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.
|State Insurance Commissioners||Link||02-19-2015|
|State Securities Administrators||Link||02-19-2015|
|SEC: Variable Annuities: What You Should Know||Link||02-19-2015|
|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||Investor Alert||08-30-2009|
|Regulatory Notice 09-42|
FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities
|Seniors Beware: What You Should Know About Life Settlements||Investor Alert||07-29-2009|
|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||News Release||04-13-2009|
|FINRA Fines Banc One for Unsuitable Variable Annuity Sales, Inadequate Supervision of Fixed-to-Variable Annuity Exchanges||News Release||01-28-2008|
|FINRA Publishes Guidance, Text for New Rule Governing Deferred Variable Annuity Transactions||News Release||11-05-2007|
|Regulatory Notice 07-53|
SEC Approves New NASD Rule 2821 Governing Deferred Variable Annuity Transactions
|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||News Release||05-07-2007|
|NASD Charges Two Former Prudential Brokers with Facilitating Hedge Fund Manager's Deceptive Market Timing in Variable Annuities||News Release||02-14-2007|
|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?||Investor Alert||03-01-2006|
|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||News Release||06-08-2004|
|SEC/NASD Report On Examination Findings Regarding Broker-Dealer Sales of Variable Insurance Products||Document||05-31-2004|