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, surrender 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 member firms to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the rule. Member 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 (e.g., 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 with insurance carriers and third-party data providers?
- How do your firm’s WSPs support a determination that a recommendation of 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, a death or living benefit)? What processes, forms, documents and information do your firm’s registered principals rely on to make such determinations?
- What is your firm’s process to supervise registered representatives who make recommendations regarding buyout offers?
- What is your firm’s process for supervisory review when a registered representative recommends additional deposits into existing variable annuity contracts? What is your firm’s process for documenting the rationale for the additional deposit?
- If your firm offers registered indexed-linked annuities (RILAs), do the products’ disclosures address buffer and cap rates, as well as market value adjustment risks?
- Does your firm maintain records of retail customers’ investment objectives, risk tolerance and other information that support the rationale for recommending particular investment options?
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 investment 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 and compare costs and fees, surrender charges and long-term income riders to determine whether exchanges complied with the standards of FINRA Rule 2330 and Reg BI.
- 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., registered representatives’ recommendations that investors surrender the contract in order to generate an exchange or new purchase) for compliance with FINRA Rule 2330 and Reg BI.
- Additional Deposits: Failing to evaluate and supervise registered representatives’ recommendations of additional deposits into existing VA contracts, including review of disclosure, any applicable surrender fees related to this transaction and rationale for the addition.
- Reasonably Available Alternatives: Pursuant to Reg BI, insufficient consideration of reasonably available alternatives to the recommended VA purchase, surrender or exchange.
- 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.
- Detailed Rationales for VA Exchanges: Confirming that registered representatives’—and, where applicable, supervisory principals’—written rationales for variable annuity exchanges for each customer address the specific circumstances for each customer and do not replicate rationales provided for other customers; and requiring supervisory principals to verify the information in these rationales that registered representatives provide, 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., Depository Trust and Clearing Corporation (DTCC), consolidated account report providers) to:
- confirm its variable annuity data integrity (including general product information, share class, riders and exchange-based activity); and
- address inconsistencies in available data, data formats and reporting processes for variable annuities.
- Data Acquisition: Establishing a supervisory system that collects and uses key transaction data, including, but not limited to:
- transaction date;
- representative 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 a recommended 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.
- Variable Annuities Topic Page
- 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)