We have previously written on the concept of “churning,” which is a fraud perpetrated by brokers who buy and sell securities for the primary purpose of generating a commission, and where that activity would be considered excessive in light of the investor’s investment goals. But is it possible to have a churning claim when a broker sells you an insurance product or recommends swapping out one variable annuity policy for another? And can a single transaction be considered “excessive” in the context of a churning claim? The answer to both of these questions is yes.
The law appears to provide an opening for churning claims when it comes to investors, and in particular retirees, who find themselves “stuck” with an illiquid annuity in their portfolio. Retirees, who tend to need access to capital more than other segments of the population (due to not working and the increased medical costs associated with getting sick and old), are often sold unsuitable variable annuities, which can tie up retirement funds for decades. Technically the investor can get of the policy, but not without paying significant IRS tax penalties and steep surrender charges, sometimes as high as 10% to 15%. Sadly, these costs and product features are often misrepresented and go undisclosed at the point of sale.
While not all annuities are considered securities under the law, variable annuities certainly are securities. The SEC requires the seller of a variable annuity to possess a Series 6 or 7 brokerage license with the Financial Industry and Regulatory Authority (FINRA). Variable annuities can be distinguished from fixed annuities in that their returns are not fixed, but rather determined by the performance of the stock market. One characteristic of a variable annuity policy is that you get to choose a fund to invest in, much like you would with a mutual fund. Variable annuities are highly complex investment products. They are also costly to investors, in part because of the high commissions they generate for the brokers who sell them. Regardless of whether you were sold a variable annuity or some other type, it should be noted that FINRA requires its member brokerage firms to monitor all products sold by their brokers.