Senate Panel Postpones COLI Hearing

Moreover, the testimony says, COLI generally covers only managerial-level employees and employers almost universally obtain the consent of insured employees.

As for COLI being a corporate windfall, the testimony says businesses use COLI not as a profit generator but as a means of offsetting liabilities arising from benefit programs.

In the case of bank-owned life insurance, the testimony says, the Office of the Comptroller of the Currency has issued guidelines explicitly providing that COLI may not be used as a means to generate profit.

In other news, ACLI is challenging a proposed new rule by the National Association of Securities Dealers imposing supervisory control procedures which, ACLI says, are inappropriate for limited service broker-dealers.

In a formal letter to the Securities and Exchange Commission, Carl B. Wilkerson, ACLIs chief counsel for securities and litigation, says the NASDs proposed rule is based on the full service broker-dealer model.

He says that the SEC, among other things, should create a mechanism allowing an exemption for limited service broker-dealers.

Wilkerson says the NASDs proposal is based on the case Frank Gruttadauria, who defrauded more than 60 customers over a 15-year period while working for five different full service broker-dealers.

Gruttadauria accomplished his fraud by lying about purchases and sales of securities, misappropriating assets and sending out falsified account documents, Wilkerson notes.

However, he says, most of the factors enabling the Gruttadauria fraud do not exist with limited service broker-dealers affiliated with life insurers.

"These broker-dealers generally do not hold customer assets or securities," Wilkerson says. "They do not maintain cash management accounts or hold free cash balances. Many broker-dealers affiliated with life insurers distribute only variable life insurance and variable annuities."

Wilkerson notes that one proposed new NASD requirement calls for written reports about testing and verification of supervisory procedures covering safeguarding of customer funds and securities, transmittal of funds between customers and third parties, and validation of customer account changes.

"These supervisory procedures have no relevance to broker-dealers that do not hold customer funds, transmit customer funds to third parties or validate customer account changes," he says.

Imposing the NASD rules on limited service broker-dealers, Wilkerson says, would impair competition.

"The NASD inflicts disparate operational costs when limited purpose broker-dealers must fulfill procedures relevant only to full-service firms," he says.

"Jamming broker-dealers affiliated with life insurers into inapplicable full-service compliance thwarts competition," he says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.