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.