Securities Regulation and FINRA Rules
Securities Regulation and FINRA Rules
This domain tests the federal securities framework and FINRA conduct rules that apply to variable contracts. The key issue is that variable life and variable annuities are both insurance and securities, so insurance agents who sell them take on registered-representative obligations.
Core rules
- The Securities Act of 1933 requires registration of securities offerings and prospectus delivery; the Securities Exchange Act of 1934 regulates broker-dealers and exchanges; the Investment Company Act of 1940 governs separate accounts as investment companies.
- FINRA rules require registration and qualification of representatives, supervision by a principal, and approval of communications. Rule 2111 requires suitability based on customer profile and reasonable basis; Rule 2090 requires know-your-customer.
- FINRA Rule 2320 specifically addresses variable contracts of an insurance company. Deferred variable annuity sales are subject to additional principal review under Rule 2330, including review before submission and heightened review of exchanges within 36 months.
- Advertising and sales literature must be fair and balanced, not misleading, and must not project performance as guaranteed. Records must be retained under FINRA and securities rules.
- The broker-dealer supervises the registered representative; the insurer supervises the insurance side. Dual supervision is common.
Worked example
A registered representative recommends exchanging an existing deferred variable annuity for a new one within 36 months. Under FINRA Rule 2330, the member firm’s procedures must require principal review of the exchange, including surrender charges, new surrender charges, and whether the exchange is suitable. The representative cannot submit the application without the required review. The fact that the old contract is “out of surrender” does not by itself make the exchange suitable.
Traps
Do not say FINRA registration replaces the state insurance license. Do not treat principal review as optional. Do not assume a prospectus can be omitted because the client already owns an annuity.