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FINRA keeping busy with enforcing annuity sales misdeeds

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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 months. 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 NAIC revised its annuity sales model regulation in March 2010 to provide annuity protections for consumers of any age.