In September 2007, the SEC approved Rule 2821, which in turn was adopted by FINRA. This was due to the perception of “numerous instances of questionable sales practices” and what it determined to be inadequate supervision and training procedures regarding variable annuities. This rule adds new requirements that deal with suitability, principal review & approval, supervisory procedures, and training.

The suitability requirements state that the representative must have a “reasonable basis” to believe that the transaction would benefit the customer. Also, the product must be thoroughly explained to the customer and signed documentation must be provided that the customer understands the benefits and risks that may go along with the product. Also, if a 1035 is involved, the representative must disclose if the customer will have to pay a surrender charge, be subject to a new surrender period, any lost benefits, or if there will be any changes to fees. All considerations must be documented and signed by the representative and customer.

Part of Rule 2821 requires a registered principal review for all transactions. This review must occur before the transaction is submitted to the insurance company, and within 7 days of the customer signing the application.

Supervisory procedures must be documented and maintained in order to be in compliance with Rule 2821. This includes specific compliance procedures that ensure that registered representatives are not engaging in excessive switching and establish corrective measures for any inappropriate exchanges.

Training programs must be established for member firms that are designed to ensure that both registered representatives and registered principals understand the variable annuity products they are selling or approving and the special requirements of Rule 2821

Cobia will help your firm determine if they are in compliance with Rule 2821. We will also be able to assist in establishing the policies and procedures needed for your variable annuity sales. Contact us today for a consultation.