and a scarcity of customer complaints -- to feel good about the compliance status of your bank-sited investment sales organization.
Actually, it is the perfect time to poke around for hidden flaws that can cause regulatory compliance problems.
One such flaw involves "selling away," which historically has been the bane of every compliance professional's life. Full-time registered representatives often get base salaries, fringe benefits, marketing and sales support, and referred leads and appointments. How unfair it would be, under these conditions, if the rep were to direct sales to unapproved products and prevent the firm from sharing in the resulting compensation.
Because of centralized control of the National Association of Securities Dealers and the requirement that all securities compensation flow through a registered broker-dealer, selling away registered securities is not the problem it once was. The NASD will always notify a member firm when its rep attempts to register dually with another broker-dealer. The same cannot be said of nonregistered products.
Given the popularity of fixed-rate annuities and most banks' desire to sell various forms of life, health, and disability insurance -- most of which are not registered securities -- there's a gaping loophole enabling reps to sell products that have never gone through the firm's due diligence. And the bank and its associated member firm may never know about it.
Flip through any issue of an insurance-trade periodical (like The National Underwriter) and you will find it rife with aggressive recruiting ads for "independent" agents. All one has to do is call an 800 number and ask that a product kit and license-appointment documents be sent to one's home. When the appointment is completed at the state insurance department, that person can (from the state's perspective) legally sell that company's product whether the bank approves or not.
How powerful is the temptation? Look at the ads. They promise commissions as high as 10%, free trips, free computers, and myriad other incentives. Compare this against the "scale" commission from your firm. If you paid 2% and the other product paid 8% direct to the agent, an agent who normally sold $600,000 of annuities monthly could increase his total commission by 50% ($12,000 to $18,000) by selling away only $100,000.
Do reps have unauthorized appointments? Oh, yes.
If your firm is average, roughly 70% of your reps will have about four unauthorized appointments each. That does not mean they are all actively selling away business. Most of these unauthorized appointments result from license clutter -- meaning that appointments existing when a rep was hired were never terminated or that, when a product dropped off the approved list, no one thought to terminate the appointment for that company.
There are two main reasons why an organization should control unauthorized appointments: first, to be certain it is receiving all the compensation to which it is entitled and that its sales-force investments are not being used for other purposes and second, to avoid the risk associated with a customer complaint if a transaction in a sold-away product goes bad for any reason.
By letting your representatives maintain insurance license appointments with companies that are not approved for sale, you invite them to take advantage of this selling-away loophole. New communication techniques can virtually eliminate these redundant appointments without a great deal of time or expense.