RCA - Spring 2002 - Reminder—Suitability Of Variable Annuity Sales

Variable annuities, already a complex product, are becoming more complicated because of many new product enhancements. In light of this trend, NASD Regulation reminds members of their suitability obligations under Conduct Rule 2310 when recommending variable annuities.1


As an initial matter, it is imperative that members and their associated persons thoroughly understand all of the investment products that they recommend to customers. That is, members cannot determine whether a recommendation is suitable for a particular customer unless they are knowledgeable about the investment product at issue.


Members also should carefully consider the impact that a proposed transaction might have on an investor’s financial status before recommending the transaction. In this regard, the recent stock market drop has had a negative effect on many variable annuity contract values and variable annuity death benefits. A recommendation that an investor replace his or her existing variable annuity contract with another contract could result in the new variable contract having a smaller value and death benefit than the original contract.


In addition, members must keep in mind that the suitability rule applies to any recommendation to sell a variable annuity regardless of the use of the proceeds, including situations where the member recommends using the proceeds to purchase an unregistered product such as an equity-indexed annuity. Any recommendation to sell the variable annuity must be based upon the financial situation, objectives and needs of the particular investor.


Questions about this article may be directed to the Investment Companies Regulation Department at (240) 386-4535.


1 NASD Regulation has previously published materials regarding variable annuity sales activities, including the supervision of variable annuity sales (Notice to Members 99-35), the advertising of bonus variable annuities (Summer 2000 Regulatory & Compliance Alert), and an Investor Alert regarding variable annuity exchanges. In 2001, NASD Regulation announced several enforcement actions against member firms and individuals involving variable annuity sales.