Deferred Variable Annuities
Deferred variable annuities are hybrid investments containing securities and insurance features. Their sales are regulated both by FINRA and the Securities and Exchange Commission (SEC). These annuities offer investors choices among a number of complex and costly contract features and options, which can be confusing for both individuals who sell them and customers who buy them.
Due to the complexity and confusion surrounding them, which can lead to questionable sales practices, variable annuities are a leading source of investor complaints to FINRA.
FINRA developed Rule 2330 to enhance firms’ compliance and supervisory systems, and provide more comprehensive and targeted protection to investors who purchase or exchange deferred variable annuities.
FINRA Rule 2330
This rule establishes sales practice standards regarding recommended purchases and exchanges of deferred variable annuities. Among the rule’s key requirements, a registered representative, when recommending a deferred variable annuity transaction, must reasonably believe the customer has been informed of the various features of this type of annuity, such as a surrender charge, potential tax penalties, various fees and costs, and market risk.
A registered representative must have a reasonable basis to believe the customer would benefit from certain features of deferred variable annuities, such as tax-deferral, annuitization, or a death or living benefit. The rule also covers the suitability of a deferred annuity exchange for a particular customer, considering, among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges, and has had another exchange within the preceding 36 months.
In some instances, FINRA Rule 2111 applies in deferred variable annuity recommendations where Rule 2330 does not apply, such as recommendations to fund qualified accounts.
Principal Review and Approval Obligations
Rule 2330 requires a registered principal to review and determine whether to approve a customer’s application for a deferred variable annuity before sending the application to the issuing insurance company. This must occur no later than seven business days after an office of supervisory jurisdiction receives a complete and correct application. A principal can approve the transaction only if it is suitable based on the factors that a registered representative must consider when making a recommendation.
Firm Supervisory Procedures
Rule 2330 requires firms to establish and maintain written supervisory procedures reasonably designed to comply with the rule’s standards. Firms must implement surveillance procedures to determine whether brokers have incidence rates of variable annuity exchanges that might show misconduct, and have policies and procedures in place to address inappropriate exchanges.
Firms also must create training programs for registered representatives who sell deferred variable annuities and for registered principals who review these transactions.
|FINRA's 2015 Regulatory and Examination Priorities Part 2|
Part two of this six-part series covers sales practice priorities for products, such as fixed income products, variable annuities, and alternate funds.
|State Insurance Commissioners||Link||02-20-2015|
|State Securities Administrators||Link||02-20-2015|
|SEC: Variable Annuities: What You Should Know||Link||02-20-2015|
|Regulatory Notice 13-31|
FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule
|Regulatory Notice 12-55|
Guidance on FINRA’s Suitability Rule
|Regulatory Notice 11-25|
New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
|Regulatory Notice 10-05|
FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchanges of Deferred Variable Annuities
|Variable Annuities: Beyond the Hard Sell|
The marketing efforts used by some variable annuity sellers deserve scrutiny- especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors.
|Regulatory Notice 09-42|
FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities
|Seniors Beware: What You Should Know About Life Settlements|
Lately, more and more seniors are hearing about opportunities to sell their existing life insurance for cash in transactions known as life settlements. A life settlement, or senior settlement, as they are sometimes called, involves selling an existing life insurance policy to a third party--a person or an entity other than the company that issued the policy--for more than the policy's cash surrender value, but less than the net death benefit.
|Regulatory Notice 09-32|
SEC Approves Amendments to NASD Rule 2821 Governing Purchases and Exchanges of Deferred Variable Annuities
|FINRA Fines Fifth Third Securities $1.75 Million for 250 Unsuitable Variable Annuities Transactions|
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Fifth Third Securities, Inc., (FTS) of Cincinnati, OH, $1.75 million for a series of violations related to variable annuity sales and exchanges.
|FINRA Fines Banc One for Unsuitable Variable Annuity Sales, Inadequate Supervision of Fixed-to-Variable Annuity Exchanges|
Tuesday, January 29, 2008 Nancy Condon (202) 728-8379 Brendan Intindola (646) 315-7277 Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that as part of its ongoing efforts to curb abuses in the sale of variable annuities, it has fined Banc One Securities
|Regulatory Notice 07-53|
SEC Approves New NASD Rule 2821 Governing Deferred Variable Annuity Transactions
|FINRA Publishes Guidance, Text for New Rule Governing Deferred Variable Annuity Transactions|
Tuesday, November 6, 2007 Nancy Condon (202) 728-8379 Herb Perone (202) 728-8464 Washington, DC — The Financial Industry Regulatory Authority (FINRA) today published guidance to firms on a new rule covering transactions in deferred variable annuities. FINRA Regulatory Notice 07-53 outlines the
|Regulatory Notice 07-36|
FINRA Clarifies Guidance Relating to SEC Regulation S-P under Notice to Members 07-06 (Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products)
|NASD, State Regulators Issue Joint Statement to Support Insurance Regulators' Model Annuity Suitability Regulation|
Washington, DC — NASD and state regulators from North Dakota, Iowa and Minnesota announced today that they have signed a joint statement supporting a new rule to require that insurance companies and agencies recommend only suitable annuity products to their customers.
|NASD Charges Two Former Prudential Brokers with Facilitating Hedge Fund Manager's Deceptive Market Timing in Variable Annuities|
Thursday, February 15, 2007 Nancy Condon (202) 728-8379 Herb Perone (202) 728-8464 Washington, D.C. — NASD announced today that it has charged two Utah brokers, Jeffrey Doerr and David Corn, with facilitating a hedge fund manager's deceptive practices to market time through variable
|Notice to Members 06-38|
Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties
|Should You Exchange Your Variable Annuity?|
If you have a life insurance or annuity contract, you may have been approached to exchange it for a new model, one with better or the latest features. You need to know that even though tax law makes the exchange income tax free and the new contract may sound better for you, you may be losing- not gaining- if you make the exchange.
|Notice to Members 07-06|
Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products
|Notice to Members 04-72|
Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)
|Notice to Members 04-45|
NASD Seeks Comment on Proposed Rule to Impose Specific Sales Practice Standards and Supervisory Requirements on Members for Transactions in Deferred Variable Annuities
|SEC And NASD Release Joint Staff Report On Broker-Dealer Sales Of Variable Insurance Products|
Wednesday, June 9, 2004 Herb Perone 202-728-8464 John Nester 202-942-0020 Washington, DC- The Securities and Exchange Commission (SEC) and NASD today released a joint staff report on the findings of their examinations of broker-dealer sales of variable annuities and variable life insurance. The