Written by The White Law Group• January 5, 2024• 8:16 pm• FINRA SEC Sanctions, Securities Fraud Articles

FINRA Rule 2330 Deferred Variable Annuities

FINRA Rule 2330 Members’ Responsibilities Regarding Deferred Variable Annuities

FINRA, or the Financial Industry Regulatory Authority, is the self-regulator that supervises brokerage firms and enforcing rules associated with securities trading. FINRA has certain rules in place to protect investors, such as FINRA Rule 2330.

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FINRA Rule 2330 Members’ Responsibilities Regarding Deferred Variable Annuities is designed to safeguard investors by setting standards for broker-dealers when handling customer accounts. This rule primarily focuses on ensuring that the recommendations made by broker-dealers regarding the purchase, sale, or exchange of deferred variable annuities are suitable for the customer.

FINRA Rule 2330 outlines that brokers must have a reasonable basis for believing that the recommended transaction or investment strategy is suitable for the customer based on factors such as the customer’s investment objectives, risk tolerance, financial situation, and other relevant information.

By enforcing these suitability requirements, FINRA Rule 2330 aims to protect investors from unsuitable investment recommendations and strategies related to deferred variable annuities.

If a broker-dealer fails to comply with this rule and provides unsuitable recommendations, investors can seek recourse through FINRA arbitration to potentially recover losses incurred due to such unsuitable recommendations.

What are Deferred Variable Annuities?

Deferred variable annuities are financial products offered by insurance companies as a long-term investment vehicle. They are essentially contracts between an individual and an insurance company.

Here’s how they generally work:

Deferred Phase: During the accumulation phase, you invest money into the annuity. These funds can be allocated among various subaccounts, which are similar to mutual funds and can consist of stocks, bonds, or other investments. The value of your annuity can fluctuate based on the performance of these subaccounts.

Tax-Deferred Growth: One of the primary advantages of a deferred variable annuity is the tax-deferred growth. Any earnings within the annuity aren’t taxed until you start receiving payouts or withdraw money. This allows your investment to potentially grow faster than if it were subject to immediate taxation.

Annuity Payout Phase: After a certain period, usually years down the line, you can start receiving regular payouts, either as a lump sum or as periodic payments. The annuity can provide a stream of income in retirement, and the way you receive the payouts can be customized based on your preferences.

However, there are several important considerations and potential drawbacks to deferred variable annuities:

Fees and Expenses: Variable annuities often come with various fees, including mortality and expense fees, administrative fees, and fees associated with the underlying investments. These fees can eat into the overall returns of the investment.

Market Risk: Since the value of your annuity is tied to the performance of the underlying investments, there’s a risk of loss if those investments perform poorly.

Surrender Charges: Annuities typically have surrender periods during which you may face charges if you withdraw more than a certain amount.

Complexity: Variable annuities can be complex investment products, and understanding all the terms, fees, and features can be challenging.

Due to their complexity and potential fees, variable annuities might not be suitable for everyone. They are often considered as part of a retirement strategy for individuals who have already maxed out other tax-advantaged retirement accounts like 401(k)s or IRAs and are looking for additional tax-deferred growth potential.

Suitability Rules FINRA Rule 2330 and FINRA Rule 2111

FINRA’s suitability rule, Rule 2111, also applies to the sale of variable annuities, just as it does to other investment products. This rule requires brokers to have a reasonable basis to believe that any recommended transaction or investment strategy involving a variable annuity is suitable for the customer.

Under FINRA Rule 2111, brokers are obligated to consider various factors about the customer, such as their:

Investment Objectives: Including factors like long-term goals, risk tolerance, and financial situation.
Risk Tolerance: Assessing the level of risk the customer is willing and able to take on with their investments.
Financial Situation: Considering the customer’s income, assets, debts, and overall financial standing.
Other Investments: Evaluating how the recommended variable annuity fits within the customer’s overall portfolio.

Brokers must gather this information and make recommendations that align with the client’s needs and circumstances. They should also disclose the risks associated with variable annuities and any fees or expenses involved.

Failure to abide by these suitability requirements may result in disciplinary actions from FINRA. Firms that fail to perform adequate due diligence, or that make unsuitable recommendations, can be held responsible for losses in a FINRA arbitration claim.

Securities Fraud Attorneys

Victims of securities fraud can pursue restitution through FINRA arbitration by engaging a securities fraud attorney and filing a claim detailing the fraudulent activities, the amount lost, and providing supporting evidence.

Once filed, FINRA appoints an arbitrator to review the case, determine if the investor deserves restitution, and if ruled in favor, issue an award for damages. This award aids in seeking compensation from the individual or entity responsible for the fraud.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases.

Our firm represents investors in all types of securities related claims, including claims involving stock fraud, broker misrepresentation, churning, unsuitable investments, selling away, and unauthorized trading, among many others.

With over 30 years of securities law experience, The White Law Group has the expertise to help investors defrauded in securities and investment fraud attempt to recover their investment losses.