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Regulation and Compliance > Federal Regulation > FINRA

FINRA Sanctions Fifth Third Over Variable Annuity Exchanges

By Melanie Waddell

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The Financial Industry Regulatory Authority said Tuesday that it has fined Fifth Third Securities, Inc., $4 million and required the firm to pay approximately $2 million in restitution to customers for failing to appropriately consider and accurately describe the costs and benefits of variable annuity exchanges.

Fifth Third also recommended exchanges “without a reasonable basis to believe the exchanges were suitable,” FINRA said.

FINRA found that Fifth Third failed to ensure that its registered reps obtained and assessed accurate information concerning the recommended VA exchanges, and that the BD’s registered reps and principals were not adequately trained on how to conduct a comparative analysis of the material features of the VAs.

As a result, “the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to the customer,” FINRA states.

Susan Schroeder, FINRA’s executive vice president and head of enforcement, said that FINRA remains vigilant in examining how member firms market variable annuities, which are “complex products pitched to retirees and people saving for retirement.”

By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, FINRA states that it found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77% of the sample.

For example, Fifth Third:

  • Overstated the total fees of the existing VA or misstated fees associated with various additional optional benefits, known as riders.
  • Failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
  • Represented that a proposed VA had a living benefit rider even though the proposed VA did not, in fact, include a living benefit rider.

The BD’s principals ultimately approved approximately 92% of VA exchange applications submitted to them for review, FINRA found. “However, in light of the firm’s supervisory deficiencies, the firm did not have a reasonable basis to recommend and approve many of these transactions.”

Fifth Third also failed to comply with a term of its 2009 settlement with FINRA.

In the 2009 action, FINRA found that, from 2004 to 2006, Fifth Third effected 250 unsuitable VA exchanges and transactions and had inadequate systems and procedures governing its VA exchange business.

“For more than four years following the settlement, the firm failed to fully implement an independent consultant’s recommendation that it develop certain surveillance procedures to monitor VA exchanges by individual registered representatives,” FINRA states.

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

— Related on ThinkAdvisor:

Melanie Waddell

@Think_MelanieW

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