Variable Contract Suitability

FINRA Rule 2330 establishes specific suitability requirements for variable annuity recommendations. Understanding when variable contracts are appropriate—and when they are NOT—is essential for the Series 6 exam and for protecting investors.

FINRA Rule 2330 Overview

FINRA Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities) requires:

1. Reasonable belief that the customer has been informed of product features
2. Reasonable basis to believe the customer would benefit from the product
3. Principal approval before transmitting applications
4. Surveillance procedures to detect problematic patterns

Scope: Rule 2330 applies to recommended purchases AND exchanges of deferred variable annuities.

Required Customer Information

Before recommending a variable annuity, representatives must make reasonable efforts to obtain:

Key Product Features to Disclose

Customers must be informed of:

• Surrender charges and schedule
• Tax penalties for early withdrawal (10% before 59½)
• Fees and expenses (M&E, admin, subaccount, riders)
• Market risk to principal
• Mortality risk and insurance features
• Living and death benefit features

When Variable Annuities ARE Suitable

Variable annuities may be suitable for investors who:

Ideal Variable Annuity Candidate

A 55-year-old investor who has maximized their 401(k) and IRA contributions, has a 15+ year time horizon before needing income, can tolerate market risk, and wants additional tax-deferred growth with lifetime income options.

When Variable Annuities Are NOT Suitable

Red Flags for Unsuitable Sales

Variable Annuity in an IRA - Usually Unsuitable

Key Point: Placing a variable annuity inside an IRA or 401(k) is generally unsuitable because:

• The IRA already provides tax deferral
• Adding another layer of fees provides no tax benefit
• May be appropriate ONLY if specific insurance features are needed

Principal Review Requirements

FINRA Rule 2330 requires registered principal approval:

• Must occur before application is sent to insurance company
• No later than 7 business days after OSJ receives complete application
• Principal must determine reasonable basis for suitability
• Must document approval decision

Exchanges and Replacements

Variable annuity exchanges require heightened scrutiny because:

1. New surrender period begins (losing progress on old contract)
2. Loss of existing benefits (death benefit step-ups, guarantees)
3. New fees may be higher
4. Suitability concerns - was exchange truly in customer's interest?

Exchange Red Flags

1035 Exchange Considerations

When recommending a 1035 exchange, document:

• Why is the new product better for this client?
• What benefits are being surrendered?
• What is the cost comparison?
• Is the exchange in the client's best interest?

Regulation Best Interest (Reg BI)

In addition to Rule 2330, Reg BI requires:

Reg BI Standard: Don't put your financial interests ahead of the customer's interests.

FINRA 2025 Enforcement Focus

According to FINRA's 2025 Annual Regulatory Oversight Report, common violations include:

• Unsuitable exchanges - Recommendations inconsistent with customer goals
• Inadequate supervision - Failing to review exchange patterns
• Insufficient alternatives analysis - Not considering lower-cost options
• Excessive switching - Multiple exchanges in short periods

Suitability Documentation

Best practices for documentation include:

• Customer investment profile (age, income, objectives, etc.)
• Explanation of recommendation rationale
• Comparison of alternatives considered
• Disclosure of fees and surrender charges
• Customer acknowledgment of disclosures
• Principal approval record

Key Exam Points

1. Rule 2330 - Specific requirements for variable annuity suitability
2. Principal approval required - Before sending application to insurer
3. Exchanges require extra scrutiny - New surrender period, lost benefits
4. VA in IRA usually unsuitable - Tax deferral already exists
5. Age matters - Elderly clients may not benefit
6. Document everything - Rationale, disclosures, approvals
7. Reg BI applies - Best interest standard for retail customers