FINRA Rule 2330
FINRA Rule 2330 deals exclusively with deferred variable annuities. These complex securities have a long history of presenting difficulties and confusion for retail investors, making them vulnerable to fraudulent actions and misconduct by regulated securities professionals. In response, FINRA has enacted Rule 2330 specifically to counter these issues. However, the conditions imposed by the Rule are sufficiently strict to be an obstacle to upstanding broker-dealers who are acting in the best interests of their clients.
The national law firm Oberheiden P.C. is staffed with senior attorneys who have extensive experience in securities litigation and the field of FINRA defense. With their legal guidance, numerous regulated securities professionals and brokerage firms have taken the steps necessary to ensure that they are complying with Rule 2330. For traders who have been accused of violating the Rule, Oberheiden P.C. has provided the vigorous advocacy needed to protect their rights and future.
Experienced FINRA Defense Lawyers
A Summary of FINRA Rule 2330
FINRA Rule 2330 states how regulated securities professionals are to handle deferred variable annuities, including rules that govern:
- What amounts to a deferred variable annuity
- How and when broker-dealers can recommend purchasing or exchanging them
- The supervisory review and approval process
- Training requirements
Each of these issues deserves explication.
Deferred Variable Annuities and Rule 2330 Applicability
According to guidance from the Financial Industry Regulatory Authority (FINRA), a deferred variable annuity is a hybrid investment that includes both securities and insurance features. The added complexity that comes with these hybrid investments gives investors an important avenue to use to reach their goals, but also requires regulation by both FINRA and the U.S. Securities and Exchange Commission (SEC).
The complexities that come with deferred variable annuities also make them one of the leading sources of investor complaints that FINRA receives.
In addition to deferred variable annuities, FINRA Rule 2330 also applies to initial subaccount allocations.
However, the Rule does not apply to either of the following:
- Reallocations among subaccounts after the initial transaction involving a deferred variable annuity, or
- Transactions involving deferred variable annuities that were made in connection with an eligible employer-sponsored retirement or benefit plan, unless the broker-dealer interacted with an individual plan participant.
The bulk of the legal obligations imposed by FINRA Rule 2330 are with regard to how broker-dealers can recommend deferred variable annuities to customers.
Regulated securities professionals can only recommend these investment schemes if they have a reasonable basis to believe that the transaction or exchange is suitable for the customer under the terms of FINRA Rule 2111. This requires a reasonable basis to believe that:
- The customer has been informed of the general features of deferred variable annuities, including:
- The potential surrender period,
- Surrender charges,
- Tax penalties if the customer sells or redeems the annuity before reaching the age of 59.5,
- Mortality, expense, and investment advisory fees,
- Rider features and charges,
- Market risks of annuities, and
- The insurance and investment components of the annuity;
- The customer would benefit from at least some of the features of a deferred variable annuity,
- All of the aspects of the exchange, including the deferred variable annuity as a whole as well as all of its attendant parts, are suitable for the particular customer, and
- If the transaction is an exchange of deferred variable annuities, the exchange is a suitable one based on:
- Any surrender charges to be incurred,
- Loss of existing benefits,
- Increases in fees or charges,
- Benefits of any improvements in the security, and
- Recent deferred variable annuity exchanges involving the customer.
To obtain a reasonable basis to believe these factors, securities professionals have to take reasonable efforts to acquire information before making a recommendation involving a deferred variable annuity. At minimum, this requires learning about the customer’s:
- Risk tolerance
- Tax status
- Annual income
- Financial situation
- Investment experience
- Investment time horizon
- Investing goals
- Intended use of the annuity
- Existing assets, including investment holdings and life insurance
- Liquidity needs
- Liquid net worth
Soon after determining to trade or exchange a deferred variable annuity, FINRA Rule 2330 requires broker-dealers to send the application package to an appropriate supervisor for review and approval.
Review and Approval
Within seven days of receiving a complete and correct application package for a deferred variable annuity, a registered principal has to review the recommendation. Only if the principal is satisfied that the broker-dealer has a reasonable basis to believe that the transaction would be suitable for the customer will the recommendation be approved.
Brokerage firms have to adopt written supervisory procedures that are reasonably designed to ensure compliance with FINRA Rule 2330. This includes surveillance mechanisms designed to detect high levels of recommendations of deferred variable annuities, as well as procedures for taking corrective actions against employees who recommend these annuities inappropriately.
Whether the application is approved or rejected, the principal’s decision has to be documented and signed.
If the transaction is approved, the application is sent to the issuing insurance company.
Finally, FINRA Rule 2330 requires all brokerage firms to adopt written training policies that are reasonably designed to ensure that their employees comply with the Rule. This includes training for both the broker-dealers who interact with customers and the supervisory principals who review and approve their transactions. Among other things, these training programs must ensure that relevant professionals understand all of the important features of deferred variable annuities.
Frequently Asked Questions that Oberheiden P.C. Gets About Its Legal Services and FINRA Rule 2330
Does FINRA Focus on Rule 2330 Enforcement?
There are strong signs that FINRA is more diligent about enforcing Rule 2330 than some of its other regulations. Deferred variable annuities are notoriously complex securities and are the source of a shockingly high number of customer complaints to the agency. Treating this as a sign of abuse and securities misconduct, FINRA has named variable annuity transactions, and exchanges of the security, in particular, as priorities for its investigative and enforcement actions.
Why is a Customer’s Recent Annuity Exchange a Factor in Recommending Another One?
FINRA Rule 2330 mandates that regulated broker-dealers ensure that deferred variable annuity exchanges are suitable for the customer’s needs. According to Rule 2330(b)(1)(B)(iii), one of the factors to consider in making this determination is whether the customer has had another similar exchange in the last 36 months.
The reason for this recent activity being a factor is the high commissions and fees that broker-dealers can often charge on these types of annuities. Exchanging, or switching, deferred variable annuities on a frequent basis is a strong indication of misconduct on behalf of the broker-dealer. In many cases, the benefit to the broker-dealer in the form of fees to be charged vastly outweighs the benefits to the customer made from the switch. This makes the trade unsuitable.
However, FINRA goes further than regulating how often particular securities professionals can recommend switching a deferred variable annuity: It requires broker-dealers to seek out whether the customer switched deferred variable annuities with other traders at the brokerage firm, and even with other brokerage firms. These onerous obligations arguably go beyond the need to protect an investor from a fraudulent broker-dealer.
What Can Oberheiden P.C. Bring to the Table?
Oberheiden P.C. is not like most other law firms. Not only are we a national law firm with offices in nearly every major American city, but we are also one of the only firms that exclusively employs senior-level attorneys. This means no junior associates, paralegals, or legal secretaries will handle your case, strategize about your future, or provide legal advice. Everything that Oberheiden P.C. provides to your case will come from an experienced securities litigation lawyer.
The value of that experience cannot be overstated, particularly when it comes to FINRA matters.
FINRA investigations are unique in that the agency is not a government regulator. While that means the sanctions that it can impose are relegated to your securities certifications and profession, it also means that you have fewer due process rights. Defending against enforcement actions brought by FINRA are complex, and can quickly escalate into more severe enforcement actions if FINRA forwards its findings to the SEC or the Department of Justice.
Why Doesn’t Oberheiden P.C. Call Itself the Best FINRA Defense Firm?
When our clients leave such glowing testimonials about the services that we have provided, there is little more that we can add.
FINRA Compliance and Defense Lawyers at Oberheiden P.C.
FINRA Rule 2330 is a very specific, but also very detailed, rule. It only applies to a small set of securities transactions. However, it regulates those transactions extremely closely to prevent fraudulent purchases and exchanges and to protect investors from broker-dealers who stand to profit from recommending these complicated securities instruments when they are not suitable.
Given the potential for securities professionals to abuse their power when recommending deferred variable annuities, FINRA keeps a very close eye on conduct that could violate FINRA Rule 2330. Even minor transgressions of the Rule can lead to enforcement actions by the agency and stiff sanctions that can imperil your professional future.
The securities litigation lawyers at Oberheiden P.C. strive to legally represent regulated securities professionals across the country. This includes coming into compliance with FINRA Rule 2330 and defending those who have been accused of violating it while buying, selling, or exchanging deferred variable annuities.
Contact us online or call our national law firm at (888) 680-1745.