In a recent blog, we provided an overview and key takeaways of FINRA’s 2022 Examination and Risk Monitoring Program Report. Over the past several years, FINRA has made the sales and supervision of variable annuities a priority. In their new report, the self-regulatory organization adds questions about variable annuity buyout supervision, and compliance technology programs. In this blog, we will take a closer look at FINRA’s expanding focus on variable annuities and how automated data solutions can help your firm remain compliant.

Variable Annuities – Still Under Scrutiny

The report’s section on Variable Annuities: Regulatory Obligations and Related Considerations summarized several noteworthy examination findings regarding variable annuities:

  • Exchanges
  • Insufficient Training
  • Poor and Insufficient Data Quality
  • Issuer Buyouts

The report confirms that both FINRA Rule 2330 and Reg BI apply when a registered person recommends the purchase or exchange of a variable annuity to a retail customer. FINRA states that firms “must implement surveillance procedures to determine if any associated person is effecting deferred variable annuity exchanges at a rate that might suggest conduct inconsistent with FINRA Rule 2330 and any other applicable FINRA rules or the federal securities laws.”

Of particular note is FINRA’s calling attention to “poor and insufficient data quality.” According to FINRA, an effective practice for firms is using automated data acquisition and data analysis systems. FINRA highlighted the following effective practices centered around automated data and compliance technology:

  • Automated Surveillance — Using automated tools, exception reports and surveillance to review variable annuity exchanges; and implementing second-level supervision of supervisory reviews of exchange-related exception reports and account applications.
  • 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.
  • Data Integrity — Engaging with insurance carriers (affiliated and non-affiliated) and third-party data providers (e.g., DTCC and consolidated account report providers) to address inconsistencies in available data, data formats and reporting processes for variable annuities.
  • Data Acquisition and Analysis — Establishing a supervisory system that collects and utilizes key transaction data.
  • Data Analysis — Considering the following data points when conducting a review of an exchange transaction under FINRA Rule 2330 and Reg BI: branch location; customer state of residence; policy riders; policy fees; issuer of exchanged policy; exchanged policy product name; date exchanged policy was purchased; living benefit value, death benefit value or both, that was forfeited; surrender charges incurred; and any additional benefits surrendered with forfeiture.

How Terrapin Can Help Your Firm

Data Aggregation

A key exam finding according to FINRA was “poor and insufficient data quality” on variable annuity transactions. Poor data quality can cause inaccurate reporting, accounting errors, and non-compliance. Data quality suffers when it’s compiled from numerous disparate sources via one-off files and spreadsheets and only gets worse when transferred from one stage to the next. Data aggregation is the foundation upon which all of our solutions are built. Terrapin ingests data from clearing firms, data intermediaries, custodians, and insurance carriers. By compiling multiple sources and automating processes, Terrapin’s data aggregation technology can equip your compliance program with complete and accurate data.

Automated Trade Surveillance 

Terrapin provides automated trade surveillance technology to support your firm’s compliance program. Our trade surveillance solution is designed to detect, document, and help mitigate potential violations of firm policy and FINRA and SEC regulations. Building upon our robust data aggregation technology, our trade surveillance tools automatically generate intelligent “risk alerts,” allowing compliance departments to monitor sales activity efficiently. The trade analysis is displayed on a customizable dashboard and sorted by risk level. The review and case management system provide a mechanism to approve or resolve an exception and note any action taken. In addition to pre-configured alerts, the solution has the ability to add custom alerts covering a broad range of products and issues.

A sampling of variable annuity related risk alerts include:

  • Annuity withdrawals and switches 
  • Financial activity processed outside broker-dealer 
  • Free look period
  • Risk-based trade review
  • Account liquidation report 

Together, our data aggregation and compliance tools will help your firm stand up to the increasing regulatory scrutiny of the sales and supervision of variable annuities. More details on our compliance management solutions can be found here

FINRA Audit Guide