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A Mid-Sized Insurance-Affiliated Broker/Dealer
(Prepared for 1996) Needs Analysis Training Plan Introduction BACKGROUND This report is submitted to comply with the requirements of the Continuing Education Program adopted by the NASD in February, 1995. This firm's approach to the Regulatory Element is presented in Appendix A [not included]. What follows is the Firm Element Needs Analysis and Training plan for [this Firm]. It was prepared during May and June, 1995 by a project team consisting of [team names]. Additional input from home office and field people associated with [Firm] was gathered by a survey, described below, that was a major component of the project. TOPICS OF DISCUSSION Part One of this report is the needs analysis. Part Two is the training plan. The content of both Parts is based upon guidelines which were published in March, 1995 by the NASD in Notice to Members 95-13. We analyzed the guidelines and identified all the topics that the project team considered applicable to [Firm]. These topics were subsequently grouped into several larger categories for purposes of the work of the project team. This report is organized around those larger categories, which are: The way in which this Firm has clearly separated its needs analysis and training plan enables it to communicate the logic behind its overall Firm Element plan very effectively. 1. A Description of [Firm] - the NASD guidelines on the Firm Element are very clear that each firm's training program be tailored to the firm's unique characteristics. This section of the report provides details about [Firm's] organization, product offerings, distribution strategies, and compliance experiences. 2. A Survey of [Firm] - this section summarizes a survey of 15 people--12 home office and 3 field--associated with [Firm]. The survey was designed to evaluate levels of knowledge and skill of [Firm] registered representatives in the areas of product, administrative procedures, and sales practices. 3. Proposed Training Modules - drawing upon the characteristics of this firm and the results of the survey, this section outlines proposed modules for the Training Plan. Appendix C is a catalog and assessment of existing training resources organized according to the proposed training modules. Here the Firm makes it clear that it drew upon real needs identified in the analysis of its organization, product offerings, distribution strategies, and compliance experience. A question remains, however, if the survey sample (summarized in #2 above) is adequate to represent the Firm accurately. 4. Implementation Schedule - this section lays out a schedule for achieving full implementation by January 1, 1996. 5. Market Events and Regulatory Responses - this section of the report provides perspective on the context within which the continuing education requirement was created. It is background material that explains the need for the regulation and the sorts of issues the regulation hopes to address. [Since this section has little direct bearing on developing a training plan for [Firm], it has been omitted from this publication.] PART ONE - NEEDS ANALYSIS Category 1--A Description of [Firm] Organization - [Firm], a wholly owned subsidiary of [parent insurance company], was founded in 19[ ] to act as broker/dealer for stock mutual funds managed by [subsidiary company]. In 19[ ] the two funds were consolidated into one, and in 19[ ] the assets of the remaining fund were merged with a fund managed by [subsidiary company]. Since then [Firm] has functioned as a conduit for the sale of mutual fund shares and variable products of outside investment companies. [Firm] is based at the [Parent firm's home office] with staffing provided by [Parent] employees who allocate some or all of their time to conducting the management, supervisory, and training functions of the broker/dealer. The home office is the only Office of Supervisory Jurisdiction that [Firm] maintains. All review and acceptance of new accounts is performed by a home office-based registered principal--trades are accepted at any other location. All mutual fund shares sold by [Firm] representatives are registered directly between the mutual fund company and the investor; no shares are held in "street name" accounts by the broker/dealer and there are no discretionary accounts. Additionally, permanent records of all applications, investor information, check registers, licensing, commissions, and other activities are kept at the home office. Sales Force - Licensed to sell securities in [ ] states, [Firm] operates in 37 locations. There are approximately 250 registered representatives. The number of representatives associated with each location ranges from 0 to 25, with most locations having between 1 and 10 reps. Each location has a sales coordinator who is responsible for the distribution of sales material, maintaining records, and carrying out other functions requested by the broker-dealer. Some locations have one or more unit coordinators with whom the sales coordinator shares his duties. The coordinators do not have authority to manage, supervise, or train sales representatives. [Firm's] sales force consists of the career agents, brokers first line and, on an exceptional basis, brokers of [Parent] Insurance Company. To become registered with [Firm], an individual must take, minimally, Series 6 and 63. Although unable to sell general securities through [Firm], almost half of the reps hold a Series 7 license. Additionally, 94 reps are appointed with at least one variable annuity company and some are appointed with more than one. About 30% of reps have been licensed for over ten years; 50% have at least one professional designation such as JD, CLU, ChFC, CFP, or CPA. Product - [Firm] currently has selling agreements to provide its reps access to mutual funds, variable annuities, and variable life. No other product types are available through [Firm], nor are new ones currently contemplated. Sales are overwhelmingly concentrated in mutual funds as demonstrated by 1994 sales results (almost $45,000,000): Sales agreements have been signed with over 40 different mutual fund companies and 6 variable product companies, providing approximately 1,500 funds with a full range of investment options. Within this product line, however, mutual fund sales volume is concentrated in 6 or 7 fund families and less than 100 funds, while, among the variable products, 3 of the 6 companies represent over 95% of the sales volume. Distribution - Sales of [Firm's] products are generally incidental to the primary focus of its reps, which is the sale of individual life insurance, disability insurance, and qualified plans in the professional and small business market. [Firm's] target market is generally quite affluent and is reasonably astute about financial matters. The typical approach to the market is based on total needs rather than on transactions. It is quite common that the individuals whom [Firm] reps work with to become long term clients whose financial affairs are well known to the producers. [Firm] investor purchases are divided among regular accounts, company pension plan side funds and IRAs as shown by the chart: Although 14 locations produced sales in excess of $1 million, the top 5 locations combined for over 40% of 1994 sales. Similarly, the top ten [Firm] producers accounted for about one third of total sales, while most reps sold less than $100,000 in volume: Compliance - [Firm] has always considered compliance to be a top priority. As market events and SRO initiatives have accelerated, [Firm] has also accelerated its compliance activities. Specific examples include: * Development and updating of the annual Compliance Meeting. Each year since its inception in 1989, the outline for the meeting has been reviewed and modified to recognize current hot topics. For example, in 1994 the outline was expanded to include a copy of NASD Notice To Members 94-16 regarding sales practice obligations. * Special mailings on selling away, RIA issues and outside business interests. While these items are all part of the annual Compliance Meeting, [Firm] has conducted special mailings and surveys on them. In December, 1994, [Firm] conducted a survey to determine which of its reps are RIAs and to inform all reps of the NASD's position on RIAs directing trades to outside broker/dealers. * Closer monitoring of registered rep status. In 1992, [Firm] developed procedures designed to provide better control over the composition of its field force. Of particular concern were dually licensed reps, and reps who were non- first line brokers of [Firm]. After cleaning up dual licensing records and clearing out brokers whose registrations appeared to be "parked" at [Firm], the broker/dealer instituted an annual review of these two categories of reps. * Enhancing suitability review procedures. Beginning in mid-1994, [Firm] embarked on a project intended to respond to NASD concerns about suitability. Following extensive research and discussion, a New Account Form was created and introduced to the field in June, 1995. * Industry Organization Support. A variety of organizations exist throughout the industry that provide access to an outside source of expertise and opinion on SRO positions. The organization most closely tied to [Firm]'s operational environment is the Insurance Affiliated Broker Dealer Forum (IABDF). [Firm] has made it a point to have somebody attend at least one IABDF meeting a year. In addition, the NASD sponsors an annual District compliance meeting, which [Firm] sends somebody to on an annual basis. Customer Complaints and Litigation - [Firm] has been fortunate in its relationship with its customers. There has been no litigation involving [Firm] accounts. A review of the Complaint File reveals: * A complaint from 1992 which was determined by [the NASD District Office] not to warrant action. * A 1991 memo describing a misunderstanding that resulted in a $100 loss to an investor; the situation was settled when the rep covered the loss as a goodwill gesture. Audits and Regulatory Reviews - [Firm] was audited in routine by the NASD in 1990 and 1993. The 1990 audit found a small technical discrepancy in computing net capital; this item was addressed in response to the audit. In 1993 the audit found: * Certain firm employees needed to be fingerprinted; * Wire order checks were not being deposited quickly enough into the firm's escrow account; * Customer confirmations were not being retained until the annual statements were received; and * The [Firm]'s Compliance Meeting did not mention the prohibition against insider trading. All of these items were addressed in response to the audit. This section provides a good overview of the Firm's organization, involvement in the securities business, and relationship to the insurance company parent. The Firm's existing compliance educational efforts are appropriately focused on the securities activities of this insurance-affiliated broker/dealer. Reviewing past training efforts provides good insights to a firm for ascertaining future training needs. Category 2--Firm Survey Personnel in all the functional areas of the broker/dealer were surveyed about their opinions on registered rep knowledge about three major topics: product, procedure, and practice. While not all the people surveyed could answer all the questions from first-hand experience, the composite results were consistent and clear: On average, rep knowledge about the issues addressed is perceived as only fair to good.
Survey - In your experience, rate [Firm] registered representatives on their knowledge of the following items: * Product 1. Products available through [Firm] and the investment features of those products.
2. The various risk associated with investments (business risk, interest rate risk, inflation risk, market risk, etc.)
3. The tax issues involved with mutual funds and variable annuities.
* Procedure 1. NASD and state licensing requirements.
2. The licensing issues involved with variable products.
3. The conditions under which one must register as an investment advisor.
4. [Firm] procedures for submitting new account applications.
5. The need for documentation in the sales and servicing of customer accounts.
6. The procedures for [Firm] commission payments.
* Practice 1. The NASD Rules of Fair Practice.
2. Suitability issues.
3. What is the general approach taken by [Firm] registered reps in selling securities?
4. What is the place that securities sales occupy in [Firm] reps' business practice?
* Comments 1. There is a wide range of experience and knowledge among the RRs; the top producers (20 or so) know the issues very well; most others have only a limited knowledge; knowledge is related to production level, both at the agency level and among RRs. 2. Where there is a weakness, it is the result of inadequate communication from the home office. 3. Sales coordinators need to be better trained in order to help RRs before questions come to the home office. 4. There isn't enough communication about who to call on a particular issue (e.g., accounting calls on product).
PART TWO-TRAINING PLAN Category 3--Proposed Training Modules Critical Factors - From the preceding material, a number of items emerge as the critical factors to address in creating a training plan. These are: * [Firm] functions as a conduit for the sale of mutual fund shares and variable products of outside investment companies. From a training perspective, it is clear that product knowledge of a limited and specific sort is required. Training in a wide array of investment vehicles is necessary only to the degree that a knowledge of how the securities underlying mutual funds work is important in understanding the funds themselves. Extensive training in stock options, for example, would serve little purpose. * [Firm's] sales force consists of the agents and brokers of [Parent] doing business in small clusters - typically with less than 10 reps at each location. Training materials should generally be suited to delivery to small, spread-out groups via computer, videotape, or written word. In-person presentations may be suited to certain agencies and at certain events (e.g., regional seminars). * [Firm's] customers' primary relationship with a [Parent] rep is based mainly on insurance needs. Training materials should recognize the relationship orientation of the [Parent] reps. This is not a "dialing for dollars" environment. * [Firm] reps are only secondarily in the securities business and most sell less than $100,000 a year. As with most things, knowledge of securities products, procedures, and practices is acquired through repetition. Reps who seldom engage in fund sales require ready access to information that will quickly refresh their knowledge of securities activities. This section clearly identifies certain constraints within which the training plan must be conducted. These "critical factors" condition the environment for training and must be accommodated if that training is to be successful. For example, 1) the product training must focus on the managed securities offered by the Firm, 2) the form of the training must be adaptable to the wide distribution of the sales force, 3) the presentation of the material must incorporate the relationship between representatives and their clients, and 4) because the representatives only occasionally engage in securities activities, the training material must be readily accessible and lend itself to quick review. Modules - The training plan will consist of modules which address product, procedures, and practice, all of which the survey showed as areas needing improvement. The objectives of the modules are described below: * Product 1. Availability - A guide to the mutual funds and variable products available through [Firm], with special attention given to those most frequently used by our RRs. 2. Investment Features - A generic discussion about the characteristics of the various types of funds, including the underlying investments, expenses, and sales charges. 3. Risk Characteristics - A generic discussion about the specific risk factors associated with each type of mutual fund. 4. Tax Issues - a generic discussion about taxation of mutual funds and variable products, with focus on issues such as capital gains vs. ordinary income and tax deferral. * Procedure 1. NASD Licensing - A guide to the requirements and procedures for registration with the NASD and the states in which the RR will conduct business. 2. Variable Product Licensing - A guide to the special requirements for becoming licensed to sell variable products. 3. RIA Registration - A guide to the conditions under which an RR must become registered (SEC and states) as an investment advisor and the position of [Firm] RRs who engage in investment advisory activities. 4. Submitting Business - A description of the procedures and requirements for submitting applications and executing wire orders. 5. Servicing Existing Accounts - A description of handling additional investments in a client's account, and the need for record keeping by the registered rep in order to adequately service client accounts. 6. Commission Payments - A description of the process and schedule of [Firm] commission payments. * Practice 1. Rules of Fair Practice - Ongoing training in the RR's responsibilities in dealing with customers under the Rules of Fair Practice and updates on current issues of concern by the NASD regarding compliance matters. 2. Suitability - Ongoing training in the issues connected with "knowing the customer" and establishing a match between the customer and recommended investments; also on the use of the New Account Information form. 3. Sales Approaches - Ongoing training in the opportunities for securities sales which will arise in the course of the RR's practice, with a focus on total needs planning and qualified plans. 4. Role of Securities - Ongoing training in the role which the sale of securities plays in the registered reps' primary practice of life insurance. The content of the above modules reflects the Firm's securities activities and the results of its needs analysis in the first part of the report. Of particular note are the last two modules above, which go beyond product and compliance knowledge to address overall financial and retirement planning approaches. Ten RRs produce approximately one-third of this Firm's securities revenues (see chart #4). The Firm may benefit from having a two-tiered approach to its continuing education by addressing the special needs of those individuals most actively involved with mutual funds and variable annuities, as well as the "baseline" needs of others in the sales force. Category 4--Implementation Schedule Projects - To proceed from this level of planning to full implementation, we have adopted the following schedule: Project Assess internal and external resources and make decisions on delivery system for each module. In evaluating external training programs we must take into account the critical factors listed above, specifically the limited scope of our registered reps' activities. We will consult with the [Parent] training department for assistance in this phase. Time Frame July - August Project Develop and deliver initial training modules at the [Parent] regional seminars. These modules will be in the form of in-person presentations by home office personnel. Time Frame September - October Project Assess feedback from the regional seminars and finalize other elements of the training program. Time Frame November - December Project Begin implementation of all program modules for the continuing education of [Firm] registered reps. Time Frame January 1, 1996 Although the Firm's entire training plan is not printed here, it is interesting to note that the Firm set out to assemble its training modules with an eye to the critical factors discussed earlier in the report. The Firm also elected to "pre-test" the content of the modules at regional seminars so as to obtain constructive feedback before committing to the final versions of the module content. |
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