RAA Regulatory Compliance & Ethical Practices 2 — Questions and Answers
Question 1: Under FINRA Rule 2330, a principal must review and approve a deferred variable annuity application within how many business days of the customer's signed application?
- 3 business days
- 5 business days
- 7 business days (Correct answer)
- 10 business days
Correct answer: 7 business days
FINRA Rule 2330 requires a registered principal to review and approve or reject a deferred variable annuity application within 7 business days of receiving the customer's signed application.
Question 2: A client wants to do a 1035 exchange from an existing annuity to a new one. Which ethical concern must the advisor FIRST address?
- Whether the new annuity has a lower premium
- Whether the exchange is in the client's best interest given surrender charges and new surrender periods (Correct answer)
- Whether the insurer is rated A or higher
- Whether the client qualifies for a bonus annuity
Correct answer: Whether the exchange is in the client's best interest given surrender charges and new surrender periods
Before recommending a 1035 exchange, the advisor must determine whether the exchange genuinely benefits the client, factoring in existing surrender charges, new surrender periods, and any loss of benefits.
Question 3: Which federal law primarily governs the anti-money laundering (AML) obligations of insurance companies selling annuities?
- Gramm-Leach-Bliley Act
- Bank Secrecy Act (Correct answer)
- Securities Exchange Act of 1934
- Investment Advisers Act of 1940
Correct answer: Bank Secrecy Act
The Bank Secrecy Act (BSA) requires insurance companies to establish AML programs and file Suspicious Activity Reports (SARs) for potentially illicit transactions involving annuities.
Question 4: An annuity advisor discovers a client's existing annuity has no surrender charges remaining. The advisor recommends switching to a new annuity with a 10-year surrender period to earn a higher commission. This is an example of:
- Suitable replacement
- Twisting (Correct answer)
- Rebating
- Misrepresentation
Correct answer: Twisting
Twisting is the unethical and often illegal practice of inducing a client to replace an existing insurance or annuity contract primarily for the agent's financial gain rather than the client's benefit.
Question 5: Under the NAIC Suitability in Annuity Transactions Model Regulation, which of the following is NOT one of the required suitability factors an advisor must consider?
- Financial situation and needs
- Tax status
- The insurer's current stock price (Correct answer)
- Investment objectives
Correct answer: The insurer's current stock price
The NAIC model regulation requires consideration of financial situation, tax status, investment objectives, risk tolerance, and time horizon — not the insurer's stock price.
Question 6: A state insurance department conducts a market conduct examination of an annuity producer. Which of the following would most likely trigger a compliance violation finding?
- Using NAIC-approved disclosure forms
- Failing to provide a free-look notice (Correct answer)
- Recommending a fixed indexed annuity to a 55-year-old with a 15-year horizon
- Collecting a signed acknowledgment of all disclosures
Correct answer: Failing to provide a free-look notice
Failure to provide the required free-look notice — which allows clients to return the annuity contract within a specified period — is a clear and commonly cited market conduct violation.
Question 7: When an advisor receives a gift from an annuity product wholesaler, what is the primary ethical concern under FINRA gift rules?
- Whether the gift is tax deductible for the wholesaler
- Whether the gift could improperly influence the advisor's product recommendations (Correct answer)
- Whether the gift was disclosed to the state insurance department
- Whether the gift was received before or after a sale
Correct answer: Whether the gift could improperly influence the advisor's product recommendations
FINRA Rule 3220 limits gifts to $100 per year per person from anyone connected to a securities transaction to prevent gifts from improperly influencing an advisor's product recommendations.
RAA Regulatory Compliance & Ethical Practices 2
Under FINRA Rule 2330, a principal must review and approve a deferred variable annuity application within how many business days of the customer's signed application?