In its January 11, 2013 Regulatory and Examination Priorities Letter (2013 Letter), the Financial Industry Regulatory Authority (FINRA) includes variable annuity sales practice issues as among the "key investor protection and market integrity issues" that it will focus on in the coming year.
In discussing variable annuities in the 2013 Letter, FINRA recognizes the benefits that they can provide investors, but notes the following concerns:
- long holding periods in conjunction with significant surrender charges can make variable annuities unsuitable for investors who have near-term liquidity needs;
- high fees and expenses above typical subaccount fees reduce performance, and high commissions make variable annuities a target for switching;
- consolidation in insurance companies offering variable annuities may provide an inappropriate incentive for brokers to recommend exchanges;
- insurance company offers to buy back a variable annuity or increase the account value to forgo contractual guarantees may present both brokers and investors with a less-than-clear picture of the transaction’s financial benefit to the investor; and
- finding a similar variable annuity with the features included in the prior variable annuity may be challenging.
Many of the concerns noted in the 2013 Letter were referenced in FINRA’s 2012 and prior letters. For example, the 2009 and 2010 letters also focused on variable annuity exchanges (especially in connection with employment changes by registered representatives who sold the variable annuities), and suitability issues, in particular with regard to sales and exchanges involving older investors.
FINRA notes in the 2013 Letter that its examiners will focus on the following variable annuity-related issues:
- suitability of recommendations;
- the sales representative’s level of product-specific knowledge;
- the level of due diligence in assessing the risk tolerance and liquidity needs of the customer when making investment recommendations;
- the manner in which material risk exposures are disclosed to customers; and
- the impact on broker compensation associated with competing investment alternatives.
FINRA member firms have rightly complained at times that that they have been surprised by the level of scrutiny that FINRA has attached to certain products or sales practices. No such complaint would be warranted in this case. As indicated above, FINRA has consistently highlighted its concerns regarding variable annuity sales practices. Firms involved in the distribution of variable annuity products, both product creators and retail sellers, should review their policies, the implementation of those policies, and the educational support they provide their sales representatives to ensure that they are ready to answer the questions that FINRA is all but promising to ask.