Fines for alleged wrongdoing in variable annuity sales are starting to mount up at the Financial Industry Regulatory Authority.
By mid-year, the self-regulatory agency had already imposed at least $3.4 million in such fines.
The fines include a $1.75 million fine on a firm for alleged unsuitable transactions in April 2009 and more recently, $1.65 million in fines on five bank broker-dealers for inadequate oversight. (See related article here )
By comparison, in 2008, VA sales accounted for only $295,000 in FINRA enforcement fines, according to the Sutherland law firm in Washington, D.C. (See related article here ).
From $295,000 to $3.4 million is a huge jump, and, again, this is the only mid-year number.
It seems VA sales fines are approaching the soaring totals usually assigned to mutual fund sales fines. In 2008, for instance, mutual funds were hit with a total of $4.5 million in FINRA fines, according to Sutherland.
One can only speculate as to the reasons for the shift.
It could be that VA sales have suddenly taken a turn for the worse, in terms of compliance with FINRA regulations.
Or it could be a mere matter of happenstance–i.e., several FINRA investigations involving VAs just happened to come to fruition this year, and each case involved violations that were so egregious that the penalties had to be huge.
And/or there could be more subtle factors involved.
For instance, it is well known that Federal agencies often look for a “poster child” to make their point about the cost of violating agency rules and regulations. So, it could be that the new FINRA fines are forming the basis of a VA poster now in the making.
It is also well known that Congress is knee-deep in scrutinizing financial reform legislation that could potentially alter, curtail or even remove some of today’s federal regulatory bodies. So it could it be that FINRA is ramping up its VA enforcement this year to demonstrate to lawmakers that it is indeed on the job, fulfilling its self-regulatory duties in all product sales under its purview.
In addition, it is well known that the VA sales have been in the tank this year, right along with other securities products. So it could be that FINRA has been stepping up its VA sales scrutiny at a time when the agency believes the industry or its reps may be tempted to cut corners–a matter of nabbing when the nabbing is easy.
Or maybe the agency is striking while the public relations iron is hot. “Annuities” have been much in the news of late, following the Security and Exchange Commission’s release of Rule 151A (which would treat index annuities as securities), the subsequent industry outcry, the inconclusive court decision on the rule’s viability, and more. FINRA authorities may have decided this is a good time to take a more aggressive stance on sales of the one annuity product that is squarely in its purview, the VA.
Whatever the reason, it is time for industry professionals to start digesting the fact that FINRA variable annuity sales fines no longer represent an insignificant dollar amount, as they have in the past. The number of firms involved in alleged wrongdoing may still be small but the fines are not.
This awareness needs to be factored into operations at multiple levels–from client presentations on through marketing, public relations, compliance, training and more.
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–Linda Koco, Managing Editor, e-Publications
National Underwriter Life & Health