Solution Spotlight: Fund Transfers Report

In an effort to enable supervision of broker-initiated fund transfers within variable annuity products, Insurance Services is developing a new solution aimed at helping broker/dealers more closely monitor and manage the activities of their registered representatives. Rollout of the service -- called Fund Transfers -- is slated for the second half of 2006, subject to regulatory approval.

The service is a response to regulatory concerns surrounding illegal market timing and late-day trading activities. These concerns stem from recent regulatory actions to curtail abusive trade activities by registered representatives within several prominent broker/dealer firms. As part of the regulatory sanctions, firms paid substantial fines and were required to implement new procedures to maintain and monitor all broker-initiated transaction requests involving sub-account transfers within annuity products held with outside insurance carriers.

The insurance industry has made it a priority to better identify and monitor broker-initiated fund transfers. Recently, the SIA Insurance Panel issued an advocacy paper highlighting the need for quick resolution and calling for a standardized, centralized industry solution through DTCC. (See SIA Advocacy Paper Progress Report.)

“The current regulatory climate is challenging broker/dealers to exercise tight oversight of fund transfer requests made by their agents,” said Nancy Jansen, co-chair of the SIA Insurance Panel and managing director of Operations at Piper Jaffray. “With so much concern being focused on this issue by regulators, it’s vital that we communicate to insurance carriers and the broader distribution community our commitment and support to fast-tracking an industry solution.”

Front-end Linkage

As envisioned, the new service, which will be offered through DTCC’s National Securities Clearing Corporation subsidiary, will give broker/dealers an automated, centralized, standardized, and secure platform for submitting agent requests for fund transfers. The service will enable broker/dealers to link their front-end monitoring technologies to DTCC’s centralized processing hub and provide the level of supervision and control required by regulators.

“The Fund Transfers service will work in coordination with several existing DTCC services to provide a comprehensive tracking and processing solution,” said Randi Gordon, vice president of Product Management, Insurance Services, who is overseeing the initiative. “By vetting annuity contract detail, provided through DTCC’s Positions & Valuation service, against their internal product and processing rules, broker/dealers can validate that the trade is in good order prior to submitting the transaction to the carrier.

“Once the request has been validated and approved by the broker/dealer, a real-time request will be routed through DTCC’s Fund Transfers service where editing will take place to ensure compliance with industry-defined standards,” she continued. “DTCC will then forward the request to the carrier for immediate pre-cycle validation and receipt confirmation. The transaction will be pended by the insurance carrier to be processed during nightly batch cycles. Once the transaction is successfully processed, distributors will receive transaction details for the completed fund transfer through DTCC’s Financial Activity Reporting service.”

ACORD XML

Traditionally, Insurance Services has built its solutions using fixed-length, flat-file formats. However, at the request of the insurance industry, Fund Transfers will incorporate ACORD’s Extensible Markup Language (XML) messaging solutions. XML is playing an increasingly important role in the exchange of a wide variety of data on the Web and elsewhere. Use of XML in the new service marks the first time that Insurance Services has incorporated this text processing language in any of its solutions.

To help guide the development of the new service, Insurance Services formed an advisory group last July comprising more than 20 individuals from carriers, distributors, and other industry players. The advisory group is working on developing business requirements for the new service, including recommendations on technology, process definition, legal requirements, and best practices. Pilot testing of the service is expected to begin in 2Q 2006, with formal rollout expected in the second half of the year.

“With this new service, broker/dealers will be afforded the capability to establish the controls required to monitor their registered representatives’ activities,” said Lana Macumber, director of Relationship Management, Insurance Services. “In the larger scheme of things, the insurance industry is taking yet another step toward adopting automated and standardized technology solutions that promote straight-through processing.”