© 2020 Arizent. All rights reserved.

How variable annuity lapses cost 8 firms $6.2M in FINRA fines

Register now

Variable annuities are in hot water — again.

FINRA fined eight broker-dealers a total of $6.2 million for failing to supervise sales of variable annuities and provide guidance to registered representatives on their suitability for clients, according to a disciplinary action released Wednesday.

The Wall Street regulator also ordered five of those firms to pay a collective $6.3 million to customers who bought L-share variable annuities that were packaged in such a way to maximize fees while lowering their intended benefits, according to FINRA.

Voya Financial Advisors received the harshest fine of $2.75 million and was ordered to pay $1.8 million to investors.

Five broker-dealer subsidiaries of Cetera Financial Group, comprising Cetera Advisor Networks, Cetera Financial Specialists, First Allied Securities, Summit Brokerage Services and VSR Financial Services, were fined a total of $2.95 million. With the exception of Cetera Financial Specialists, the four other firms have to pay out a combined $4.5 million to investors. Kestra Investment Services and FTB Advisors were fined $475,000 and $250,000, respectively.

L-share variable annuities carry shorter surrender periods than other share classes, FINRA says, and are designed for short-term investors willing to pay a higher fee for that feature. As a result, they also have the potential to pay greater compensation to the firms and registered reps selling them.

According to FINRA, each of the firms in this disciplinary action lacked an adequate system to supervise the sale of variable annuities with multiple share classes, and failed to advise its reps and principals on the narrow group of customers for whom L-share variable annuities are suitable.

The regulator also found that in direct conflict with the investment objective of investors buying the short-surrender L-shares, the product was often sold with complex and expensive guaranteed income and withdrawal riders that would only be beneficial over longer holding periods.

Specifically, FINRA censured Voya and four of the Cetera Group subsidiary firms for failing to address “red flags” that signaled widespread, unsuitable sales of this form of product combination.

Given their complexity and cost structures, variable annuities require “exceptional diligence” in the training and supervision of the reps that sell them, Brad Bennett, FINRA’s chief of enforcement, said in a statement.

“When a firm cannot explain why a significant number of clients are paying up for the short-term flexibility of L-shares while at the same time buying riders that only have value over the long term, it is clear that these supervisory obligations are not met.”

The disciplinary actions also include additional violations by Voya, Cetera Advisor Networks, Cetera Financial Specialists and VSR for failure to monitor rates of variable annuity exchanges, FINRA says.

The sale of variable annuities has long been scrutinized by regulators wary of their susceptibility to misuse.

In May, FINRA handed out a record $25 million sanction against MetLife for a “systematic failure” to accurately represent the features of different variable annuities to clients and vet the replacement applications submitted by reps, as reported by Financial Planning. It was the largest fine from the regulator for wrongdoing involving variable annuities.

The eight firms named in Wednesday’s action neither admitted nor denied FINRA’s charges, but consented to the entry of its findings, according to FINRA.

For reprint and licensing requests for this article, click here.