On November 17, 2010, the SEC approved the Financial Industry Regulatory Authority’s (“FINRA”) proposal adopting rules governing Know Your Customer (FINRA Rule 2090) and Suitability (FINRA Rule 2111). FINRA issued Regulatory Notice 11-02 in January to announce SEC approval and describe the new rules.
What does it mean for insurers? It means that insurers offering annuity products need to review yet another recently amended suitability requirement. In March 2010, the NAIC amended its annuity suitability model regulation, Model Rule 275 (Model), that now requires insurance companies ensure that all annuity transactions are appropriate for customers. Under that Model, insurers must establish a system to supervise recommendations made by sellers of annuities and to make sure that suitability standards are consistent with the Model. Currently, over 40 states have adopted the earlier version of the NAIC regulation. Adoption of the current version by states has begun. Recently, Rhode Island, Iowa, Colorado, New York, Ohio, Oregon and the District of Columbia adopted the Model.
The new FINRA rules, a combination of the prior NYSE Rule 405 and NASD Rule 2310, extend the suitability obligations to include investment strategy; create a suitability obligation where a member makes an explicit recommendation; recognize three suitability obligations (reasonable basis, customer specific, and quantitative). The October 7, 2011 effective date for the new FINRA rule should provide insurers with ample time for compliance.
