Deferred Variable Annuity Suitability Standards

Hollywood, Florida Attorney Russell L. Forkey, Esq. - Post Regarding Suitability Standards for Variable Annuities

In order to make investors aware of the requirements of FINRA Rule 2330, we have provided the following information, which should be considered for educational purposes only.  The information contained in this post should not be considered legal advice.  If you have any question relative to your purchase, sale or exchange of a deferred variable annuity, you should contact experienced legal counsel.

All broker/dealers and associated persons dealing with members of the general public must be licensed with the Financial Industry Regulatory Authority, Inc. (FINRA), which has adopted various rules and regulations which its members must comply with.  In addition to its general suitability rule, FINRA has adopted product specific suitability rules such as FINRA Rule 2330, which relates to deferred variable annuities. This rule was an outgrowth of various sales practice abuses relating to the purchase and exchange of deferred variable annuities.

FINRA Rule 2330, labeled Members' Responsibilities Regarding Deferred Variable Annuities, provides generally:

Recommendation Requirements

No member or person associated with a member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe that the transaction is suitable in accordance with NASD Rule 2310 and, in particular, that there is a reasonable basis to believe that :

  • the customer has been informed, in general terms, of various features of deferred variable annuities, such as the potential surrender period and surrender charge; potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59½; mortality and expense fees; investment advisory fees; potential charges for and features of riders; the insurance and investment components of deferred variable annuities; and market risk;
  • the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit; and
  • the particular deferred variable annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable (and, in the case of an exchange, the transaction as a whole also is suitable) for the particular customer based on the information required by the provisions of this Rule; and
  • in the case of an exchange of a deferred variable annuity, the exchange also is consistent with the suitability determination required by paragraph this rule, taking into consideration whether (i) the customer would incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living, or other contractual benefits), or be subject to increased fees or charges (such as mortality and expense fees, investment advisory fees, or charges for riders and similar product enhancements); (ii) the customer would benefit from product enhancements and improvements; and (iii) the customer has had another deferred variable annuity exchange within the preceding 36 months.
  • Prior to recommending the purchase or exchange of a deferred variable annuity, a member or person associated with a member shall make reasonable efforts to obtain, at a minimum, information concerning the customer's age, annual income, financial situation and needs, investment experience, investment objectives, intended use of the deferred variable annuity, investment time horizon, existing assets (including investment and life insurance holdings), liquidity needs, liquid net worth, risk tolerance, tax status, and such other information used or considered to be reasonable by the member or person associated with the member in making recommendations to customers.

Of interest is that this rule requires that the above determinations be documented and signed by the account executive separately from the information contained on the new account documents. It is for this reason that, as an investor, it is of paramount importance that the information that you provide to the account executive is accurate. For if a problem arises, what is contained on these documents has significant value relative to the prosecution of your case.

Moreover, this rules creates a second tier of suitability review. It requires that a registered principal, of the firm, must approve the recommended transaction only if he or she has determined that there is a reasonable basis to believe that the transaction would be suitable based on the factors delineated in the rule. Again, this determination must be documented and signed by the registered principal who reviewed and then approved or rejected the transaction.

However, even if these procedures are allegedly in place and followed, there is still a possibility that, as an investor, you might suffer damages as a result of fraud, misrepresentation or other broker/dealer misconduct relative to the purchase, sale or exchange of a deferred variable annuity.

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