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 contract features and options.
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 (Members' Responsibilities Regarding Deferred Variable Annuities) 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 2320 (Variable Contracts of an Insurance Company) contains important requirements regarding cash and non-cash compensation arrangements associated with variable annuity sales.
FINRA Rule 2330 - Members' Responsibilities Regarding Deferred Variable Annuities
Rule 2330 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.
Prior to recommending the purchase or exchange of a deferred variable annuity, a registered representative must make reasonable efforts to determine the customer’s age, annual income, investment experience, investment objectives, investment time horizon, existing assets, and risk tolerance.
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.
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 Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.
OGC staff contact:
1735 K Street, NW
Washington, DC 20006
- FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchanges of Deferred Variable Annuities
- SEC Approves Amendments to NASD Rule 2821 Governing Purchases and Exchanges of Deferred Variable Annuities
- SEC Approves New NASD Rule 2821 Governing Deferred Variable Annuity Transactions
- 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)
- Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products
- Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties
- Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)
- NASD Seeks Comment on Proposed Rule to Impose Specific Sales Practice Standards and Supervisory Requirements on Members for Transactions in Deferred Variable Annuities
- The NASD Reminds Members Of Their Responsibilities Regarding The Sale Of Variable Life Insurance
- SEC Approves Rule Change Relating To Sales Charges For Investment Companies And Variable Contracts
- Questions And Answers Relating To Non-Cash Compensation Rules
- The NASD Reminds Members Of Their Responsibilities Regarding The Sales Of Variable Annuities
- SEC Approves Rule Change Relating To Non- Cash Compensation For Mutual Funds And Variable Products
- NASD Regulation Requests Comment On Amendments To Rules Governing Sale And Distribution Of Investment Company Shares And Variable Insurance Products
- Application Of NASD Conduct Rules To Group Variable Contracts And Other Exempted Securities
- NASD Regulation Reminds Members And Associated Persons That Sales Of Variable Contracts Are Subject To NASD Suitability Requirements
- Report / StudyJoint SEC/NASD Report on Examination Findings Regarding Broker-Dealer Sales of Variable Insurance Products
Variable annuity and variable life insurance products (collectively, “variable insurance products" or “variable products”) are being marketed and sold to a large number of investors. While variable insurance products may be appropriate investments for some investors, concerns have been raised about the sale of these products. This prompted the staffs of the Securities and Exchange Commission (“SEC” or “Commission”) and NASD (“Staff”) to conduct examinations of broker-dealers that sell variable insurance products. This report summarizes the findings of those examinations.June 09, 2004
- Interpretive LetterSeparate sales contests under NASD Rule 2820(g) for group variable annuity contracts and employer-sponsored retirement plans.February 03, 2003
- FINRA Sanctions Fifth Third Securities, Inc., $6 Million for Cost and Fee Disclosure Failures and Unsuitable Recommendations Related to Variable Annuity ExchangesMay 08, 2018
- FINRA Fines VALIC Financial Advisors, Inc. $1.75 Million for Failure to Prevent Conflicts of Interest in its Compensation Policy and for Other Supervisory Failures Related to Variable Annuity SalesNovember 28, 2016
- FINRA Fines Eight Firms a Total of $6.2 Million for Supervisory Failures Related to Variable Annuity L-SharesNovember 02, 2016
- FINRA Fines Prudential Annuities Distributors, Inc. $950,000 for Failing to Prevent Theft of $1.3 Million From Elderly Customer’s Variable Annuity AccountJuly 19, 2016
- FINRA Sanctions MetLife Securities, Inc. $25 Million for Negligent Misrepresentations and Omissions in Connection With Variable Annuity ReplacementsMay 03, 2016
- FINRA Fines Bank Broker-Dealers $1.65 Million for Supervisory Failures in Variable Annuity, Mutual Fund and UIT TransactionsJuly 23, 2009
- April 14, 2009
- FINRA Fines Banc One for Unsuitable Variable Annuity Sales, Inadequate Supervision of Fixed-to-Variable Annuity ExchangesJanuary 29, 2008
- November 06, 2007
- Waddell & Reed, Inc. Agrees to Pay $5 Million Fine, up to $11 Million in Restitution to Settle NASD ChargesRelating to Variable Annuity Switching CampaignApril 29, 2005
- Investor EducationPerhaps you spoke with an investment professional about an existing variable annuity you own, and the possibility of exchanging your current VA with a new one came up. Be aware that replacing one VA with another involves a comparison of the complex features of each security.
- Investor EducationVariable annuities are investment products with insurance features. They allow you to select from a menu of investment choices, typically mutual funds. The value of your annuity depends on how your investment choices perform.
- Investor AlertThe 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.
- Investor AlertEarly retirement is an alluring prospect. When faced with a pitch that promises that you can cash in your company retirement savings in your 50s, reinvest the money, and live comfortably off the proceeds for the rest of your life, many simply can't say no.
- Investor AlertIf 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.