When Annuity Exchanges Go Wrong: FINRA Enforcement Action Highlights Risks of Registered Index-Linked Annuities (RILAs) Recommendations

Registered Index-Linked Annuities (RILAs) have become increasingly popular among financial professionals and insurance professionals, promoting products that offer a blend of market-linked returns and a measure of downside protection. However, their complexity has triggered growing regulatory scrutiny, especially when sold to retail investors. A recent FINRA disciplinary action against AAG Capital, Inc. highlights the importance of proper supervisory systems, regulatory compliance, and investor protection in the sale of these complex annuity products.

In May 2025, FINRA announced a settlement with AAG Capital, Inc., a broker-dealer headquartered in Florida, for failing to establish and maintain written supervisory procedures reasonably designed to achieve compliance with Regulation Best Interest (Reg BI) in connection with RILA recommendations. From February 2021 through April 2023, AAG Capital sold RILAs, including 41 exchange transactions where existing annuities or life insurance policies were surrendered to fund new RILA purchases. See AAG Capital, Inc., FINRA AWC No. 2022073342401 (May 20, 2025).

FINRA’s investigation found that the firm’s written policies and supervisory systems did not adequately address the unique complexities of RILAs, particularly in cases involving the surrender of products that included valuable features such as income and death benefit riders. In nineteen of the forty-one exchanges, customers forfeited benefits or incurred surrender charges. In several instances, customers lost death benefits exceeding $100,000, or income riders that had accumulated value surpassing the contract’s surrender value. Supervisory documentation failed to sufficiently explain why these exchanges were in the customers’ best interest or provide meaningful comparative analysis justifying the change.

As a result, FINRA concluded that AAG Capital had violated Exchange Act Rule 15l-1(a)(1) (Reg BI’s Care and Compliance Obligations), FINRA Rule 3110 (supervision), and FINRA Rule 2010 (just and equitable principles of trade). The firm agreed to a censure, a $100,000 fine, restitution of over $38,000 to affected customers, and an undertaking to remediate its supervisory deficiencies. This disciplinary action serves as a cautionary tale for broker-dealers recommending complex insurance products without proper internal controls and investor-focused review mechanisms in place.

Central to the misconduct in the AAG Capital case were annuity exchanges, which are transactions where an investor surrenders an existing annuity or life insurance policy to purchase a new one. While such exchanges can be suitable under certain circumstances, they often carry risks and require careful evaluation. These transactions may trigger surrender charges, lead the investor to forfeit valuable riders or accumulated benefits, and restart the clock on a new surrender period. Importantly, brokers recommending these exchanges often earn a new commission on the sale of the replacement product, presenting a powerful incentive to recommend an exchange even when it may not be in the client’s best interest.

Under Regulation Best Interest, and previously long-standing suitability principles, an annuity exchange should only be recommended if it puts the investor in a better position or aligns with newly emerged or significantly changed investment objectives. For example, a change in income needs, time horizon, or risk tolerance may justify an exchange. Absent a clear financial or strategic benefit, recommending to a customer to give up long-term guarantees, income riders, or favorable terms in exchange for a new product is not only questionable but may constitute a violation of securities laws and FINRA rules.

The AAG Capital case brings into focus the broader need for understanding what RILAs are and how they differ from other types of annuity products. While RILAs may seem appealing for their balance of growth opportunity and downside protection, their complexity demands a clear explanation, both for compliance professionals and investors considering whether such a product fits their financial profile.

RILAs, or Registered Index-Linked Annuities, are hybrid insurance products that combine characteristics of fixed and variable annuities. Unlike immediate income annuities, which begin making guaranteed payments shortly after investment, or fixed rate annuities, which offer predictable returns over time, RILAs base their returns on the performance of a market index such as the S&P 500. Unlike variable annuities that expose investors directly to the market through subaccount investments, RILAs do not invest in the index itself but credit interest/return based on index performance using specified formulas. This distinction is critical because it determines how returns are calculated and how much risk the investor assumes.

What makes RILAs particularly unique is the way they blend growth potential with partial downside protection. Unlike fixed annuities, which offer complete principal protection and fixed caps on gains, RILAs allow investors to take on more risk in exchange for the possibility of higher returns. This is done through mechanisms such as participation rates, return caps, and downside buffers. Given their structure, complexity, and risk features, RILAs are classified as securities, requiring that the professionals who recommend them be properly licensed and possess specialized training, product knowledge, and a thorough understanding of the regulatory obligations imposed under securities laws such Reg BI.

The core features of a RILA include its strategy term, upside crediting method, and downside protection mechanism. The strategy term is the period over which index performance is measured, typically ranging from one to six years. During this term, the RILA’s performance is determined not by ongoing management but by a fixed set of crediting and protection parameters agreed upon at contract initiation. The upside crediting mechanism allows the investor to benefit from positive index performance through a participation rate, such as earning 80% of the index’s gains, or a cap that limits maximum returns. On the downside, the protection mechanism comes in the form of a buffer or a floor. A buffer absorbs a portion of market losses, for example, the first ten percent, while the investor bears any losses beyond that. A floor sets a maximum loss an investor can experience, but may reduce upside potential more severely in exchange for that protection.

To better illustrate, consider an investor who enters into a RILA contract with a three-year term, a 10% downside buffer, and an 80% participation rate in index gains, capped at 12%. If the index rises by 15% over the period, the investor earns 12%, the maximum permitted by the cap. If the index falls by 8%, the loss is absorbed entirely by the buffer, meaning the investor does not lose any principal. However, if the index declines by 20%, the investor incurs a 10% loss, the amount exceeding the 10% buffer. This structured risk-reward tradeoff makes RILAs appealing to some investors, but their complexity can be difficult to grasp, especially for unsophisticated investors and even some financial professionals, particularly when exchanging products that offer guaranteed income or death benefits.

Because of this complexity, evaluating whether a RILA recommendation truly serves a client’s best interest requires more than a surface-level comparison of products. The best interest evaluation must account not only for the investor’s risk tolerance and time horizon, but also for the specific features being surrendered in the exchange. The AAG Capital case highlights the dangers of a cookie-cutter supervisory process that fails to scrutinize individual customer profiles and transaction-specific tradeoffs. It also demonstrates FINRA’s willingness to enforce Reg BI not only at the level of the individual registered representative, but at the firm-wide supervisory level.

At AMW Law PLLC, we represent investors who have suffered losses due to inappropriate or misleading annuity recommendations, including those involving RILAs. We also provide regulatory defense counsel to financial professionals and broker-dealers facing investigations or enforcement actions related to Reg BI, annuity sales practices, and supervisory failures. With experience on both sides of FINRA enforcement proceedings, as former regulatory counsel, defense attorney, and arbitrator, we bring a comprehensive perspective to every case. We understand how to build a case from the facts and navigate the complexities of regulatory investigations, securities arbitrations, and compliance defense.

If you believe you were improperly advised to surrender an annuity or insurance product in favor of a RILA, or if you are a broker under scrutiny for your sales practices, contact us for a confidential consultation. We offer personalized legal advice and representation tailored to your unique circumstances, and we are committed to ensuring that investors are protected and industry professionals are treated fairly under the law.