FINRA Fines Firms For Not Supervising L-Share Annuity Sales

Insurance   |   Life, Annuity, and Retirement Litigation   |   Life, Annuity, and Retirement Solutions   |   Securities Litigation and Enforcement   |   Securities Transactions and Compliance   |   FINRA Enforcement, Arbitration, and Appeals   |   December 22, 2016

For two years FINRA has made sales and marketing of L-Share variable annuities (VAs) a regulatory and examination priority. Not surprisingly, FINRA in November announced settled actions against eight broker-dealers, alleging failure to supervise sales of L-Share VAs. Without admitting or denying FINRA’s findings, the eight firms agreed to pay a collective total of $6.2 million in fines and more than $6 million to customers who purchased L-Share VAs.

L-Share VAs typically have a shorter surrender charge period (of three to five years) and higher ongoing mortality and expense risk (M&E) charges than a typical B-Share VA. Accordingly, L-Share VAs are generally more suitable for investors with short-term time horizons who want the optionality to be able to surrender the VA sooner than a B-Share VA.

On the other hand, certain VA guaranteed income benefit riders, which FINRA dubbed "long-term income riders," are designed primarily for investors with long-term time horizons. FINRA found "the potentially incompatible time horizons" of L-share VAs with long-term income riders "may present a red flag that the purchase may not be suitable for a customer’s investment objective and time horizon."

Among other things, FINRA determined that the firms did not have and enforce adequate supervisory procedures regarding the sale of multiple-share class VAs, and did not provide adequate training or guidance to registered representatives about the types of customers for whom L-Share VAs would be suitable. Further, FINRA found that five of the firms did not identify or investigate "red flags" of potentially unsuitable sales of L-Share VAs.

FINRA’s focus on L-Share VAs has contributed to some firms’ decisions to cease offering L-share VAs or to ask insurers to redesign VAs to reduce the product’s "mortality and expense risk" charge upon completion of the surrender charge period. In this regard, the FINRA actions exclude L-Share VAs with a "persistency credit" that reduces ongoing fees – to a B-Share VA level – after the VA is held for a period of time, generally seven to 10 years.

©2023 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications


The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.