They've long been touted as the best way to motivate agents. But incentive meetings at some companies are threatened by complex rules governing sales of variable insurance products. Here's how to keep the NASD cops at bay.
At Security Life of Denver's last incentive meeting, 400 qualifiers enjoyed sun and fun in Hawaii. That was in 1999. But the company, a subsidiary of ING Life Group US, no longer has any incentive trips on its conference calendar. With variable insurance products sold by broker/dealers making up 90 percent of its business, Security Life of Denver must comply with complex National Association of Securities Dealers rules on compensation for variable product sales. The rules, which were passed in 1998 and took full effect in June 2000, forbid financial services companies from planning and hosting incentive meetings in some situations.
The regulations do allow companies to sponsor educational meetings — with some restrictions — so Security Life plays by the rules by holding six regional educational forums annually. Each has about 100 attendees, who do not have to meet sales goals to attend.
“I think the educational meetings are almost more effective than the incentive trips,” says Jodi Kotouc, meeting planner for ING Life Group US. “In a social situation, it's difficult to talk business all the time because people want to do other things. During the educational meetings, business is being discussed all the time, so it's easier for us to get a real feeling of how we can serve our broker/dealers better.”
Farewell to a Tradition
Incentive travel has long been the favored way for insurance companies to motivate both independent and career agents, and to allow executives to maintain their relationships with field forces. But since the NASD three years ago adopted amendments to its rules on such programs — to deter inappropriate influences on what products are sold — many companies are under pressure to modify or cancel their incentive programs.
The amendments state that qualifications for incentive trips can't be based on the sales of variable products unless the products of all companies offering that product are included in the contest. More dramatic, insurance companies themselves can no longer plan and sponsor such programs. But they can partner on an incentive trip with an affiliated broker/dealer, provided that the sales of all companies' products are included in the qualification requirements.
Companies also can plan and sponsor educational meetings, provided sales aren't among the qualifications for attendance and the meeting is in a “reasonable” location in proximity to the company's offices.
And that's where it gets bewildering for companies affected by the rules. What constitutes a “reasonable location”? How much education is required per day?
Rather than ask for clarifications on these and other questions, many companies appear to be laying low, working with their own interpretations. Indeed, most of the insurance and financial services firms contacted for this article declined to speak on the issue. “If you're written about and the NASD knows what you're doing, you could become a target,” says one planner.
“Nobody wants to be made an example of,” says Jaimee Niles, vice president, corporate relations and events, for Newport Beach, Calif. — based MetLife Investors. “The thing is, when a new regulation comes out, there is a lot of confusion and room for interpretation.” Niles, who is also the current vice president of public relations for the Insurance Conference Planners Association, believes that planners and their companies need to evaluate what they are doing because NASD will be scrutinizing what goes on more than ever.
As of this writing, no disciplinary actions have been taken, says Larry Kosciulek, associate director of the NASD, which is overseen by the Securities and Exchange Commission. But NASD-licensed companies found in violation of the rules could face various penalties, including losing their licenses — and hence their ability to sell securities in the U.S.
Enforcement of NASD regulations takes place during routine examinations of companies' practices, Kosciulek explains, noting that exams are done on cycles at least once every four years, based on the type of operation and product sold.
If an issue is brought to the NASD's attention, the first course of action is to call the financial services company in question to discuss the matter. Some education meetings with too many sideline activities have been intercepted, says Kosciulek.
Mary L. Shapiro, NASD president, addressed this issue in a letter to members earlier this year. She said that financial services company sponsors can pay the expenses of NASD-licensed brokers who sell their products for certain educational meetings. But, she wrote, “some [companies] sponsor trips that are laden with golf outings, cruises, tours, or other entertainment, all under the umbrella of training or education meetings. These trips violate both the letter and the spirit of the noncash compensation rules.”
Security Life of Denver is interpreting the rules conservatively, canceling an educational forum it had planned for Amsterdam, even though it might have been compliant because parent company ING is based in Amsterdam. Kotouc says the company feared the European location might have been “pushing it” in the eyes of the NASD. Instead, Security Life held educational events in Miami and Denver. The company is also making an effort to hold more “one-on-one” dinner meetings with brokers to motivate them and build relationships, she adds.
On the Rise
Sales of variable products are steadily increasing. The Life Insurance Marketing Research Association (LIMRA) International estimates that for the fourth quarter of 2000, U.S. annuity sales were $137.7 billion, up 13 percent from 1999. Variable universal life insurance sales were up 28 percent in 2000 over 1999.
Variable products comprise about half the business of Denver-based Southland Life Insurance Company, another subsidiary of ING Life Group US. In the past, says ING's Kotouc, Southland held incentive meetings in international locations like New Zealand and Switzerland. The events, typically for 225 or so of the company's top producers, were more social than educational in nature.
Under the revised NASD rules, Southland will now partner with an affiliated broker/dealer on the events. Southland helps pay the tab, but the broker/dealer invites the reps that it determines qualify based on sales of variable life products from all companies, meaning that reps who have never sold a penny of Southland product might qualify.
“Partnering with the broker/dealer allows us to get in line with the regulations,” Kotouc says.
What happens to a company's ability to compete when incentive meetings are eliminated? Beth Shanker, chief compliance officer with ING America Equities, Denver, the wholesale broker/dealer for Southland Life and Security Life, notes that today most companies with variable production comprising a great proportion of total sales are in the same boat as Security Life. They must compete against companies that can still offer trips to exotic locations because they have more substantial general account business or can include career agents who are registered with an affiliated broker/dealer.
While reps might be disappointed that the invitations now proffered are not to exotic locations, she concedes, they understand that it's because of the NASD rules. And response from attendees to the educational meetings has been enthusiastic. “Maybe that's for the better,” she says. “It gives us an opportunity to provide training meetings, which are valuable.
“I would hope everyone is playing fair,” Shanker adds. “It's a level playing ground to the extent that everyone follows the rules.”
Niles of MetLife Investors, who has been working with the NASD regulations for several years, points out that that isn't always the case. Until recently, Niles had been with Newport Beach, Calif. — based Pacific Life Insurance, a company that faced the issue earlier and more seriously than many other companies because its business is primarily variable life sales. “The challenge is that it isn't always a level playing field,” she says. “Some companies who have exclusive broker/dealers could run an incentive meeting through that broker/dealer, and companies with a small amount of variable sales could exclude that block of business from their incentive program qualifications and run the program on traditional business.”
On the variable product side, everyone has to comply, and broker/dealers are understanding of the fact that the rules must be followed. Niles says she sees more problems with reps coming from the traditional life insurance sales side, where incentive trips are part of the culture.
“NASD-licensed companies found in violation of the rules could lose their licenses — and their ability to sell securities in the U.S.
Further, she adds, “it is surprising to me how many meeting planners are not knowledgeable about these regulations.” Especially when responsibility for compliance often falls on the meeting planner's shoulders. “It adds another dimension to the job,” Niles says. “It is our responsibility to stay current and informed on the status of the regulations and what other companies are doing as a result of these rules — and share that information with our senior management and legal folks.”
How Your Program Can Avoid Red Flags
What types of incentive meetings are acceptable under the rules? For many planners whose companies are affected by the NASD rules on incentive meetings, the path to compliance isn't exactly clear-cut. We ran a few examples by Larry Kosciulek, associate director of NASD, to get his take on whether they'd pass muster.
A U.K.-based insurance company with offices and independent salespeople in the U.S. wants to hold a training meeting near its London offices for U.S. representatives. Is this an acceptable location?
It could be, says Kosciulek, but be careful. “We never said that a foreign location is inappropriate, but it would send up a red flag. The problem is it's pretty difficult not to offer a lot of additional (non-work-related) activities when you're halfway around the world. People would naturally want to do something other than training.”
As long as meetings are held somewhere near the office of the member sponsoring the meeting, the rules are liberal regarding locations, he acknowledges. But planners must keep training the focus of the events. “It can't be a trip to the beach,” he warns.
The rules let the meeting sponsor pay for the attendee's lodging, transport, and meals. OK if they spring for the spouse's room and board too?
Absolutely not, says Kosciulek. Companies affected by the NASD rules cannot pay for the expenses of a spouse or any other guest of meeting attendees.
ABC Insurance has planned its training meeting. Mornings are devoted to education, afternoons to recreation. OK by the rules?
No. A full work day of training is the NASD requirement, says Kosciulek, noting that the organization has “intercepted” some meetings called to their attention which had too many sideline activities on the agenda. Planners were asked to either modify or cease their plans.
Many of Company X's brokers enjoy time on the fairway. Can the company offer golf as a leisure activity during a training meeting?
Yes. Golf can be a part of the agenda, but only if the attendees pay for it themselves and it is not offered during the business day. Kosciulek notes that the NASD understands that many corporate meetings end up being held at resort properties because they have the size and appropriate facilities for such events, and that attendees would naturally want to enjoy the amenities. “But they have to do so after-hours,” he says.
What Companies Must Play by NASD Rules?
Insurance companies with incentive trip qualification requirements that include sales of variable insurance products and that sell these products through independent brokers
Who Isn't Affected
Companies that work with independent brokers but don't sell variable products
Companies that sell variable products through their own employees
Companies that sell variable products through independent brokers but don't include sales of those products in their incentive qualification requirements