Variable Annuity Exchanges and Reg BI: When a Higher Rider Credit Leaves Investors Worse Off

Variable Annuity Exchanges and Reg BI: When a Higher Rider Credit Leaves Investors Worse Off

Variable annuities are often sold as a way to combine investment growth with retirement income and insurance protection. An exchange into a newer contract may sound attractive when a financial advisor points to a higher guaranteed credit or a larger withdrawal percentage. But those numbers can obscure what the investor is giving up—and whether the advertised benefit will actually help that investor.

A FINRA complaint filed in October 2026, against Gerald James O’Halloran, Francisco B. Almada, and Union Capital Company illustrates these concerns. FINRA alleges that eight retail customers incurred approximately $144,000 in surrender charges and reductions in death benefits totaling $173,365 after O’Halloran recommended variable annuity exchanges between May 2023 and May 2024. The exchanges generated approximately $180,000 in commissions, more than $162,000 of which went to O’Halloran.

The complaint contains allegations, not adjudicated findings. It nevertheless provides a useful examination of how annuity riders work, why exchanges create conflicts of interest, and what Regulation Best Interest and FINRA’s annuity rules require.

What is a Variable Annuity?

A variable annuity is an insurance contract that also involves securities investments. The investor contributes money and allocates it among available investment options, generally through subaccounts investing in underlying funds. The contract’s value fluctuates with investment performance, fees, and withdrawals. The investor can lose money.

These products generally provide tax-deferred growth and may offer death benefits and income options. They are designed for long-term goals. Their costs can include mortality and expense charges, administrative fees, underlying fund expenses, and charges for optional benefits. Early withdrawals or an exchange may trigger surrender charges.

Optional benefits are commonly called riders. A lifetime withdrawal benefit rider, for example, may permit specified annual withdrawals for life, even after investment performance, fees, and withdrawals have exhausted the account’s value. That protection can serve an important retirement need. Its usefulness depends on the actual contract terms and the investor’s circumstances.

The Rider's Benefir Base Is not the Investor's Cash Value.

Understanding the distinction between contract value and benefit base is essential to evaluating the exchanges alleged here.

Contract value represents the value of the investments held within the annuity, after applicable fees and withdrawals. The amount available upon surrender may be lower because of surrender charges. A benefit base is a separate reference amount used to calculate a rider’s permitted withdrawals. It generally is not an amount the investor can cash out. A death benefit is yet another contractual measure determining what beneficiaries receive.

According to the complaint, the existing riders provided an annual benefit-base credit tied to the greater of 5% of the initial contract value or an increase in market value. The replacement riders used 7%. Those credits increased the benefit base, not the contract value. Under both products, the annual credit stopped after ten years or when the customer took any withdrawal, including a required minimum distribution.

Those percentages can easily be misunderstood. A 7% benefit-base credit is not a guaranteed 7% investment return. It does not mean the investor’s cash grows by 7%, and it does not necessarily increase the amount payable to beneficiaries. Nor does comparing 7% with 5% establish that an exchange is beneficial. The replacement’s starting benefit base, withdrawal formula, fees, and conditions all matter.

The fee calculation deserves attention as well. For the riders described in the complaint, the annual fee was calculated as a percentage of the benefit base and deducted from the contract value. The investor therefore paid for the protection with actual account assets, even though the reference amount used to calculate the protection was not itself available as cash.

An exchange adds another cost that must be evaluated separately from the promised benefit-base credit. If an investor pays a $10,000 surrender charge to replace an annuity, that charge reduces the money available to fund the new contract. A higher benefit-base credit does not put that money back into the account. It may increase future withdrawals, but its value depends on whether—and when—the investor will take those withdrawals and whether the additional income justifies the exchange’s costs and lost protections.

FINRA alleges that O’Halloran’s analysis failed to account for this distinction. He treated higher benefit-base credits as making up for surrender charges and reductions in contract values and death benefits, without adequately determining whether customers would receive the additional income those credits might provide.

Some customers intended to leave the money to beneficiaries rather than take income. Others needed immediate withdrawals, which would stop the annual credits. For those customers, the higher credit did not provide the benefit used to justify giving up existing assets and protections.

Why the Higher Credit Did Not Fit These Customers' Objectives.

Several customers allegedly intended to leave the annuity funds to their beneficiaries rather than use them for income. A higher benefit-base credit used to calculate future withdrawals did not serve that objective. Yet the exchanges imposed surrender charges and reduced the death benefits available to their beneficiaries.

Other customers were already taking withdrawals and needed to continue receiving income. Under the replacement contracts, those withdrawals would stop the advertised 7% annual benefit-base credit. FINRA alleges that O’Halloran nevertheless included that credit in projections used to justify the exchanges, overstating the benefits those customers could receive.

This does not mean a lifetime withdrawal rider has no value whenever an investor takes income. Providing income is its purpose. The problem is using a credit that stops upon withdrawal to justify replacing a contract for someone who will immediately withdraw money.

Why Brokers Have an Incentive to Recommend Exchanges

An exchange can produce a new commission even though the investor is moving existing assets rather than contributing new money. That compensation can create a substantial incentive to recommend a replacement.

According to the complaint, Union Capital received an upfront commission equal to 7% of the purchase price for the annuities at issue, and O’Halloran received 90% of that commission. Each replacement generated new compensation while customers paid surrender charges on their existing contracts and began new seven-year surrender periods. The annual fees of the old and new products were approximately equal; the alleged harm was not simply a higher annual expense ratio.

The timing also mattered. FINRA alleges that the prior insurer investigated an earlier customer complaint, identified deficiencies, and terminated its relationships with O’Halloran and Union Capital in February 2023. The exchanges began three months later, even though the insurer’s decision did not require customers to surrender or replace their existing annuities.

The sequence suggests a financial incentive for the replacements: moving customers to another insurer allowed O’Halloran to generate new commissions after losing his relationship with the prior insurer. Customers, meanwhile, incurred surrender charges and gave up existing benefits. But a change in the broker’s business relationships does not establish a customer need for a new annuity. Each exchange still required a determination that its benefits to the customer justified its costs and lost protections.

Commissions do not automatically make an exchange improper. However, they make an independent, customer-specific analysis particularly important because the advisor receives compensation when the exchange occurs and the customer may bear immediate costs for benefits that remain conditional or years away.

The Regulatory Framework for Variable Annuity Exchanges

A recommendation to exchange a variable annuity must satisfy both Regulation Best Interest and FINRA’s specific requirements for deferred variable annuities. Together, these standards require an advisor to understand the products, evaluate the customer’s needs, and determine whether the proposed exchange provides benefits that justify its costs and the loss of existing protections.

Regulation Best Interest, Exchange Act Rule 15l-1, requires brokers to act in a retail customer’s best interest when making a securities recommendation, without placing their own financial or other interests ahead of the customer’s. Its four component obligations—Disclosure, Care, Conflict of Interest, and Compliance—address both the recommendation itself and the firm’s responsibility to manage the incentives and practices surrounding it.

For an annuity exchange, the analysis begins with the Care Obligation. Under Rule 15l-1(a)(2)(ii)(A) and (B), the broker must understand the recommendation’s potential risks, rewards, and costs and have a reasonable basis to believe it is in the particular customer’s best interest. That requires more than identifying a higher credit or withdrawal percentage. The broker must understand how the rider operates, when its credits stop, how its payments may change, and whether those features serve the customer’s intended use of the annuity.

FINRA Rule 2330(b) has its own specific requirements. It requires evaluation of the annuity contract, its initial investment allocations, any riders, and the exchange as a whole. The broker must consider surrender charges, a new surrender period, lost contractual benefits, increased fees, whether the customer would benefit from the replacement’s enhancements. The required determinations must be documented and signed by the recommending representative. These annuity-specific requirements continue to apply alongside Reg BI.

The comparison must also account for reasonably available alternatives. SEC staff guidance on the Care Obligation explains the importance of evaluating alternatives and having a customer-specific basis for recommending a more costly investment. In this setting, keeping the existing annuity is an important alternative to examine. The relevant question is whether replacing the customer’s current contract offers sufficient value after accounting for the surrender charge, lost benefits, and new restrictions.

Neither disclosure nor a customer’s signature resolves that question. A customer may acknowledge a surrender charge without the exchange being in that customer’s best interest. Compensation conflicts also require attention: under Rule 15l-1(a)(2)(iii)(B), the brokerage firm must identify and mitigate conflicts that create incentives for its financial professionals to put their own interests ahead of customers. Simply disclosing that an exchange generates a commission does not satisfy that requirement.

The complaint illustrates how these obligations work together. FINRA alleges that O’Halloran and Union Capital failed to understand and properly evaluate the riders, relied on benefits that did not fit the customers’ needs, and failed to consider reasonably available alternatives. It charges violations of Reg BI’s Care Obligation and general best-interest standard, FINRA Rule 2330(b), and FINRA Rule 2010. The central issue is whether the actual benefits available to each customer justified replacing the existing contract—not whether the new annuity offered a more attractive headline percentage.

What Investors and Financial Advisors Should Consider Before an Exchange

Before replacing an annuity, investors and financial advisors should carefully compare the existing and proposed contracts, including their costs, benefits, risks, and restrictions. The recommendation should reflect the investor’s financial needs and goals and explain why an exchange would better serve those needs than keeping the existing contract.

Investors should ask questions about anything they do not understand. Advisors should provide clear explanations, evaluate the tradeoffs, and address any financial incentives associated with the recommendation.

Investors concerned about an exchange should preserve their contracts, statements, sales materials, and communications so potential recovery claims can be evaluated. Advisors and firms should maintain accurate records showing how they evaluated the products, considered alternatives, and determined that the recommendation served the customer’s best interest.

AMW Law PLLC represents investors in FINRA arbitration involving improper annuity exchanges and other investment disputes. We also advise financial advisors and brokerage firms on regulatory obligations and represent them in FINRA investigations and enforcement proceedings. If you have concerns about an annuity recommendation or need guidance on a regulatory matter, contact our firm to discuss your circumstances and legal options.