What’s FINRA Rule 2330 (and How Can It Protect You?)
FINRA Rule 2330 establishes sales practice standards regarding recommended purchases and exchanges of deferred variable annuities. FINRA defines deferred variable annuities as hybrid investments containing securities and insurance features.
The SEC and FINRA regulate the sale of deferred variable annuities. Many investor complaints arise alleging questionable sales practices because of the complexity and confusion surrounding deferred variable annuities. FINRA Rule 2330 sets various requirements for FINRA members in an attempt to remedy these issues and provide additional protection to investors.
If you suffered investment losses after your broker recommended variable annuity switching without properly disclosing any risks, your broker may have violated the rule. Contact Kurta Law today to discuss your options and see what we can do to help you recover.
FINRA Rule 2330: An Overview
Variable annuities can be complex and difficult to understand—even for more experienced investors. As a result, many investors may not fully understand what is being recommended to them.
To help prevent investor confusion and curb the rise in investor complaints in this area, FINRA developed Rule 2330.
Members’ Responsibilities Regarding Deferred Variable Annuities
The overarching goal of FINRA Rule 2330 is to enhance the compliance and supervisory systems of brokerage firms and provide more comprehensive protection to investors who purchase or exchange deferred variable annuities.
Specifically, Rule 2330 establishes certain practice standards governing the recommendation of deferred variable annuity purchases and exchanges. One of the principal provisions of the rule requires that registered representatives when recommending a deferred variable annuity, must reasonably believe that a customer has been informed of the various features of this type of annuity.
Such features that a customer should be informed of include:
- Surrender charges,
- Potential tax penalties,
- Various fees and costs, and
- Market risk.
No member should recommend any deferred variable annuity transaction unless and until they have a reasonable basis to believe that the customer has been made aware of these and any other relevant features.
Further, before recommending any purchase or exchange of a deferred variable annuity to a customer, a registered representative must make reasonable efforts to determine key information about the customer, such as their:
- Investment experience,
- Annual income,
- Investment objectives,
- Investment time horizon,
- Existing assets, and
- Risk tolerance.
The recommendation must also be suitable for the customer under FINRA Rule 2111.
Principal Review and Approval Obligations
Rule 2330 also includes a review and approval requirement.
In particular, a registered principal must review and determine whether to approve a customer’s application for a deferred variable annuity. This must be done before sending the application to the issuing insurance company.
A registered principal may approve the transaction only if they find it is suitable based on the requisite factors.
Firm Supervisory Procedures and Training
As an additional precaution, Rule 2330 also requires firms themselves to establish, implement, and maintain certain procedures.
Such procedures should address surveillance to help identify misconduct and ways to address instances of inappropriate exchanges. Firms must also create training programs for registered representatives who make recommendations and registered principals who review transactions.
What Is a Deferred Annuity?
Understanding what a deferred annuity is makes comprehending the FINRA Rule 2330 definition much easier. A deferred annuity is a contract with an insurance company that generates income later used to fund the owner’s retirement. The owner typically makes a one-time or recurring deposit, and funds will gain interest over time. Once the owner reaches retirement age, they can elect to receive a lump-sum payment or periodic payments until the annuity runs out of money. With a deferred variable annuity, the value is based on the performance of an underlying portfolio of mutual funds selected by the owner. Alternatively, deferred fixed annuities promise a specific, guaranteed rate of return on the funds in the account. Thus, variable annuities hold more risk than fixed annuities.
In many cases, annuities impose penalties on investors who try to withdraw funds early. Therefore, investors should consider deferred variable annuities long-term investments.
What Is a Variable Annuity Swap?
Annuities are typically sold on commission, incentivizing brokers to advise their clients to swap their current deferred variable annuities for a new one. However, this practice could result in negative consequences for some investors. Before the 2008 financial crisis, deferred variable annuities boasted more generous living benefits than the annuities offered today. Additionally, contributions made before 1982 receive more favorable tax treatment than later contributions due to a change in tax law.
FINRA Rule 2330 attempts to address variable annuity switching by laying out the factors for brokers to consider before recommending exchanging a variable annuity. Additionally, the rule requires FINRA member firms to implement a supervisory system to aid compliance.
FINRA Enforcement for Rule 2330 Violations
FINRA dedicates significant resources to regulating variable annuity exchanges and imposes severe penalties for violations.
VALIC Financial Advisors, Inc.
On January 8, 2021, FINRA entered a Letter of Acceptance, Waiver & Consent (AWC) from VALIC Financial Advisors. FINRA’s findings alleged that VALIC violated Rule 2330 by failing to “implement surveillance procedures” designed to detect broker recommendations in violation of FINRA Rule 2330. Without admitting or denying FINRA’s findings, VALIC agreed to sanctions in the form of censure and a $350,000 fine.[KS1]
According to FINRA’s findings, between January 1, 2017, and October 31, 2018, VALIC had over 26,000 variable annuity exchanges. VALIC did implement procedures stating that the firm would monitor variable annuity transactions for inappropriate rates of exchanges. However, FINRA determined that the procedures were not “reasonably designed.” The procedures reportedly failed to detail when or how frequently the review would be completed or provide guidance on what was considered a “high rate” of exchanges. FINRA also alleged that VALIC failed to establish procedures reasonably designed to implement corrective measures to address the inappropriate exchanges. Finally, VALIC allegedly failed to keep an accurate or readily accessible record of all variable annuity exchange transactions executed by the firm. Thus, VALIC’s later reviews for inappropriate rates of exchange lacked complete information.
Fifth Third Securities, Inc.
In May 2018, FINRA fined Fifth Third Securities, Inc. (FTS) $4 million and required the firm to pay $2 million in restitution to its customers. FINRA alleged that FTS failed to appropriately consider and accurately describe the costs and benefits of variable annuity exchanges and recommended exchanges without a reasonable basis to believe they were suitable.
FINRA found that FTS failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended variable annuity exchanges. It also found that the firm’s registered representatives and principals were not adequately trained to conduct a comparative analysis of the material features of the variable annuities. As a result, the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to their customers.
By reviewing a sample of variable annuity exchanges that the FTS approved from 2013 through 2015, FINRA found that FTS misstated or omitted at least one material fact relating to the costs or benefits of the variable annuity exchange in approximately 77% of the exchanges reviewed. For example:
- FTS overstated the total fees of the existing variable annuity or misstated fees associated with various additional optional benefits, known as riders.
- FTS failed to disclose that the existing variable annuity had an accrued living benefit value or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
- FTS represented that a proposed variable annuity had a living benefit rider even though the proposed variable annuity did not.
FINRA found that the firm’s principals ultimately approved approximately 92 percent of variable annuity exchange applications submitted to them for review. However, in light of the firm’s supervisory deficiencies, the firm lacked a reasonable basis to recommend and approve many of these transactions.
Concerned About Your Broker’s Recommendations Regarding Your Deferred Variable Annuity? Contact a Securities Attorney Today
If you suffered losses as a result of recommendations that you exchange your deferred variable annuity, you are not alone. Fortunately, however, you may be able to recover your losses through FINRA arbitration.
Rule 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities. That includes requiring a reasonable belief that the customer has been informed of the various risks of the annuities. Violating FINRA rules can result in disciplinary action for the broker in addition to any arbitration actions.
If you or a loved one received bad advice concerning a deferred variable annuity transaction, contact Kurta Law today. You can call us at 877-600-0098 or email us at firstname.lastname@example.org. Let’s discuss your case and see how we may be able to help you recover your investment losses.