FINRA's 2018 year-end Examination Findings Report identified several problem areas in the securities industry relative to broker and firm interactions with retail investors, including overconcentration, excessive trading, and suitability, especially pertaining to variable annuities, in its list of examination findings.
Overconcentration, Including REITs and Complex Notes
According to FINRA's 2018 Report on Examination Findings, firms throughout the industry reportedly recommended unsuitable products for investors, namely illiquid securities and complex structured notes. Included in the list were non-traded real-estate investment trusts (REITs) and sector-specific investments that representatives recommended to customers for whom the products were unsuitable, given the investors' investment objectives, liquidity needs, risk tolerance preferences, time horizon, or financial situation.
FINRA wrote that problems with overconcentration, particularly with REITs and similar products, "resulted in significant customer losses," and that some firms failed to establish or maintain procedures or systems to supervise potential concentration issues.
For example, in May 2018, Reuters found that Fidelity increased risk for six million retirement investors by increasing concentration in a handful of sector-specific stocks. Highly-concentrated financial and energy sector mutual funds also featured prominently in our July 2018 list of funds with largest losses in 2018.
Excessive Trading
FINRA found that firms also failed to enforce adequate supervisory systems to detect and prevent excessive trading in customer accounts, finding that some firms failed to identify quantitative suitability issues while others had inadequate written supervisory procedures (WSPs). These deficiencies bled over into correspondence between firms, brokers, and clients as well, with FINRA writing that lack of supervision caused letters to become "overly general and failed to include meaningful information regarding the relevant account activity," from failing to indicate commissions and trade numbers to an outright failure to inform customers that their accounts experienced a loss in value.
For example, FINRA barred Sean J Waters for excessively trading an elderly Financial West Group client's accounts through more than 1,000 trades which generated $115,000 in commissions and fees, along with $88,000 in losses.
Unsuitable Variable Annuity (VA) Recommendations
The WSP and supervision failures extended to variable annuity recommendations, with FINRA writing that some firms failed to ensure that representatives' recommendations of VAs were suitable for their customers.
For instance, FINRA found that VA exchanges—wherein a broker recommends that a client exchange one annuity product for another—slipped through the supervision cracks, and not only was the recommended exchange inconsistent with the customer's objectives, but the resulting transaction proved harmful for the customer as well, resulting in "increased fees to the customer or the loss of material, paid-for accrued benefits."
FINRA also found that some representatives concealed the source of funding while others misrepresented the cost of variable annuity riders, surrender costs, or loss of benefits, material facts which may have persuaded a customer against selling or exchanging an existing variable annuities product.
In July 2018, FINRA ordered four firms (National Planning Corp, Investment Centers of America, SII Investments, and IFC Holdings) pay $7.7 million in fines and restitution for failures in their variable annuities business, including deficient supervisory systems. FINRA also cited the firms for sales charge discount failures with unit investment trusts (UITs).
If you have invested with a broker, firm, or financial adviser who unsuitably recommended a variable annuity exchange or over-concentrated a complex or illiquid securities product, such as a REIT, resulting in losses or excessive fees and commissions, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.