FINRA Asks Members to Check RILA Disclosures

The Financial Industry Regulatory Authority says financial firms should be ready to show examiners what they tell investors about registered index-linked annuities.

The Washington-based organization has added a line about RILAs to the variable annuity section in a report on its examination and risk monitoring priorities for 2023.

“If your firm offers registered indexed-linked annuities (RILAs), do the products’ disclosures address buffer and cap rates, as well as market value adjustment risks?” FINRA asks in the new “related considerations” item.

What It Means

Many life insurers like issuing RILA contracts, and some clients like buying them. Now, FINRA likes the idea of including them in examinations of member firms.

RILA Basics

A RILA is an annuity with returns tied to the performance of an investment index that is registered with the U.S. Securities and Exchange Commission as a variable annuity contract.

Because a RILA is registered with the SEC, the issuer can expose the contract holder to potential index-related loss of contract value.

A RILA is usually designed in such a way that the base contract provides a limited amount of protection against loss value through a mechanism such as a “buffer,” or specified percentage of value loss that the issuer will absorb, or “floor,” or a predetermined minimum level for the contract value, if the investment index falls dramatically and the issuer can make good on the contract guarantees.

When a contract holder pulls cash out early, an issuer might apply a “market value adjustment,” or reduction in contract value, based on index returns and other factors.

The History

FINRA included a reference to the products, under the name “annuities with structured or buffered options,” in a 2017 risk control glossary.

FINRA CEO Robert Cook said in 2020, at a conference organized by the American Law Institute, that the organization had noticed a big increase in RILA contract sales.

Cook said FINRA would promote clear descriptions of product features; some ability for annuity holders to get cash out of the contracts reasonably quickly; and the effects of product features on potential returns.

RILA sales accounted for about $10.5 billion of the $80 billion in U.S. individual annuity sales that issuers recorded in the third quarter of 2022, according to LIMRA, a financial services data and research industry organization.

The Exam Priorities

FINRA’s new exam priorities report covers a wide range of oversight priorities, such as issues related to cybersecurity threats, mobile apps and the Regulation Best Interest sales standards.

FINRA has been including a section on variable annuities for years.

In addition to the RILA item, the new exam report also includes two new questions for members that market variable annuities, and two new “findings,” or practices that FINRA dislikes.

The New Variable Annuity Questions

The new questions are:

• What is your firm’s process for supervisory review when a registered representative recommends additional deposits into existing variable annuity contracts? What is your firm’s process for documenting the rationale for the additional deposit?
• Does your firm maintain records of retail customers’ investment objectives, risk tolerance and other information that support the rationale for recommending particular investment options?

The New Variable Annuity Findings

The new findings are:

• Additional Deposits: Failing to evaluate and supervise registered representatives’ recommendations of additional deposits into existing [variable annuity] contracts, including review of disclosure, any applicable surrender fees related to this transaction and rationale for the addition.
• Reasonably Available Alternatives: Pursuant to Reg BI, insufficient consideration of reasonably available alternatives to the recommended VA purchase, surrender or exchange.

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