RAA Regulatory Compliance & Ethical Practices 3 — Questions and Answers
Question 1: Which of the following actions by an annuity producer constitutes 'rebating,' which is prohibited in most states?
- Offering a client a portion of the advisor's commission as an incentive to purchase (Correct answer)
- Explaining surrender charge schedules before the sale
- Recommending a lower-cost annuity over a higher-commission product
- Providing a client with a product illustration
Correct answer: Offering a client a portion of the advisor's commission as an incentive to purchase
Rebating occurs when a producer gives or offers to give a client anything of value — including a share of the commission — as an inducement to purchase an insurance or annuity contract.
Question 2: The SEC's Regulation Best Interest (Reg BI) applies to annuity recommendations when:
- Any annuity is recommended to a retail customer
- A variable annuity is recommended by a broker-dealer to a retail customer (Correct answer)
- A fixed annuity is recommended by an insurance-only producer
- An immediate annuity is recommended for IRA rollover purposes
Correct answer: A variable annuity is recommended by a broker-dealer to a retail customer
Reg BI applies to broker-dealers recommending securities — which includes variable annuities — to retail customers, requiring the recommendation to be in the customer's best interest.
Question 3: A client's annuity application is flagged under an AML Customer Identification Program (CIP). What is the advisor's correct response?
- Proceed with the sale and notify the client that a SAR was filed
- Follow the firm's AML procedures and do NOT tip off the client that a SAR may be filed (Correct answer)
- Refuse to sell any annuity to the client permanently
- Refer the client to a compliance officer without doing anything else
Correct answer: Follow the firm's AML procedures and do NOT tip off the client that a SAR may be filed
AML regulations strictly prohibit 'tipping off' — advisors must follow internal AML procedures and may file a SAR, but they must never alert the client that suspicious activity has been reported.
Question 4: Under the NAIC's Best Interest Standard for annuity transactions, which of the following best describes the 'care' obligation?
- Disclosing all compensation the producer receives from the sale
- Acting with reasonable diligence and care to understand the annuity and the client's profile before recommending it (Correct answer)
- Placing the client's interest above the producer's in all circumstances
- Maintaining records of all client interactions for at least five years
Correct answer: Acting with reasonable diligence and care to understand the annuity and the client's profile before recommending it
The 'care' obligation under the NAIC Best Interest Standard requires producers to exercise reasonable diligence, care, and skill in understanding the product, the client's financial situation, and the suitability of the recommendation.
Question 5: An advisor recommends a fixed indexed annuity to an 82-year-old client with significant liquid assets. Which suitability factor is MOST critical to document?
- The client's health insurance coverage
- The client's liquidity needs relative to the annuity's surrender period (Correct answer)
- The advisor's years of experience with indexed products
- The insurer's AM Best rating
Correct answer: The client's liquidity needs relative to the annuity's surrender period
For elderly clients, documenting that the client has sufficient liquid assets outside the annuity to meet ongoing needs is the most critical suitability factor given long surrender periods.
Question 6: Which regulatory body enforces state insurance laws governing annuity sales, licensing, and market conduct?
- The SEC
- The CFPB
- The state's Department of Insurance (Correct answer)
- FINRA
Correct answer: The state's Department of Insurance
State Departments of Insurance are the primary regulators of fixed and fixed indexed annuity sales, licensing requirements, and market conduct for insurance producers.
Question 7: An advisor uses a product illustration showing a fixed indexed annuity earning 8% annually for the last 20 years to close a sale. Why is this a compliance concern?
- Illustrations must use returns from the last 30 years, not 20
- Cherry-picking historically favorable periods to imply future performance is misleading and violates fair and balanced disclosure requirements (Correct answer)
- Indexed annuity illustrations may only show minimum guaranteed returns
- The 8% figure should be rounded to the nearest whole number
Correct answer: Cherry-picking historically favorable periods to imply future performance is misleading and violates fair and balanced disclosure requirements
Selecting only favorable historical periods to imply future performance misleads clients and violates state insurance laws and NAIC illustration model regulations requiring balanced, non-misleading disclosures.
RAA Regulatory Compliance & Ethical Practices 3
Which of the following actions by an annuity producer constitutes 'rebating,' which is prohibited in most states?