Best-Interest Rules for Annuity Sales: NAIC Model 275 and Reg BI

When someone recommends an annuity, rules decide how much homework they must do first and what they must tell you. Two sets matter most: the NAIC's Suitability in Annuity Transactions Model Regulation, which states adopt for insurance sales, and the SEC's Regulation Best Interest, which applies to broker-dealers recommending securities. Which one applies depends on the product and on who is selling it.

Knowing the outline of these rules helps you grade an offer. You will know what questions the seller should have asked, what paperwork you should have received and where the protections stop.

This guide is general information, not financial, insurance or legal advice. Rules vary by state; your state insurance department can tell you which version applies where you live, and a licensed professional or attorney can advise on your own situation.

Which rules apply to which annuities

FINRA's annuities page explains that while all annuities are regulated by state insurance commissioners, variable annuities and registered index-linked annuities (RILAs) are also regulated at the national level by the SEC and FINRA. The Texas Department of Insurance (TDI) annuities guide adds that an agent selling variable annuities must have a state license and be registered with FINRA.

In practice, a fixed or fixed indexed annuity sale is governed mainly by your state's insurance rules. A variable annuity or RILA sold through a broker-dealer is also covered by federal securities rules, including Regulation Best Interest and, for deferred variable annuities, FINRA Rule 2330.

The NAIC model: from suitability to best interest

The NAIC's best-interest topic page (last updated November 1, 2023) says state insurance regulators have overseen annuity sales for suitability since 2003, using Model #275 as the basis. NAIC members approved revisions in February 2020 clarifying that all recommendations by agents and insurers must be in the consumer's best interest and that agents and carriers may not place their financial interest ahead of the consumer's. The page says most states have enacted the updated version.

Under the 2020 model text, an agent acts in your best interest by meeting four obligations:

• Care. Know your financial situation, insurance needs and objectives; understand the available options after a reasonable inquiry; have a reasonable basis to believe the recommendation effectively addresses your situation over the life of the product; and communicate the basis for the recommendation.
• Disclosure. Before the recommendation or sale, give you a form describing the relationship, what the agent is licensed to sell, which insurers the agent represents and how the agent is paid, plus a reasonable estimate of cash compensation on request.
• Conflict of interest. Identify and avoid, or reasonably manage and disclose, material conflicts of interest.
• Documentation. Make a written record of the recommendation and its basis.

The model also puts duties on insurers. An insurer may not issue a recommended annuity unless there is a reasonable basis to believe it would effectively address the consumer's situation, must maintain a supervision system, and must identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific annuities within a limited period of time. For an exchange or replacement, the agent must weigh surrender charges, a new surrender period, lost benefits, higher fees and any other exchange within the preceding 60 months, under the 2020 model text.

What the NAIC standard does not promise

The model is explicit about its limits, and they are worth knowing:

• It does not create a fiduciary obligation or relationship, only a regulatory obligation.
• The agent must consider products the agent is licensed and authorized to sell, not every alternative on the market.
• It does not mean the annuity with the lowest compensation must be recommended.
• It does not create an ongoing duty to monitor your annuity, although a separate advisory or planning agreement might.
• It does not create a private right to sue for a violation.

The model also has a safe harbor: sales by broker-dealer representatives, investment advisers and certain plan fiduciaries that comply with "comparable standards," such as Regulation Best Interest or the fiduciary duties of investment advisers, satisfy the model's requirements, without limiting the insurance commissioner's power to investigate and enforce.

Regulation Best Interest for broker-dealers

The SEC adopted Regulation Best Interest in 2019. According to the Federal Register release, the rule took effect September 10, 2019, with a compliance date of June 30, 2020. It requires a broker-dealer, when recommending a securities transaction or investment strategy to a retail customer, to act in the customer's best interest at the time of the recommendation without placing its own financial or other interest ahead of the customer's. The SEC's release says this standard cannot be satisfied through disclosure alone.

The rule's current text breaks that duty into disclosure, care, conflict-of-interest and compliance obligations. The care obligation includes having a reasonable basis to believe a recommendation is in the particular customer's best interest based on an investment profile that includes age, other investments, financial situation and needs, tax status, objectives, experience, time horizon, liquidity needs and risk tolerance. Firms must also identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific securities within a limited period of time.

FINRA's extra rule for deferred variable annuities

FINRA Rule 2330, as posted in FINRA's online rulebook (checked October 2026), adds steps for deferred variable annuities. Before recommending a purchase or exchange, the firm needs a reasonable basis to believe the customer has been informed, in general terms, of features such as the surrender period and charge, potential tax penalties, fees, rider charges and market risk; that the customer would benefit from features such as tax-deferred growth, annuitization or a death or living benefit; and that the annuity, its subaccounts and riders are suitable for the customer. For an exchange, Rule 2330 also has the firm consider surrender charges, a new surrender period, lost benefits, higher fees and whether the customer has had another deferred variable annuity exchange within the preceding 36 months. A registered principal must review and decide whether to approve the recommended purchase or exchange no later than seven business days after the firm's supervisory office receives a complete and correct application package.

What this means when you grade an offer

• Expect questions. Both rules depend on your profile. If no one asked about your income, liquidity needs or time horizon, ask why.
• Ask which hat the seller is wearing for this recommendation: insurance agent, broker-dealer representative or investment adviser.
• Read carefully before signing a statement that you refused to give information or that you are buying without a recommendation. Under Model #275, the agent's care obligation does not apply when no recommendation is made, when you refuse to give profile information and the annuity is not recommended, or when you choose a transaction the agent did not recommend, although the insurer's issuance must still be reasonable based on what it knows.
• Report concerns. Your state insurance department handles complaints about insurance agents and insurers. For brokerage accounts and variable annuities, FINRA's BrokerCheck shows registration, and FINRA runs a Securities Helpline for Seniors.

Key takeaways

• All annuities fall under state insurance regulation; variable annuities and RILAs also fall under SEC and FINRA rules.
• The NAIC's 2020 model requires care, disclosure, conflict-of-interest and documentation obligations, and most states have adopted it.
• The NAIC model is not a fiduciary standard and does not require comparing products the seller can't offer.
• Regulation Best Interest has applied to broker-dealer recommendations since its June 30, 2020 compliance date.
• Think twice before signing forms saying you declined to give information or bought without a recommendation.

Sources

• National Association of Insurance Commissioners, Suitability in Annuity Transactions Model Regulation #275 (2020)
• National Association of Insurance Commissioners, Annuity Suitability & Best Interest Standard (last updated November 1, 2023)
• Securities and Exchange Commission, Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 FR 33318 (July 12, 2019)
• eCFR, 17 CFR 240.15l-1, Regulation best interest (current text)
• FINRA, Rule 2330, Members' Responsibilities Regarding Deferred Variable Annuities
• FINRA, Annuities
• Texas Department of Insurance, Annuities guide (last updated October 16, 2023)
• FINRA, Securities Helpline for Seniors