- with readers working within the Banking & Credit industries
The Financial Industry Regulatory Authority, Inc. ("FINRA") 2025 Annual Regulatory Oversight Report (the "2025 Report") includes a discussion on FINRA's concerns about recommendations of variable annuities and registered index-linked annuities ("RILAs").1 Recommendations of these products to retail investors fall within the ambit of both Regulation Best Interest ("Reg BI")2 and FINRA Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities).
Reg BI establishes a "best interest" standard of conduct for broker-dealers and associated persons when they make recommendations to retail customers of any securities transaction or investment strategy involving securities (which includes variable annuities and RILAs). Pursuant to this standard, a broker-dealer and its associated persons must not put their financial or other interests ahead of the interests of a retail customer when making a recommendation. Rule 2330 applies to recommended purchases and exchanges of deferred variable annuities and requires member firms to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the rule.
The 2025 Report highlighted the following deficiencies in the practices of member firms, among others:
- Failing to have reasonably designed written supervisory
procedures ("WSPs") to achieve compliance with either Reg
BI or Rule 2330 relating to:
- Avoiding over-concentration of variable annuities and RILAs in customer accounts;
- Not taking customers' ages into consideration when making recommendations; and
- Issuer buyout offers (surrendering one RILA or annuity to buy another of the same issuer).
- Recommendations of exchanges of a variable annuity when not aligning with the customer's investment objectives and time horizon; and
- Violations of the Reg BI care obligation – recommending surrenders of existing variable annuities or RILAs without a reasonable basis and then using the proceeds to purchase RILAs.
FINRA identified effective practices for members and associated persons to improve recommendations of RILAs and variable annuities, among others:
- Following the explicit requirements in Rule 2330 for WSPs for variable annuities (and applying the same to RILAs);
- Providing guidance to associated persons so that they understand the payoff features of RILAs and applicable contract adjustments;
- Using exchange disclosure forms disclosing to customers meaningful information about the advantages and disadvantages of any recommended exchange; and
- Using automated surveillance to review exchanges of variable annuities and RILAs (keeping an eye out for excessive cumulative surrender charges of any customer of a particular associated person over a period of time).
Originally published in REVERSEinquiries: Volume 7, Issue
1.
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Footnotes
1. The FINRA Annual Regulatory Oversight Report (Dec. 2025) is available at: 2026-annual-regulatory-oversight-report.pdf. See our alert on the FINRA Report here.
2. Exchange Act Rule 15l-1.
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