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FINRA's Recent Sanctions Underscore Compensation and Conflict of Interest Priorities

FINRA demonstrated its concern with conflict of interest situations posed by broker-dealer sales incentives and similarly problematic compensation structures in a recent enforcement action, in which FINRA fined VALIC Financial Advisors $1.75 million for conflict of interest failures related to the firm's variable annuity (VA) transaction sales.

In the case of VALIC, FINRA found that the firm incentivized financial advisers to roll over retirement funds and VAs into proprietary fee-based platform or fixed index annuities by financially rewarding firm personnel for such transactions.

In its report, FINRA concluded that the firm's "compensation policy created a conflict of interest between registered representatives and customers."

An August 2015 FINRA targeted exam letter titled "Conflicts of Interest Review - Compensation and Oversight" specified FINRA's commitment to combating undue conflict of interest situations, which FINRA also referenced in its Annual Priorities Letter that year, and since that announcement, FINRA has cracked down on conflict of interest situations.

In early November 2016, FINRA fined eight firms—including El Segundo's Cetera Advisor Networks and San Diego's First Allied Securities—a total of $6.2 million for variable annuity L-share supervisory failures, including conflict of interest situations that the regulator said may have resulted in unsuitable sales, such as conservative/low-risk customers purchasing the short-term/higher fee products in exchange for shorter surrender periods that these customers did not necessarily need or want.

In October, FINRA sanctioned Cetera's Investors Capital Corporation $1.1 million in fines and restitution for unsuitable short-term unit investment trust (UIT) transactions, sales charge discount failures, and similar events that saw elderly clients with conservative investment objectives paying excessive charges and fees in exchange for investments that were more profitable to the firm and its brokers than to its customers.

Earlier in 2016, similar FINRA findings of unsuitability and excessive fees plagued UBS ($15 million; reverse convertible notes), Ameriprise Financial ($100k; short-term IPO closed-end funds [CEFs]), and JP Morgan, who along with JPMorgan Chase Bank agreed to jointly pay over $300 million—including $127.5 million in disgorgement—to settle SEC charges that two JP Morgan subsidiaries failed to disclose conflicts of interest to investors.

If you have invested with VALIC Financial Advisors, or with any firm or broker whose failure to disclose a conflict of interest situation or whose unsuitable recommendation has proven harmful to your investments or interests as a result of excessive fees, sales or surrender charges, commissions, or poor portfolio performance as the result of an unsuitable product in your account, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

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