After 3 years of debate, the Financial Industry Regulatory Authority’s new variable annuity suitability rule is now a reality. This immediately raises the question, what is the meaning for financial advisors and their broker-dealers?
First, some background. On Sept. 7, 2007 the Securities and Exchange Commission approved Rule 2821, announcing it publicly during the Second Annual Senior Summit on Sept. 10, 2007. The effective date will be 180 days after FINRA issues a regulatory notice to its members announcing the rule.
Rule 2821 creates recommendation requirements (including a heightened suitability obligation), expanded principal review and approval requirements, and supervisory and training requirements for VA transactions. The provisions will require broker-dealers and their financial advisors who are selling VAs to scrutinize carefully, and possibly revise, their processing of VA business.
The recommendation requirements: Financial advisors selling VAs will be required to determine and document various considerations regarding the transaction. In particular, there must be a reasonable basis to believe that:
o The customer has been informed, in general terms, of various VA features.
o The customer would benefit from certain VA features, such as tax deferred growth, annuitization, or a death or living benefit.
o The following are suitable for the customer: The particular VA as a whole; the underlying subaccounts; the riders and similar enhancements; and, in the case of an exchange, the transaction as a whole.
In the case of exchanges, there must also be consideration regarding whether:
o The customer would incur a surrender charge, be subject to start of a new surrender period, lose existing benefits, or be subject to increased fees or charges.
o The customer would benefit from product enhancements and improvements.
o The customer’s account had had another deferred VA exchange within the preceding 36 months.
The financial advisor recommending the transaction will be required to document these considerations and sign this documentation. The Rule will also require the advisor or firm to obtain certain specified pieces of customer information, such as age, annual income, etc.
Principal review and approval: Rule 2821 requires that a registered principal review a transaction and determine whether he or she approves of it prior to transmitting the customer’s application to the issuing insurer for processing, but no later than 7 business days after the customer signs the application. The registered principal may approve the transaction only if he or she has determined there is a reasonable basis to believe the transaction would be suitable based on all of the factors noted above.
The registered principal reviewing the transaction must document and sign the determinations, as required by the Rule. He or she must complete this documentation regardless of whether he or she approves, rejects, or authorizes the transaction.
Supervisory procedures and training: Rule 2821 requires firms to develop and maintain supervisory procedures that are reasonably designed to achieve compliance with the proposed rule.