The Financial Industry Regulatory Authority Inc. (FINRA) announced in a News Release on November 2, 2016 that it fined eight broker-dealer firms regarding failures to supervise the sale of variable annuities. FINRA announced that the following firms were fined a total of $6.2 million:
- VOYA Financial Advisors Inc., of Des Moines, IA, was fined $2.75 million;
- Cetera Advisor Networks LLC of El Segundo, CA, was fined $750,000;
- Cetera Financial Specialists LLC of Schaumburg, IL, was fined $350,000;
- First Allied Securities, Inc. of San Diego, CA, was fined $950,000;
- Summit Brokerage Services, Inc. of Boca Raton, FL, was fined $500,000;
- VSR Financial Services, Inc. of Overland Park, KS, was fined $400,000;
- Kestra Investment Services, LLC of Austin, TX, was fined $475,000; and
- FTB Advisors, Inc. of Memphis, TN, was fined $250,000.
FINRA also announced that the following five of the firms were ordered to compensate customers who purchased L-share variable annuities:
- Voya was ordered to pay at least $1.8 million to customers in this category; and
- Cetera Advisors Networks, First Allied, Summit Brokerage Services and VSR were collectively ordered to pay customers at least $4.5 million.
In the News Release, FINRA detailed that L-share annuities are complex investment products that were designed for investors willing to pay higher fees and resulted in greater compensation to the firms and brokers, and often were combined with complex and expensive guaranteed income and withdrawal riders that only provided benefits over longer holding periods. FINRA noted in the News Release that the firms lacked an adequate system to supervise variable annuities with multiple share classes, and failed to provide guidance to the firms’ sales forces to determine the “narrow class” of investors for whom L-share annuities could be suitable.
FINRA also stated in the News Release that VOYA and several of the Cetera Group firms failed to identify “red flags” of broad patterns of potentially unsuitable sales of this product combination.
Each of the firms earned shocking amounts of revenue from the sale of variable annuities, according to their respective Letters of Acceptance, Waiver and Consent (AWC). For example, in AWC No. 2014039172901, VOYA was found to earn 25% of its revenue from the sale of variable annuities, and more than 1/3 of that revenue was from the sale of L-share variable annuities. AWC No. 2015045234401 detailed that the Cetera firms generated between 18% and 34% of the firms’ respective revenue from the sale of variable annuities, and between 25% and 38% of that revenue was from the sale of L-share variable annuities.
Brokerage firms are required to adequately supervise their brokers to ensure they are complying with FINRA rules. Firms may be held responsible to their customers if they failed to supervise the sale of investment products, as well as if the recommendations made by the firms’ brokers were unsuitable. FINRA’s suitability rules require that each recommendation made by a broker must be based on a reasonable basis of belief that such recommendation is suitable, considering each customer’s age, other investments, financial situation and needs, tax status, investment objectives and experience, among other factors.