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Regulation and Compliance > Federal Regulation > FINRA

MetLife fined millions for annuity sales

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WASHINGTON — MetLife’s securities sales unit today was fined $20 million and ordered to reimburse $5 million to customers for wrongdoing related to sales of replacement variable annuities from 2009 to 2014.

The action was announced by the Financial Industry Regulatory Authority (FINRA), which cited MetLife Securities, Inc. “for making negligent material misrepresentations and omissions” on variable annuity (VA) replacement applications for tens of thousands of customers.

Specifically, according to FINRA, MetLife’s securities unit in some cases overstated the cost of a customer’s existing VA contract, while failing to tell them about cheaper replacements. FINRA found that from 2009 through 2014, the firm misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72 percent of the 35,500 VA replacement applications the firm approved, based on a sample of randomly selected transactions.

 ”Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers’ existing VAs,” FINRA said, noting that the unit’s replacement business constituted a substantial portion of its business, generating at least $152 million in gross dealer commission for the firm over a six-year period.

According to Michelle Ong, a FINRA spokesman, the settlement involved the second highest fine ever imposed by FINRA. The largest was a $50 million fine against Credit Suisse First Boston Corp. in proceedings in 2002 related to initial public offering issues. An additional $50 million was levied against CSFB by the Securities and Exchange Commission, Ong said.

Joseph M. Belth, professor emeritus of insurance at Indiana University, said replacement has been a huge problem since the beginning of the life insurance business in the U.S. in the first half of the 19th century.

“The reason is that sales of life insurance policies and annuity contracts are driven by commissions,” Belth said. He said New York’s Regulation 60 and other such regulations are attempts to deal with the problem.

“I believe that violations of the type found at MetLife would be found at many other major firms as well,” Belth said. 

An industry lawyer in Washington, D.C., who asked not to be named, agreed. He said the settlement was a “significant matter” for the insurance industry, citing New York’s Regulation 60, as Belth did, especially since the Department of Labor’s new fiduciary standard rule imposes an upgraded standard of care for sale of investment products such as annuities into retirement accounts.

The lawyer said it shows that VAs “continue to be on FINRA’s radar” because it charged MetLife for issues related to Reg 60. He said industry lawyers are watching to see if FINRA charges other firms with rules violations related to sales of products overseen by FINRA as well as other regulators, such as the states and the Department of Labor.

“One example is whether FINRA will charge its members for violations related to the DOL rule,” the lawyer said. That rule was published last month and will go into effect in April 2017. It will impose a uniform fiduciary standard on sale of all investment products into retirement accounts. Currently, sales of some insurance products into retirement accounts are covered by a lesser, “suitability” standard.

In settling the issue, MetLife’s securities unit neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Christopher Stern, a spokesman for MetLife in Washington, D.C., said MetLife fully cooperated with the FINRA investigation, and “we are pleased to put this matter behind us.”

The MetLife Premier Client Group (MPCG), the MetLife subsidiary involved, is in the process of being sold to MassMutual. A deal was announced in February and is expected to close “by mid-2016.” MPCG is a retail distribution operation with more than 40 local sales and advisory operations and approximately 4,000 advisors across the country, according to a statement issued in connection with the sale announcement.

The sale of the distribution unit is consistent with a recent trend, with AIG recently selling its securities distribution unit in a cost-cutting move.

It is also part of MetLife’s effort to divest itself of more risky activities. Besides selling the advisory unit to MassMutual, MetLife said in January it plans to separate a substantial portion of its U.S. retail business, including the VA and life insurance sales unit, from the core company. The sale would split off the retail business through an initial public offering, a spinoff or a sale. The business generates at least one fifth of MetLife earnings.

See also…

Avoiding variable annuity compliance problems

Variable annuities: What’s hot, what’s not


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