The Financial Industry Regulatory Authority has fined AAG Capital $100,000 and ordered the firm to pay nearly $39,000 in restitution for exchanging retail customers' insurance policies, fixed indexed annuities and variable annuities for more costly registered index-linked annuities, or RILAs. The exchanges violated Regulation Best Interest.
From February 2021 through the present, AAG Capital failed to establish and maintain written policies and procedures and a supervisory system reasonably designed to comply with Reg BI or recommendations to retail customers regarding RILAs, the order states.
During the time period, the firm’s annuity business exclusively involved the recommendation of RILAs from three issuers. "AAG Capital’s Reg BI-related written policies and procedures were not tailored to address recommendations of a complex product that comprised a significant component of its revenue and the entirety of its annuity business," FINRA said.
With respect to recommendations to exchange an existing investment into a RILA, "the firm’s supervisory system failed to ensure that the recommendations reasonably considered disadvantages from the exchange that arose from the customer’s surrender of their existing investment," the order states.
As a result, AAG Capital was fined $100,000, will undertake corrective action and was ordered to pay of $38,591.39 in restitution.
In reviewing the RILA recommendations, the firm failed to reasonably consider various disadvantages of the exchanges.
As the order explains, 19 of 41 exchanges resulted in a customer giving up death and living benefits, or incurring a surrender charge from the exchange:
- Six customers gave up life insurance policies with a death benefit valued more than the surrender value of the contract, in some cases by over $100,000
- Fifteen customers relinquished fixed or variable annuities with optional death benefit riders or living benefit riders, some of which had accrued value exceeding the contract value;
- Eight customers incurred surrender charges as a result of the exchange, which totaled $38,591.39.
A RILA is a type of annuity that relies on market performance as measured by an index to determine return. RILAs can feature both upside limits and downside protection during a specified investment term and can have complex structures.
Between February 2021 and April 2023, the firm recommended 479 RILA purchases, representing more than $92 million in principal. Of these purchases, 41 were exchanges funded by the surrender of variable annuity, fixed indexed annuity, or life insurance policies, representing more than $7.9 million in principal from exchanges, according to the order.
Some of the firm’s RILA recommendations included recommendations that its retail customers exchange existing annuity and life insurance products for a RILA.
"Throughout this period, the firm’s written policies or procedures and supervisory system for recommending and supervising RILA purchases or exchanges were not sufficiently specific," according to the order.
"For example, the firm’s written policies and procedures failed to reasonably describe the steps that supervisors must take to evaluate whether the registered representatives had a reasonable basis to believe that the RILA recommendations were in the customers’ best interest, such as the identification of potential red flags that the recommendation was not consistent with the customer’s investment profile," FINRA said.
AAG accepted and consented to FINRA's findings without admitting or denying them.
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