Variable Annuity Suitability: Long Surrender Charge Periods vs. Liquidity Needs
A 72-year-old retired widow has total liquid net worth of $140,000, lives on Social Security, and anticipates needing $40,000 within the next two years for major orthopedic surgery and home healthcare. A representative recommends placing $120,000 into a deferred variable annuity with a 7-year surrender charge schedule. Why does this violate FINRA Rule 2330?
Variable annuities are long-term illiquid vehicles. Recommending an annuity with a 7-year surrender charge to a client who needs liquid cash within 2 years is a severe suitability violation.
Complete Analysis & Legal Rationale
FINRA Rule 2330 specifically requires registered representatives to evaluate customer liquidity needs and investment horizon before recommending deferred variable annuities. Annuities carry multi-year contingent deferred sales charges (surrender charges) that impose penalties (often 7% to 1%) if funds are withdrawn before the surrender period lapses. Recommending that an elderly client commit 85% of her total liquid net worth to an annuity when she has known upcoming medical expenses violates suitability and the Reg BI Care Obligation.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Variable annuities are long-term illiquid vehicles. Recommending an annuity with a 7-year surrender charge to a client who needs liquid cash within 2 years is a severe suitability violation.
Fails to adhere to suitability standards regarding B.
Fails to adhere to suitability standards regarding C.
Fails to adhere to suitability standards regarding D.
Official Standard: FINRA Rule 2330 specifically requires registered representatives to evaluate customer liquidity needs and investment horizon before recommending defer