FIELD UNDERWRITING · 6 MIN READ

Securities Standards: SEC Reg BI and FINRA Rules

Variable annuities and variable life are securities, so producers selling them operate under securities-conduct rules layered on top of insurance law. The modern retail standard is SEC Regulation Best Interest (Reg BI), which took effect June 30, 2020, filling the gap left when a federal appellate court vacated the Department of Labor's 2016 Fiduciary Rule in 2018 for exceeding the agency's authority. Reg BI applies to broker-dealers recommending securities to retail customers and is built — like its NAIC annuity cousin — on four component obligations: Disclosure (deliver Form CRS, the customer relationship summary, at or before the recommendation, plus material facts about fees, services, and conflicts), Care (understand the product, consider reasonably available alternatives, and have a reasonable basis that the recommendation is in this customer's best interest), Conflict of Interest (written policies to identify and mitigate or eliminate conflicts), and Compliance (firm-wide written policies reasonably designed to achieve compliance with the whole rule). Reg BI's default is transactional: no ongoing duty to monitor an account arises unless the firm agrees — expressly or through course of dealing — to monitor, in which case each agreed review is an implicit hold recommendation that must itself satisfy the Care obligation. FINRA rules supply the rest of the conduct architecture. Rule 2090 (Know Your Customer) requires reasonable diligence to know and retain the essential facts about every customer and the authority of persons acting for the customer — a continuous obligation independent of any recommendation. Rule 2111 codifies three suitability obligations: reasonable-basis (suitable for at least some investors), customer-specific (suitable for this investor's profile), and quantitative (a series of transactions must not be excessive in the aggregate); Reg BI superseded it for retail recommendations, but 2111 still governs institutional customers. Rule 2330 adds a variable-annuity gate: a registered principal must review and approve a VA transaction within seven business days after the office of supervisory jurisdiction receives a complete application. Supervision and disclosure rules round it out. Rule 3110 requires a supervisory system; Rule 3120 and its companion require an annual CEO certification that the firm has processes to establish, maintain, review, test, and modify its written supervisory procedures. Registered persons must give prior written notice before outside business activities, obtain prior written employer consent before opening outside brokerage accounts, and route private securities transactions through the firm. Rule 4530 requires firms to report enumerated events — including qualifying written customer complaints alleging theft or misappropriation — within 30 calendar days of when the firm knew or should have known. Forms U4 and U5 carry a representative's registration and termination disclosures.