Variable Annuities – Still Under the Regulatory Microscope
Recent FINRA settlements make clear that regulators continue to see the sales and supervision of variable annuities as a priority, especially when it comes to switches or exchanges between products. Because of their complexity and costs, firms must ensure that recommendations of variable annuities are suitable for (and now in the best interest of) clients, and that firms have robust supervisory systems for reviewing recommendations of new sales and exchanges between products. Regulators have said they are concerned about the volume of annuity exchanges and that these transactions should receive extra scrutiny, especially when surrender charges are incurred or benefits are given up as part of the exchange. Regulators also expect firms to have a process for testing to ensure that their supervisory procedures are being carried out effectively. Below are some takeaways from recent cases:
Suitability and Best Interest Considerations
Policies and procedures should clearly set out the factors that should be considered when recommending and approving a variable annuity transaction and firms should provide training regarding how these decisions should be made. In addition to the normal suitability and best interest factors, representatives should especially focus on:
- the age of the customer;
- the customer’s liquidity needs;
- the customer’s investment horizon;
- the customer’s ability to understand the product, its features and risks; and,
- the customer’s need for the insurance features of the variable annuity.
Annuity Exchanges and Switches
Particular attention should be paid to exchanges, especially if the customer is older, surrender charges are incurred and/or the customer will lose existing benefits (e.g. death benefit, living benefits, etc.). Since annuities are generally considered to be long-term investments, regulators look skeptically at recommendations to exchange annuities, especially when there are significant costs involved in doing so. You can expect FINRA to look for and focus on patterns of exchanges when they conduct examinations. It is important to document these decisions and ensure that the justification is compelling.
Testing Supervisory Systems
In two recent cases, FINRA found that the firms had procedures that required alerts to be generated when exchanges were conducted. The alerts would require a supervisory review and switch letters to be sent to clients. However, despite those procedures, no alerts were triggered for switches from variable annuities to investment company products. This resulted in no supervisory review of the switches to determine if they were suitable and caused the firms to fail to send out switch letters. This highlights the importance of testing of controls. Even if your firm has the greatest procedures in the world, failures to adequately implement them can result in missed problems and supervisory violations.
Firms should regularly assess their procedures, training, controls and testing on variable annuity recommendations, supervision and testing. Oyster’s experts have years of industry and regulatory experience and can help quickly assess your supervisory system. Oyster has the tools and practices for conducting thorough and effective testing on both an in-person and remote basis. Contact us to learn more about how we might be able to help you develop, implement and test your supervisory systems and controls.
About the Author: Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as Senior VP and Midwest Regional Director. While there, he was responsible for the Region’s risk assessment, examination and investigation programs. Ed was a member of the team that developed FINRA’s risk-based examination program and he developed and managed FINRA’s first Digital Asset and Cybersecurity examination programs.