July 1, 2011

From FINRA Case, a Cautionary Tale on Immediate Annuities—Compliance Watch

A FINRA arbitration panel recently decided in favor of a broker against his former BD in a dispute over a U4 involving ads for a fixed annuity

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A FINRA arbitration panel recently decided in favor of a broker against his former broker-dealer in a dispute over a U4 involving an examination over advertisements for a fixed annuity product.

The decision not only resulted in a settlement for compensatory damages and legal fees, but also $575,000 in punitive damages, double the settlement amount, sending a message that alleged wrongful termination and defamation in FINRA BrokerCheck forms will not be tolerated.

The arbitration panel’s decision was a “serious signal” to the BD that it had “screwed up big-time,” says Alan Wolper of Locke LordBissell & Liddel in Chicago, the lawyer representing the broker, Scott Olson of Melbourne, Fla.

Despite Olson’s victory in the arbitration, however, he may still be facing an enforcement action from FINRA.

The B/D, World Equity Group Inc. (WEG), also had to pay legal fees totaling almost $283,000, plus FINRA filing fees. Compensatory damages awarded were $285,000.

The conflict between World Equity Group and Olson was over the advertising of insurance products, not securities, but since Olson is a registered rep, FINRA has jurisdiction over all communications to the public.

The arbitration panel found no violations of investment-related statutes, it stated.

The 2009 BrokerCheck U4 document prepared by WEG and disputed successfully alleged that Olson disregarded FINRA advertising rules and enforcement action protocol and attempted to use WEG to facilitate “ulterior agenda vis-a-vis FINRA.”

Olson alleged defamation; expungement; false light invasion of privacy; breach of contract; and tortious interference with prospective economic advantage and existing business relationships. The “actionable items” were allegations that WEG breached its employment contract, wrongfully terminated him just before Thanksgiving 2009, and maliciously defamed him on his public form. He had trouble finding a job after being terminated.

FINRA’s arbitration panel agreed WEG’s allegations were untrue and that WEG had approved every one of about 60 ads, Olson told AdvisorOne. WEG’s compliance officer did not return a phone call from AdvisorOne requesting comment.

Earlier this year, FINRA’s enforcement arm sent Olson a Wells notice—a letter informing him that an enforcement action may be taken—according to Wolper, who adds that he hasn’t heard from FINRA on whether it is proceeding with a formal enforcement action.

The U4 also stated the product type in question is a fixed annuity, an insurance product, not a security. This product, says Wolper, is a single premium immediate annuity (SPIA). Olson advertised the guaranteed income for life feature, through a life insurance product bought with the proceeds of liquidation of the IRA. Thus, the advertising language mimicked thousands of similar insurance agent advertisements for similar annuities and life insurance products, according to Wolper and Olson.

The SPIA “can really increase the death benefit and remove taxes,” Wolper notes. “It is not an exotic product, it is simple and clean and effective for the right person.” Olson contends there is nothing misleading in the fixed annuity/life insurance product’s guarantees.

Olson, who has been in the business for 34 years, says he doesn’t like indexed annuities and acts as an expert witness in cases involving their misleading sales and suitability issues and speaks widely on financial planning and estate topics.

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