Commentary February 09, 2022 at 07:44 AM Share & Print
What You Need to Know
- FINRA says the new batch of exam guidance simply interprets existing requirements.
- The guidance reflects findings in a 2019 FINRA exam findings report and a 2021 exam standards update.
- The self-regulatory organization says one effective practice may be to use automated data acquisition and data analysis systems.
The Financial Industry Regulatory Authority says the variable annuity issuers and distributors it oversees should be prepared for new exam questions about use of automated transaction tracking tools.
Many life insurers have been shifting toward the sale of life insurance and annuity products with no guarantees, or only limited guarantees, because of concerns about low interest rates, investment market volatility and tough new long-term insurance and annuity liability accounting rules.
Last year, FINRA emphasized that it wanted to hear about the procedures member firms use to handle variable annuity buyout efforts.
This year, the Washington-based organization says, it’s adding a question about variable annuity buyout supervision, and adding general questions about compliance technology programs.
FINRA officials talk about the questions that might show up on its variable annuity firm exams in a section in a new report on its examination and risk monitoring priorities for 2022.
Officials also talk in the report about many other oversight priorities. For a general report overview, see 5 Hot Topics for FINRA Exams in 2022.
Officials note, as they do every year, that the priorities report reflects existing rules and interpretations and, from FINRA’s perspective, does not create new legal requirements, regulatory requirements or interpretations of requirements.
FINRA has jurisdiction over companies involved with variable annuities because the federal government classifies variable annuities and variable life insurance policies as securities.
Officials note that the variable annuities exam priorities update reflects the new Regulation Best Interest rules as well as the older annuity suitability rules.
Best interest rules are supposed to ensure that annuity sellers sell only products that are good for the customers and identify and disclose any potential conflicts of interest.
Suitability rules are supposed to ensure that annuity products offered and sold to customers suit those customers’ needs.
State insurance commissioners, the regulators who oversee non-variable annuities, operate under separate rules but may choose to apply FINRA standards, or locally developed standards reflecting FINRA rules, in their jurisdictions.
The New Exam Questions
FINRA has revised many of its variable annuity and variable annuity buyout questions.
It also has added this buyout question: “What is your firm’s process to supervise registered representatives who advise their clients’ decisions whether or not to accept a buyout offer?”
FINRA says its examiners could issue the following exam finding:
Poor and Insufficient Data Quality – Not collecting and retaining key information on variable annuity transactions, particularly in connection with exchange transactions; relying on processes for data collection and retention in situations where the volume of variable annuity transactions renders these processes ineffective; and failing to address inconsistencies in available data for variable annuities, as well as data formats and reporting processes.
The listing list of “effective practices” for firms with variable annuity operations now includes a compliance tech item:
Automated Data Supervision — Creating automated solutions to synthesize variable annuity data (including general product information, share class, riders and exchange-based activity) in situations warranted by the volume of variable annuity transactions.”
The list of effective practices also includes new data acquisition and data analysis items.
A firm may want to establish a supervisory system that collects key transaction data, such as the transaction date, the sales representative’s name and the customer’s name, FINRA says.
FINRA suggests that a firm should consider factors such as policy riders, policy fees and surrender charges when reviewing annuity exchange transactions.