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Regulation and Compliance > Federal Regulation > FINRA

FINRA keeping busy with enforcing annuity sales misdeeds

By Elizabeth D. Festa

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Suitability sales issues continue to be an problem for an aging nation, and the NAIC has weighed in after a Government Accountability Office (GAO) report warning on suitability questions involving insurance and investment product sales to veterans. The Financial Industry Regulatory Authority (“FINRA“) has been actively enforcing all manner of annuity transaction misdeeds nationwide on as regular of a basis as any state insurance department, according to recent enforcement reports from the agency.

Recently, FINRA censured a firm and fined it $40,000 to settle allegations (not admitted or denied) that, among other things, the firm failed to gather and maintain required documentation about variable annuity transactions and the customers. Sampled transactions of the firm, Allied Beacon Partners, Inc., Richmond, Va., lacked certain customer information or documentation needed in order to make a reasonable suitability determination, FINRA alleged in its consent order description of enforcement actions rounded up in October.

“A large portion of variable annuity transactions sampled revealed the firm’s failure to ensure that a designated principal adequately reviewed and approved the customer’s application prior to its transmission to the issuing insurance company,” FINRA wrote.

FINRA contended that the firm’s Written Supervisories (WSPs) for variable annuity transactions were deficient. The WSPs identified one individual as having the responsibility to supervise variable transactions, but another individual not identified in the WSPs was actually the primary person responsible for supervising VA transactions, FINRA found. 

The findings also included that the WSPs did not address how the firm would monitor compliance with SEC Rule 15c2-8, which requires that a prospectus be delivered to customers. Of transactions FINRA staff sampled, the firm was unable to provide any documentation demonstrating that a prospectus was sent to any of the customers, FINRA alleged.

FINRA also settled a matter involving a registered representative who recommended unsuitable transactions, a mortgage and a variable annuity, to a customer, a 53-year-old widow who worked as an administrative assistant for a public school system. Her annual salary was approximately $55,000, she owned a home unencumbered by a mortgage and valued at approximately $500,000, and she had an investment portfolio valued at approximately $160,000 in retirement accounts and $100,000 in certificates of deposit.  

In another recent case, FINRA found that the representative did not have a reasonable basis for recommending that the customer mortgage her primary residence to invest $300,000 in a variable annuity, given that the customer intended to retire in seven years, had limited income, expected an equally limited retirement income and would have an insufficient monthly income to make the mortgage payments. 

FINRA concluded that the registered representative’s conduct violated rules of ethical standards and rules concerning recommendations to customers. FINRA fined the representative $5,000 and suspended him in all capacities for 10 business days.

In another case, a registered representative in Naples, Fla., submitted a letter of acceptance, waiver and consent in which he was fined $25,000 and suspended from association with any FINRA member in any capacity for three month. He consented to findings that he recommended and executed a variable annuity replacement contract for a member firm customer in a state in which he was not licensed to sell insurance products and included false information in the firm’s electronic books and records. 

The findings stated that he logged into his member firm’s Web-based system utilized by firm sales staff to complete transaction paperwork for annuity contract purchases reporting that the customer was a New York state resident. When the system rejected the replacement transaction because the deferred VA product was not offered to New York residents and because he did not hold the requisite state insurance license, he improperly input the customer’s state of residence as Florida.  

Another recently closed case alleged that a registered principal from Rocky Hill, Conn., who was fined $5,000 and suspended from association with any FINRA member in any capacity for 18 months, created illustrations to show his insurance customers how the fixed annuity products he sold them operated; but at one point, the rep’s calculations failed to take into consideration the customers’ withdrawal of dividends. http://publish.lifehealthpro.com/vendor/tinymce/jscripts/tiny_mce/themes/advanced/img/trans.gif

As a result, the representative began to generate and provide the customers with illustrations that were inconsistent with the policy’s terms. The Connecticut representative provided the customers with fabricated letters he created purporting to be from the company, stating that the monthly income on their annuity would never decrease and that the monthly income on the policy was decreasing because of a recent federal law. The suspension is in effect from Aug. 20, 2012, through February. 19, 2014.  

In yet another case, a registered principal, from Federal Way, Washington State, was named a respondent in a FINRA complaint alleging that she participated in the misappropriation of variable annuity death benefit funds. The complaint alleges that Sawyer submitted a customer’s death benefit claim, along with a death certificate to the insurance company, and set up a mailbox where the check containing the misappropriated funds would be sent. 

The NAIC revised its annuity sales model regulation in March 2010 to provide annuity protections for consumers of any age, (such as the 53 year-old rather young widow), requiring insurer reviews of every annuity transaction, and clarifying that insurers are responsible for compliance with annuity protection provisions — even when insurers contract with third parties. 

However, a Florida regulatory-supported bill died in the Florida Banking & Insurance Committee back in March 2012. Florida, which has one of the highest senior population rates in the country, would have become the 20th state to enact the revised model law on annuities.  

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