The variable annuity contract sales practices were again included in the Financial Industry Regulatory Authority’s (FINRA) 2013 Regulatory and Examination Priorities Letter as among the “key investor protection and market integrity issues” that it will focus on in the coming year. This article discusses two potential risk areas that broker-dealers should consider in connection with the contracts that their registered representatives sell, and steps that they can consider to mitigate these potential risks.
Contracts often contain provisions permitting the annuity provider to implement future changes or require action by the policyholder as a condition to receiving the guaranteed payment. Broker-dealers whose advisors recommend contracts to clients that include these provisions should consider whether those contracts should be monitored on an on-going basis to ensure continued suitability, and to determine whether future client communications would be prudent.
Broker-dealers whose advisors recommend contracts have an obligation under FINRA rules to ensure that recommended products are “suitable” in light of the client’s financial needs, investment objectives, and other relevant information. As a general matter, to carry out this obligation, the broker-dealer and/or advisor will evaluate the contract’s terms, asset allocation and investment line-up and determine whether those characteristics align with the client’s financial needs, objectives and circumstances. What if after undertaking this analysis and recommending a Contract that is suitable for the Client the contract’s terms, asset allocation and/or investment line-up is significantly modified?
Recently, annuity providers have exercised their contractual right to make changes to existing contract terms, including investment line-up changes, shifts in asset allocation and the imposition of investment restrictions. These changes have presented a challenge for advisors because a contract as modified in this way may no longer be suitable for the client.
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