Definition
A broker-dealer is a firm registered with the SEC and a member of FINRA that is authorized to buy and sell securities on behalf of customers or for its own account, and through which registered representatives distribute variable annuities and registered index-linked annuities that are subject to securities-law oversight.
Why it matters
Variable annuities and registered index-linked annuities are securities, and their sale is regulated under federal securities law in addition to state insurance law. The broker-dealer is the entity through which registered representatives are supervised, through which conduct standards including Regulation Best Interest are applied, and through which the securities-law disclosure and suitability apparatus operates for these products.
How it works
A broker-dealer is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization for U.S. broker-dealers. Registered representatives of the broker-dealer hold the appropriate FINRA licenses (typically Series 6 for variable-product-only registration or Series 7 for general securities) and are supervised by the broker-dealer's compliance and supervisory personnel. For variable annuities and registered index-linked annuities — products classified as securities under federal law — the broker-dealer is the distribution channel, and the sale is subject to federal securities-law disclosure requirements, FINRA suitability rules, and SEC Regulation Best Interest (effective June 30, 2020) which imposes a best-interest conduct standard on recommendations to retail customers. Broker-dealers vary in structure and independence — independent broker-dealers operate as platforms for independent registered representatives who own their own practices, wirehouse broker-dealers employ representatives directly as part of a large integrated firm, and insurance-affiliated broker-dealers operate as the securities arm of a direct-writer carrier. Compensation for variable-annuity sales through broker-dealers is typically commission-based, though fee-based advisory annuity share classes distributed through the same broker-dealer channels have grown as a fraction of the market.
In practice
For an individual purchasing a variable annuity or registered index-linked annuity, the sale runs through a broker-dealer regardless of whether the specific registered representative is captive to a single carrier or independent across many. A professional working through the broker-dealer channel is subject to Regulation Best Interest's best-interest standard, its disclosure obligations, and its conflict-of-interest identification and mitigation requirements. The individual should ask which broker-dealer supervises the representative, the compensation structure for the specific recommendation, and how alternatives were considered. For fixed and fixed indexed annuities — regulated primarily as insurance products — the broker-dealer channel is not required, though registered representatives with appropriate insurance licenses may sell these products alongside variable products through the same practice. State best-interest annuity rules, based on the NAIC Suitability in Annuity Transactions Model Regulation, provide a state-law analog to Regulation Best Interest for the fixed side of the market.
In the Longevity Standard Framework
Broker-dealer is supporting vocabulary in the Longevity Standard framework, naming the securities-registered distribution entity through which variable annuities and registered index-linked annuities are placed. The broker-dealer channel is where federal securities-law conduct standards, including Regulation Best Interest, are applied to the recommendation process. The framework's cost-of-income analysis proceeds identically regardless of the distribution channel; the realized value delivered depends on the contract terms and, for variable products, on the subaccount selections and their performance.
Related terms
- Independent distribution
- Direct writer
- Independent marketing organization (IMO)
- Regulation Best Interest
- Suitability standard
- Best interest standard
- Variable annuity
- Registered index-linked annuity