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Regulation and Compliance > Federal Regulation > FINRA

FINRA Sets Fines

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The Financial Industry Regulatory Authority says it has fined 5 bank broker-dealers a total of $1.65 million in connection with allegations of inadequate oversight of sales of variable annuities and other products.

Brokers at each of the firms operated out of branches of affiliated banks, selling VA contracts, mutual funds or unit investment trusts to bank customers, many of whom were elderly, FINRA, Washington, says.

Bank personnel referred the customers to the brokers for sales of variable annuities, mutual funds or UITs.

The firms that FINRA fined are:

- McDonald Investments, which formerly operated as part of KeyBanc Capital Markets Inc., a unit of KeyCorp, Cleveland. Fined $425,000.

- IFMG Securities, a unit of the holding company that owns LPL Financial Corp., Boston. Fined $450,000.

- Wells Fargo Investments LLC, a unit of Wells Fargo Bank Inc., San Francisco. Fined $275,000.

- PNC Investments, a unit of PNC Bank Inc., Pittsburgh. Fined $250,000.

- WM Financial Services Inc., now Chase Investment Services Corp., a unit of J.P. Morgan Chase & Company, New York. Fined $250,000.

McDonald Investments also was charged with unsuitable VA sales to elderly customers.

In settling each of these matters, none of the firms admitted nor denied the charges, but they consented to the entry of FINRA’s findings.


McDonald: FINRA has found that, between June 2004 and January 2006, a former broker at the firm made 32 unsuitable sales to 25 elderly bank customers, recommending each customer purchase a VA contract with an enhanced death benefit rider. The customers, all 78 years old or older, were either too old to be eligible for the rider, or very close to the ineligible age, according to FINRA.

“As indicated in the FINRA news release, this issue goes back to 2004 and 2005, and involves McDonald Investments, a firm that Key no longer owns,” a KeyCorp spokesperson says. “Key has agreed to the fine and will offer the affected clients the opportunity to close their annuity accounts, along with a full refund of the initial value of their purchase, plus interest and any surrender charges, adjusted for any withdrawals. KeyBanc Capital Markets no longer sells annuities.”

IFMG Securities: FINRA alleges that the firm used trade blotters to assess suitability and approve VA and mutual fund transactions that did not capture key information, such as the customer’s investment time horizon, risk tolerance and valuations of other financial assets, which FINRA says are required to enable broker-dealer principles to adequately assess suitability.

The activities cited in the FINRA charges occurred before LPL Financial’s parent acquired IFMG, LPL Financial spokesman Joseph Kuo says.

“The activities in question occurred between 2004 and 2006,” Kuo says. “The holding company of LPL Financial acquired IFMG in November 2007. As a matter of policy, we do not comment on activities that did not involve our organization at the time they occurred.”

Wells Fargo, PNC Investments and WM Financial Services: FINRA says the firms failed to give adequate guidance to broker-dealer principals who approved VA transactions, or in the case of WM Financial, UIT transactions.

Wells Fargo Investments, PNC Investments and WM Financial also failed to spot transaction patterns that could show a broker may have failed to tailor recommendations properly to each customer’s investment needs and situations, FINRA says.

“We are glad to have resolved this matter with FINRA and move forward from here,” a Wells Fargo spokesman says. “We remain committed as an organization to do what is best for our clients.”

A J.P. Morgan Chase spokeswoman declined comment. As of the time this article was posted, PNC Bank had not yet responded to a request for comment on the allegations.

In related news, FINRA imposed a $1 million fine on NEXT Financial Group Inc., Houston, in connection with allegations of problems with supervision of 130 office of supervisory jurisdiction branch managers.

OSJ branch managers’ transactions and sales activities are then supposed to be supervised by another registered principal designated by the firm, FINRA says.

Between January 2005 and November 2006, the firm let OSJ branch managers to supervise their own handling of customer accounts without adequate review, FINRA says.

In November 2006, the firm adopted a regional manager supervisory system to provide principal review of the OSJ managers’ transactions, but, until December 2007, it required the regional managers to review too many transactions with too little access to client suitability information, FINRA says.

The problems with supervisions led to a failure to detect churning by an OSJ manager and a broker, FINRA says.

FINRA also found weaknesses in the systems and procedures governing NEXT’s variable annuity exchanges.

VA sales accounted for about 33% of the firm’s revenue during the period that FINRA analyzed.

“The firm’s written supervisory procedures…failed to provide adequate guidance concerning the criteria that should be considered in recommending variable annuity exchanges to its customers including, for example, a comparison between the features, costs and benefits of the old and new products, FINRA says.

FINRA has imposed a $35,000 on NEXT’s former chief compliance officer and suspended her as a principal for 2 months. FINRA also is requiring the former chief compliance officer to re-take her qualifying examination to be a supervisor and to take 15 hours of training on supervision issues.

NEXT and the former chief compliance officer have neither admitted nor denied the charges, but they consented to the entry of FINRA’s findings.

NEXT was not immediately available to comment on the FINRA allegations.


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