FINRA Identifies 5 High-Price Issues in Unsuitable Variable Annuity Recommendations

Attorney Advising Disclaimer

In December 2018, FINRA's year-end Examination Findings Report FINRA identified five problems with industry-wide variable annuity sales related to how firms recommend these funds to customers.

> Exchanges: VA exchanges occur when a broker or financial adviser recommends a customer surrender a VA in order to finance the purchase of another VA. Unsuitable VA exchanges occur when this recommendation results in harm to the client, such as when the client incurs excessive fees and commissions, surrender charges, loss of benefits, financial losses, or other undesirable outcomes.

In 2017, FINRA barred former Liberty Partner Financial Services (Bakersfield, CA) broker Henry "Hank" Mark Werner for fraudulently churning an elderly client's account. Werner's alleged misconduct included charges that he unsuitably recommended a variable annuity switch from a Hartford VA to a Nationwide VA.

> Purchase Funds: When representatives conceal the source of funds used to buy new VAs, unlike an exchange, a customer might come into contact with proceeds from an existing securities product that may produce unfavorable tax consequences or liabilities.

> Supervision: According FINRA, some firms lacked adequate supervisory systems and/or written supervisory procedures for variable annuities (VAs). Other firms failed to enforce existing regulations or failed to observe their brokers' conduct relative to VA recommendations and transactions.

In July 2018, FINRA fined National Planning Corporation, Investment Centers of America, SII Investments, and IFC Holdings (INVEST Financial Corporation) a total of $1.7 million and ordered $6 million in restitution for failures related to deficient supervisory systems and procedures in the firms' VA business.

Just days earlier, FINRA fined Royal Alliance Associates (RAA), FSC Securities Corporation, SagePoint Financial, and Woodbury Financial a total of $1 million for failing to establish and maintain adequate supervisory systems for multi-share class VA sales.

> Training: FINRA has a history of disciplining firms for failing to adequately train brokers to sell VAs . This includes sanctions for untrained supervisors who inevitably fail to spot red flags from a broker's misconduct.

A related problem exists when a broker sells a VA without proper license or certification. In September 2018, FINRA fined and suspended former MML Investors Services (Long Beach, CA) broker Ryan Alexander Logan for commission-sharing with an unregistered person who sold a customer a VA despite not being licensed nor registered to do so.

> Annuity Data: FINRA also found that several firms failed to log and/or maintain annuities-related data or otherwise maintained inaccurate books and records.

In March 2019, an SEC report found that former Wells Fargo Advisors representative John Gregory Schmidt (stockbroker CRD #708094) misappropriated $1.16 million from customers and executed unauthorized VA sales from certain customers in order to pay off other clients in a fraudulent Ponzi-like scheme.

If you have invested with a broker or financial adviser who has made unsuitable recommendations for a variable annuity switch, exchange, or whose firm failed to adequately train, supervise, or preserve files and communications related to the harmful transactions, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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