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Regulation and Compliance > Federal Regulation > FINRA

State Farm Ends Ties To 3 After FINRA Action

By Trevor Thomas

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State Farm Insurance Companies says it has terminated the registration of 3 of its principals after the Financial Industry Regulatory Authority disciplined 16 of its producers for allegedly cheating on tests for financial advisors.

FINRA, Washington, took the action against the 3 principals plus 13 securities brokers of State Farm, Bloomington, Ill., for misconduct involving FINRA’s continuing education requirements for registered representatives.

Although none of the registered representatives either admitted or denied the charges, they consented to the entry of findings, FINRA says.

State Farm said it had terminated the registration all 3 principals, although 1 had already retired from the company. It also terminated the registration of several others, although those individuals can still sell nonfinancial State Farm products.

FINRA imposed fines on the individuals ranging from $5,000 to $10,000 and ordered license suspensions ranging from 30 days to six months.

Some of those disciplined had allegedly arranged in 2005 to have others take FINRA-required tests for themselves or for others. Others supposedly took the tests in the names of coworkers.

The FINRA-mandated exam, known as a “Firm Element,” tested representatives on their knowledge of the company’s products and service.

The disciplined brokers and advisors were members of State Farm VP Management Corp., a company unit that sells mutual funds and variable products.

FINRA says 9 of those sanctioned were supervisors who, rather than take a proficiency examination, let subordinates take it for them. According to FINRA, one principal directed a subordinate to take the exam for other registered representatives.

Among the other sanctioned reps, 6 took on-line tests for their own bosses.

The spurious test-takers simply entered the user identifications and passwords of those for whom they were taking the test, FINRA alleged.

A spokesman for State Farm said the company initially reported the conduct to FINRA after information it received from one of its employees about alleged testing fraud led to an internal investigation.

“We do not condone this type of behavior and are disappointed in the actions of these representatives,” the spokesman said. “All 3 principals named [by FINRA] are no longer employed with State Farm. In the other cases, we have suspended or terminated licenses to represent State Farm for securities and investment products.”

One of the principals had already retired from the firm, a FINRA document shows.

Agents whose licenses were terminated can still sell other company products, the spokesman noted.

Of the terminated principals, 1 has retired from the company, according to documents filed with LIMRA.

To prevent a repeat of the cheating, State Farm has changed security procedures for access to on-line testing, said Fraser Engerman, the company’s spokesman.

According to FINRA, State Farm uncovered test-taking irregularities in one of its regions and then expanded its internal investigation nationwide, then provided FINRA with its findings.

“The continuing education requirement leads to better trained and informed securities industry professionals and promotes investor protection,” said Susan L. Merrill, FINRA executive vice president and chief of enforcement. “In this case, while the failures by the firm’s brokers to complete the requirements are disappointing enough, it is especially troubling that supervisors directed subordinates to help them avoid this important requirement.”

FINRA administers a 2-part education program for registered financial advisors. As part of the program, companies selling securities are required to administer continuing qualified training to their registered reps who have direct contact with customers and to the reps’ immediate supervisors. The training must cover topics specifically related to their business, such as new products, sales practices, risk disclosure, and new regulatory requirements and concerns.

The Firm Element, used internally by State Farm, required representatives to complete a 2-hour training session and then pass a proficiency test with a minimum score of 80%.

The 3 Series 26 principals who directed subordinates to take proficiency tests for themselves or others were fined $10,000 by FINRA and given a 6-month suspension as a principal and a 90-day suspension in all capacities.

FINRA identified the 3 as Rebecca Sappington, who has retired, Michael Stansbury, and Todd Rindfuss.

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