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SEC Hits Ameriprise Unit for Improper Variable Annuity Switching

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What You Need to Know

  • Wholesalers used color-coded lists to highlight annuity exchange opportunities among Ameriprise clients, the SEC says.
  • Annuity switches increased dramatically while this sales practice was in use and fell after it stopped.
  • This is first enforcement proceeding under Section 11 of the Investment Company Act.

The Securities and Exchange Commission on Wednesday announced settled charges against RiverSource Distributors Inc., a wholly owned subsidiary of Ameriprise Financial, for improper switching or replacing of variable annuities — which resulted in higher commissions for RiverSource employees.

The action, which involved a censure and a $5 million civil penalty, is the SEC’s first-ever enforcement proceeding under Section 11 of the Investment Company Act of 1940, the agency said.

Section 11 of the Investment Company Act prohibits any principal underwriter from making or causing to be made an offer to exchange the securities of registered unit investment trusts (including variable annuities) “unless the terms of the offer have been approved by the SEC or they fall within certain limited exceptions, none of which is applicable to RiverSource,” the SEC explained.

According to the SEC’s order, RiverSource offered and sold variable annuities to retail investors through an affiliated broker-dealer/investment advisor, Ameriprise Financial Services LLC.

The order states that “certain employees of RiverSource developed and implemented a sales practice that caused exchange offers to be made to holders of variable annuities to switch from one variable annuity to another which had the effect of increasing sales commissions for RiverSource employees, while also increasing RiverSource’s variable annuity related revenues.”

According to the order, these types of transactions increased significantly from 2016 until 2018 when RiverSource’s compliance department put a stop to the sales practice abuses.

During the relevant period, the SEC order states, “certain RDI wholesalers developed and implemented a sales practice that involved the creation of lists of variable annuities that were still in effect and owned by AFS customers, and then color-coding those lists to highlight exchange opportunities, including information about commissions from exchanges that could be earned by AFS registered representatives.”

Variable annuity exchanges, according to the order, “increased during the Relevant Period from $671 million in 2015 and $768 million in 2016, to $1,006 million in 2017 and $1,049 million in 2018. Contemporaneous RDI emails and other internal documents suggest that at least some portion of that increase likely resulted from the use of in-force annuity lists.”

RDI’s compliance department “became aware of the RDI wholesalers’ efforts and use of lists in or around March 2018, conducted an investigation, and as a result of the investigation, wholesalers who were involved in the conduct and/or those who supervised individuals involved in the conduct received letters of reprimand/caution in May 2018,” the order states.

RDI’s remedial efforts to end the practice included “a training program for wholesalers during which its chief compliance officer explained in detail how the creation and use of these types of in-force annuity lists violated the principles of Section 11,” the order states.

After the relevant period, “RDI’s variable annuity exchanges decreased from $1.049 million in 2018 to $838 million in 2019,” the SEC said.

Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement, said in a statement that “Congress enacted Section 11 to prohibit the improper ‘switching’ of investors from one investment product to another for the purpose of generating additional selling charges — precisely the conduct our order finds RiverSource to have engaged in. Protecting retail investors from abusive sales practices is a mainstay of our enforcement program, and we remain committed to holding accountable those who engage in such conduct.”

Without admitting or denying the SEC’s findings, RiverSource consented to an order finding that it violated Section 11 of the Investment Company Act and imposing a cease-and-desist order, a censure and a $5 million civil penalty.