SEC Ruling INSURER INCENTIVES RESTRICTED As of January 1, 1999, insurance companies are banned from announcing new incentive contests based on the sale of variable products. The Securities and Exchange Commission decision that put this ban into place came on July 15, 1998, and yet even now, half a year later, many insurers have not grappled with its implications. Some are even conducting business as usual, operating in the substantial gray area created by the ruling's vague wording.

"Those companies that are very active in the variable market are the most disadvantaged after this ruling," says Jaimee Niles, assistant vice president, meetings and professional relations, at Pacific Life Insurance Company in Newport Beach, Calif. Pacific Life is one of those companies: Its variable life sales have grown by 50 percent a year for the past six years, and now represent about 50 percent of total insurance sales. (This mirrors the incredible growth of variable product assets in the industry as a whole--up from $63 billion in 1992 to $500 billion in 1998, according to LIMRA.) Niles organized a special seminar on the issue at the recent Insurance Conference Planners Association Annual Meeting.

A brief history of the ruling: Several years ago, the National Association of Securities Dealers (through which anyone who sells securities-based products must be licensed) proposed amendments to its own rules regarding cash and noncash compensation arrangements for the sale of mutual funds and variable products. The idea was to prevent compensation from inappropriately influencing what products were sold to customers. Those amendments needed approval from the SEC before they could go into effect. Hitting some stumbling blocks on the amendments regarding cash compensation, the SEC finally decided to approve only the noncash compensation rules with the understanding that the NASD would continue to work separately on the cash compensation issues.

The approved amendments prohibit insurance companies from awarding noncash compensation such as incentive trips directly to sales reps for variable product sales. Sales reps can still qualify for and attend such incentive trips; however, these trips must be approved, controlled, and monitored by broker/dealers, who must keep complete records of the awards.

"The rule shuts off the direct line from the insurance company to the rep," says John Dixon, president and CEO of Mutual Service Corporation, a broker/dealer in West Palm Beach, Fla., who was a panelist at the ICPA seminar.

Further, the sales of all companies' variable products in a particular variable product line must be counted equally toward any incentive goal. So while, theoretically, a broker/dealer could approve, control, monitor, and keep records of an incentive program that is actually "sponsored" by one or more insurers, those insurers could end up paying for producers who never sold any of their products.

"We get tremendous value from our incentive meetings," Niles says. "We don't see the same value being given to us through broker/dealer meetings."

There are exceptions to the rule that could present an alternative to having to offer incentive programs through broker/dealers. Insurers can give the following noncash compensation directly to the sales rep:

* an award with a value under $100,

* occasional sports or theater tickets,

* an invitation to a training or educational meeting.

It is this third exception--a training or educational meeting--that some companies see as a way to maintain control over meeting programs. However, attendance at an educational meeting cannot be based on reaching a sales goal, the meeting must be held at an "appropriate" location, the insurer cannot cover the expenses of guests, and each rep's attendance at the meeting must still be approved by the broker/dealer.

"The 'training/education' meeting is one of the grayest areas," said co-panelist Mimi Windemuller, manager, marketing incentives at Security Life of Denver Insurance Co. in Denver. "Broker/dealers have been doing education meetings in destinations such as Arizona, California, and Vail for years. We simply don't know how strict the NASD is going to be."

Dixon said broker/dealers will want to work with insurers on complying with the rule and keeping all sides happy. But the stakes are high. "NASD is a self-regulating organization. They force us to enforce the rule for them," he said. "We could lose our license if we don't."

Insurance companies that are not affected include those that don't sell variable products and those that have captive broker/dealers. Even companies for whom variable product sales are only a small portion of their overall business can simply exclude those sales from qualification. Not only do these companies escape the ruling, but their ability to continue their incentives as usual may put them at a competitive advantage.

Dates to Remember Incentive programs announced after January 1, 1999, must be in compliance; for insurer-run programs announced before January 1, 1999, the last day a sales rep can use variable product sales to qualify for that program is June 30, 1999; and all noncompliant incentive trips must be completed by June 30, 2000. With these dates in mind, attendees at the ICPA seminar shared their strategies for complying this year. One company has announced an incentive program whose qualification period extends from December 31, 1998, through December 31, 1999. Sales of the company's variable products will be counted toward qualification through June 30; after June 30, the sale of variable products will not count toward qualification, thereby allowing this company to sidestep the new rule. However, another planner said her company had asked "informally" whether changing qualifications in midstream would be allowed and was told "informally" that it would not.

"Meeting managers and marketing professionals have a responsibility to learn and communicate the effects of this new rule in our companies and the industry," Niles sums up. "The advantage of being a member of an organization like ICPA is that you have a forum to discuss it."

You can get a copy of the new rules, detailed in "NASD Notice to Members 98-75," at www.nasdr.com.