Regulatory Obligations and Related Considerations
FINRA Rule 2330 (Members’ Responsibilities Regarding Deferred Variable Annuities) establishes sales practice standards regarding recommended purchases and exchanges of deferred variable annuities. To the extent that a broker-dealer or associated person is recommending a purchase or exchange of a deferred variable annuity to a retail customer, Reg BI’s obligations, discussed above, also would apply.
In addition, Rule 2330 requires firms to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the rule. Firms must implement surveillance procedures to determine if any associated person is effecting deferred variable annuity exchanges at a rate that might suggest conduct inconsistent with FINRA Rule 2330 and any other applicable FINRA rules or the federal securities laws.
- How does your firm review for rates of variable annuity exchanges (i.e., does your firm use any automated tools, exception reports or surveillance reports)?
- Does your firm have standardized review thresholds for rates of variable annuity exchanges?
- Does your firm have a process to confirm its variable annuity data integrity (including general product information, share class, riders and exchange-based activity) and engage with affiliate and non-affiliate insurance carriers to address inconsistencies in available data, data formats and reporting processes for variable annuities?
- How do your firm’s WSPs support a determination that a variable annuity exchange has a reasonable basis? How do you obtain, evaluate and record relevant information, such as:
- loss of existing benefits;
- increased fees or charges;
- surrender charges, or the establishment or creation of a new surrender period;
- consistency of customer liquid net worth invested in the variable annuity with their liquidity needs;
- whether a share class is in the customer’s best interest, given his or her financial needs, time horizon and riders included with the contract; and
- prior exchanges within the preceding 36 months?
- Do your firm’s policies and procedures require registered representatives to inform customers of the various features of recommended variable annuities such as surrender charges, potential tax penalties, various fees and costs, and market risk?
- What is the role of your registered principals in supervising variable annuity transactions, including verifying how the customer would benefit from certain features of deferred variable annuities (e.g., tax-deferral, annuitization, or a death or living benefit)? What processes, forms, documents and information do the firm’s registered principals rely on to make such determinations?
- What is your firm’s process to supervise registered representatives who advise their clients’ decisions whether or not to accept a buyout offer?
Exam Findings and Effective Practices
- Exchanges – Not reasonably supervising recommendations of exchanges for compliance with FINRA Rule 2330 and Reg BI, leading to exchanges that were inconsistent with the customer’s objectives and time horizon and resulted in, among other consequences, increased fees to the customer or the loss of material, paid-for accrued benefits.
- Insufficient Training – Not conducting training for registered representatives and supervisors regarding how to assess costs and fees, surrender charges and long-term income riders to determine whether exchanges were suitable for customers.
- Poor and Insufficient Data Quality – Not collecting and retaining key information on variable annuity transactions, particularly in connection with exchange transactions; relying on processes for data collection and retention in situations where the volume of variable annuity transactions renders these processes ineffective; and failing to address inconsistencies in available data for variable annuities, as well as data formats and reporting processes.
- Issuer Buyouts – Not reasonably supervising recommendations related to issuer buyout offers (e.g., associated persons’ recommendations that investors surrender the contract in order to generate an exchange or new purchase) for compliance with FINRA Rule 2230 and Reg BI.
- Automated Surveillance – Using automated tools, exception reports and surveillance to review variable annuity exchanges; and implementing second-level supervision of supervisory reviews of exchange-related exception reports and account applications.
- Rationales – Requiring registered representatives to provide detailed written rationales for variable annuity exchanges for each customer (including confirming that such rationales address the specific circumstances for each customer and do not replicate rationales provided for other customers); and requiring supervisory principals to verify the information provided by registered representatives, including product fees, costs, rider benefits and existing product values.
- Review Thresholds – Standardizing review thresholds for rates of variable annuity exchanges; and monitoring for emerging trends across registered representatives, customers, products and branches.
- Automated Data Supervision – Creating automated solutions to synthesize variable annuity data (including general product information, share class, riders and exchange-based activity) in situations warranted by the volume of variable annuity transactions.
- Data Integrity – Engaging with insurance carriers (affiliated and non-affiliated) and third-party data providers (e.g., DTCC and consolidated account report providers) to address inconsistencies in available data, data formats and reporting processes for variable annuities.
- Data Acquisition – Establishing a supervisory system that collects and utilizes key transaction data, including, but not limited to:
- transaction date;
- rep name;
- customer name;
- customer age;
- investment amount;
- whether the transaction is a new contract or an additional investment;
- contract type (qualified vs. non-qualified);
- contract number;
- product issuer;
- product name;
- source of funds;
- exchange identifier;
- share class; and
- Data Analysis – Considering the following data points when conducting a review of an exchange transaction under FINRA Rule 2330 and Reg BI:
- branch location;
- customer state of residence;
- policy riders;
- policy fees;
- issuer of exchanged policy;
- exchanged policy product name;
- date exchanged policy was purchased;
- living benefit value, death benefit value or both, that was forfeited;
- surrender charges incurred; and
- any additional benefits surrendered with forfeiture.
- Regulation Best Interest (Reg BI) Topic Page
- Regulatory Notice 20-18 (FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest)
- Regulatory Notice 20-17 (FINRA Revises Rule 4530 Problem Codes for Reporting Customer Complaints and for Filing Documents Online)
- Regulatory Notice 10-05 (FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchanges of Deferred Variable Annuities)
- 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 99-35 (The NASD Reminds Members of Their Responsibilities Regarding the Sales of Variable Annuities)
- Variable Annuities Topic Page