Annuities at their most basic level are a simple concept to grasp — but as the old saying goes: the devil is in the details. Each contract has its own unique set of provisions, which complicates the advisor’s task of recommending suitable contracts for a client’s unique situation. As a result, many clients have been sold annuity contracts that do not meet their needs. Over the years, the annuity industry has developed new, more complicated types of contracts (equity indexed annuities, for example) and introduced new benefits that are not easily understood (such as enhanced living and death benefits). Government regulators at the state and federal level have noted this growth and its adverse impact on clients. As a result, they have imposed additional regulations on the sale of annuities.
This chapter explores two regulatory frameworks: Florida’s Best Interest / Suitability Law (F.S. §627.4554, as substantially amended effective January 1, 2024) and FINRA’s rules governing variable annuity sales. These regulations overlap in some respects but may not apply identically to every situation. Ethical advisors will want to follow the general principles of these regulations regardless of whether the strict language of the rules applies to a particular situation.
Regulatory Framework
Before exploring these regulations, a brief review of the regulatory framework and jurisdictions governing annuities is in order.
Fixed annuities (including fixed indexed annuities) fall under the purview of state insurance authorities. Variable contracts fall under both state and federal jurisdictions — state insurance commissioners regulate the variable contract itself as an insurance product; the SEC claims jurisdiction over the separate subaccounts within the contract as an investment product. The SEC, in turn, delegates oversight of the sale of variable annuities to FINRA (Financial Industry Regulatory Authority). As a result:
- State laws govern the sale of all annuities (fixed, indexed, and variable)
- FINRA governs the sale of variable annuities in addition to state regulation
One of the federal requirements imposed on separate investment accounts is that they be registered under the Securities Act of 1933 and the Investment Company Act of 1940 — the same requirement that applies to mutual funds. Insurance products such as fixed annuities need not register with the SEC. In the parlance of federal regulations, fixed annuities are referred to as “nonregistered” securities — which does not mean they are unregulated. Fixed annuity contracts are filed with state regulators, so the federal use of “nonregistered” can be misleading.
Fixed Indexed Annuities — Settled Under State Regulation
For many years, the SEC proposed treating equity indexed annuities (EIAs) as variable contracts and bringing them under federal jurisdiction. That question has now been settled by federal law. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), Section 989J, explicitly confirmed the exemption of fixed indexed annuities from the Securities Act of 1933 and affirmed state regulatory authority — provided that states adopt regulations that substantially meet or exceed the NAIC’s Suitability in Annuity Transactions Model Regulation (#275). Florida’s adoption of the 2020 NAIC Best Interest standard (effective January 1, 2024) satisfies this federal requirement. Fixed indexed annuities therefore remain under state insurance regulation and are treated throughout this course as fixed annuities.
Florida’s Annuity Best Interest & Suitability Law
Historical Background
Current Law: Best Interest Standard (Effective January 1, 2024)
Florida substantially amended F.S. §627.4554 effective January 1, 2024, adopting the NAIC’s 2020 Model #275 Best Interest standard. The purpose of the current law is twofold:
- To require agents to act in the best interest of the consumer when making a recommendation of an annuity
- To require insurers to establish and maintain a supervision system to ensure that the insurance needs and financial objectives of consumers are effectively addressed at the time of the transaction
Scope: The current law applies to any sale or recommendation of an annuity — to consumers of any age, not just seniors. This is a significant expansion from the prior age-65+ framework.
Definition of “annuity”: An insurance product under state law which is individually solicited, whether classified as an individual or group annuity. This includes fixed, indexed, and variable contracts.
The Four Obligations
An agent has acted in the best interest of the consumer if the agent has satisfied the following four obligations:
1. Care — Exercise reasonable diligence, care, and skill to know the consumer’s financial situation, insurance needs, and financial objectives; understand the available recommendation options; have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product; and communicate the reason or reasons for the recommendation. This includes making reasonable efforts to obtain Consumer Profile Information from the consumer before the recommendation.
2. Disclosure — Disclose to the consumer the terms of the agent’s relationship and role in the transaction, including whether the agent is licensed to sell a particular product, the number of insurers the agent is authorized to sell for, and the sources of cash and non-cash compensation. Upon consumer request, the agent must disclose a reasonable estimate of the amount of cash compensation to be received. Prior to or at the time of the sale, the agent must have a reasonable basis to believe the consumer has been informed of key annuity features including: potential surrender period and surrender charges; potential tax penalties for early withdrawal; mortality and expense fees; investment advisory fees; any annual fees; potential charges for riders or other options; limitations on interest returns; potential changes in non-guaranteed elements; and market risk.
3. Conflict of Interest — Identify and either avoid, or reasonably manage and disclose, material conflicts of interest — meaning financial interests that could affect the objectivity of the recommendation.
4. Documentation — Record the basis for any recommendation in writing. If a consumer refuses to provide profile information, obtain a consumer-signed statement documenting the refusal and disclosing the potential consequences of not providing the required information.
Safe Harbors — When Agent Obligation Does Not Apply
An agent does not have a Best Interest obligation related to an annuity transaction if:
- No recommendation was made (e.g., consumer-initiated transactions)
- A recommendation was based on materially inaccurate information provided by the consumer
- A consumer refuses to provide relevant Consumer Profile Information and the transaction is not recommended
- A consumer decides to enter into an annuity transaction that is not based on the agent’s recommendation — in which case the agent must obtain a consumer-signed statement (Appendix C form, see below)
Consumer Profile Information
Before recommending an annuity, the agent must make reasonable efforts to obtain the following Consumer Profile Information. These 14 items are specified in F.S. §627.4554:
- Age
- Annual income
- Financial situation and needs, including debts and other obligations
- Financial experience
- Insurance needs
- Financial objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets or financial products, including investment, annuity, and insurance holdings
- Liquidity needs
- Liquid net worth
- Risk tolerance, including willingness to accept non-guaranteed elements in the annuity
- Financial resources used to fund the annuity
- Tax status
No single factor may be considered in isolation — the recommendation must be evaluated in light of the consumer’s complete profile.
Required Disclosure Forms
Florida Administrative Code Rule 69B-162.011 specifies three official forms required under F.S. §627.4554, all updated effective May 2024 and available from the Office of Insurance Regulation at floir.com/life-health/annuities:
| Form | Form Number | When Required |
|---|---|---|
| Appendix A — Insurance Agent (Producer) Disclosure for Annuities | DFS-H1-1990 | Before or at the time of any recommended annuity purchase or exchange. Discloses the agent’s role, insurer relationships, and compensation sources. |
| Appendix B — Consumer Refusal to Provide Information | DFS-H1-1991 | When a consumer refuses to provide required Consumer Profile Information. Must be signed by the consumer before execution of the transaction. |
| Appendix C — Consumer Decision to Purchase Not Based on a Recommendation | DFS-H1-1992 | When a consumer initiates a purchase or exchange without the agent’s recommendation. Acknowledges the transaction is not agent-recommended. |
The agent must use form DFS-H1-1980 (Annuity Suitability Questionnaire) to collect Consumer Profile Information before executing any purchase or exchange. (Broker-dealers and registered representatives subject to FINRA oversight may use an alternative suitability analysis compliant with applicable SEC and FINRA rules.)
Replacement & Exchange Disclosures
When recommending a transaction to replace or exchange an annuity, the agent must also provide a written comparison of the existing contract and the proposed contract using form DFS-H1-1981 (Disclosure and Comparison of Annuity Contracts). This form compares:
- The benefits, terms, and limitations between the annuity contracts
- Any fees and charges between the annuity contracts
The replacement form must also contain a statement by the agent describing the basis for recommending the exchange, including the overall advantages and disadvantages to the consumer if the recommendation is followed.
The agent must forward a copy of all completed forms to the issuing company within 10 days. A copy must be given to the client no later than the time the contract documents are delivered.
Insurer Supervision Obligations
A major addition in the 2024 Best Interest framework is the explicit requirement that insurers establish and maintain a supervision system. F.S. §627.4554 now requires insurers to:
- Maintain reasonable procedures to inform agents of the Best Interest requirements and incorporate those requirements into agent training manuals
- Establish standards for agent product training and maintain procedures to ensure compliance with training requirements
- Provide product-specific training and materials that explain all material features of the insurer’s annuity products to agents
- Establish procedures for the review of each recommendation before issuance of an annuity to ensure a reasonable basis exists to believe the recommended annuity effectively addresses the consumer’s needs
- Maintain reasonable procedures to detect and address recommendations that are not in consumers’ best interests
- Identify and eliminate sales contests, sales quotas, bonuses, and noncash compensation based on the sale of specific annuities within a limited period of time
- Annually provide a written report to senior managers (including the manager responsible for audit functions) detailing a review with appropriate testing of the supervision system’s effectiveness, exceptions found, and corrective action taken or recommended
An insurer may not issue a recommended annuity unless there is a reasonable basis to believe the annuity would effectively address the particular consumer’s financial situation, insurance needs, and financial objectives based on the consumer’s profile information.
FINRA Variable Annuity Rules
Variable annuity sales are subject to FINRA oversight in addition to Florida state law. The two key FINRA rules are:
FINRA Rule 2330 — Deferred Variable Annuity Sales
FINRA Rule 2330 establishes sales practice standards for recommended purchases and exchanges of deferred variable annuities. The rule specifically covers the suitability of a deferred annuity exchange for a particular customer, considering among other factors:
- Whether the customer would incur a surrender charge
- Whether the customer would be subject to a new surrender period
- Whether the customer would lose existing benefits
- Whether the customer would be subject to increased fees or charges
- Whether the customer has had another exchange within the preceding 36 months
Rule 2330 also imposes a principal review and approval requirement — no variable annuity application may be accepted until a registered principal has reviewed and approved the transaction based on a determination that it is suitable. Firms must maintain written supervisory procedures for this review process.
SEC Regulation Best Interest (Reg BI)
SEC Regulation Best Interest, effective June 30, 2020, requires broker-dealers and their associated persons to act in the best interest of retail customers when making a securities recommendation — including variable annuity recommendations. Reg BI aligns with Florida’s Best Interest standard and requires broker-dealers to satisfy four component obligations: care, disclosure, conflict of interest, and compliance.
Scope: State vs. FINRA
Florida’s Best Interest law applies to the sale of all annuities (fixed, indexed, and variable) by licensed insurance agents. FINRA’s rules apply specifically to variable annuity sales by registered representatives and broker-dealers. Where both sets of rules apply, the agent/registered representative must comply with both. The more stringent requirement governs.