the transaction. If an advisor will be compensated, using a very broad definition, then the firm must provide written approval or rejection of the participation. If the firm approves the transaction, it must record the transaction on its books and records and supervise the advisor’s participation in the transaction as if the transaction were executed on behalf of the firm.
Additionally FINRA recommends that firms adopt special procedures and training of advisors about these. FINRA believes it is important for advisors to understand the features of these types of products and the extent to which a particular product meets the needs of a customer.