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Regulation and Compliance > Federal Regulation > FINRA

MetLife Securities to Pay $25M to FINRA Over ‘Negligent’ VA Replacements

By Melanie Waddell

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MetLife Securities agreed Tuesday to pay $25 million to the Financial Industry Regulatory Authority for making negligent material misrepresentations and omissions on variable annuity replacement applications for tens of thousands of customers, who were often switched into annuities that were more expensive or had fewer features.

FINRA fined MetLife Securities $20 million and ordered the firm to pay $5 million to harmed customers.

FINRA found that from 2009 through 2014, MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72% of the 35,500 VA replacement applications the firm approved, based on a sample of randomly selected transactions.

MetLife Securities also failed to ensure that its registered reps obtained and assessed accurate information concerning the recommended VA replacements, and did not adequately train its registered reps to compare the relative costs and guarantees involved in replacing one VA with another.

“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 states.

MSI’s VA 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 FINRA.

MSI neither admitted nor denied the charges but consented to the entry of FINRA’s findings.

“Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning,” Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in announcing the fine. “Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate, and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling. These obligations take on even greater importance when a significant part of a firm’s marketing effort involves switching customers out of existing annuities.”

The self-regulator found that MSI failed to disclose to customers that the proposed VA replacement would reduce or eliminate important features in their existing VA, such as accrued death benefits, guaranteed income benefits and a guaranteed fixed interest account rider.

MSI also “understated the value of customers’ existing death benefits” in disclosures mandated by Regulation 60, disclosure requirements firms must adhere to for investors in New York.

MSI’s principals did not consider the relative costs and guarantees of the proposed transactions, FINRA states. “The firm’s principals ultimately approved 99.79% of VA replacement applications submitted to them for review, even though nearly three-quarters of those applications contained materially inaccurate information.”

FINRA further found that MSI failed to supervise sales of the guaranteed minimum income benefit rider, the firm’s bestselling feature for its VAs, that was marketed to customers (many of whom were already holding MetLife annuities) as a means of providing a guaranteed future income stream.

“The GMIB rider is complex and expensive — annual fees during the relevant period ranged from 1% to 1.5% of the VA’s notional income base value,” FINRA states. “A frequently cited reason for MSI’s recommendation of VA replacements was to allow a customer to purchase the GMIB rider on the new VA contract. Nevertheless, MSI failed to provide registered representatives and principals with reasonable guidance or training about the cost and features of the rider.”

FINRA also found that since at least 2009, MSI’s customers have received misleading quarterly account statements that understate the total charges and fees incurred on certain VA contracts.

“Typically, the quarterly account statements misrepresented that the total fees and charges were $0.00 when, in fact, the customer has paid a substantial amount in fees and charges,” FINRA said.

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