Articles Posted in Variable Annuities

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Money in WastebasketAs part of its ongoing enforcement focus on variable annuity (“VA”) sales practices, the Financial Industry Regulatory Authority (“FINRA”) recently censured and fined Hornor, Townsend & Kent, Inc. (“HTK”) $275,000 for its alleged failure to supervise its brokers’ sales of VAs.  HTK (CRD# 4031), headquartered in Horsham, PA, is a full-service broker-dealer that offers a range of investment, including VAs.

In recent months, FINRA has ramped up its enforcement focus on VA sales practices.  Ever since handing down a $20 million fine against MetLife Securities, Inc. (“MSI”) in May, 2016 (in addition, FINRA ordered MSI to pay $5 million to customers in connection with allegations of making negligent material misrepresentations and omissions on VA replacement applications), FINRA enforcement has continued to fine numerous member firms concerning VAs sales practice issues.  In particular, FINRA has targeted brokers recommending unsuitable VAs, in the first instance, as well as recommending the sale of one VA for another in order to generate commissions (a practice akin to churning, and commonly referred to as “switching”).

FINRA’s recent censure and fine against HTK involves sales of L-share VAs, which were allegedly made without proper supervision.  FINRA determined that the activities in question took place between April 2013 and June 2015; during this time frame, it was determined that 7,398 or nearly 47% of the 15,815 VA contracts sold by HTK registered representatives were L-share contracts.

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Money MazeAs part of its continued variable annuity (“VA”) abuse crackdown, the Financial Industry Regulatory Authority (“FINRA”) recently censured and fined member firm Ameritas Investment Corp. (CRD# 14869) (“Ameritas”) $180,000 for alleged lapses in the supervision of VA sales by its financial advisors.  In a letter of acceptance, waiver and consent (“AWC”), FINRA has disclosed that between September 2013 and July 2015, Ameritas sold 4,075 individual VA contracts.  Of these sales, Ameritas sold nearly 700 L-share contracts, totaling about 17% of its overall VA sales, or about $11 million in aggregate VA L-share sales.

FINRA has prioritized VA sales practice misconduct as warranting enhanced regulatory oversight.  Recent enforcement efforts by FINRA with regard to VAs has resulted in numerous fines levied in 2016 concerning allegations of sales abuse by brokers recommending unsuitable VAs and/or recommending the sale of one VA for another in order to generate commissions (a practice akin to churning, and commonly referred to as “switching”).

VAs are very complex financial products that typically charge significant commissions and fees.  When a financial advisor sells a VA, they will usually receive a sizeable commission, ranging anywhere from 3-7%.  Additionally, a VA contract typically carries various fees, such as a mortality expense (in connection with the contract’s death benefit), investment expenses associated with the sub-accounts holding securities, and administrative expenses on the hybrid security / insurance product.  Of significance, L-share contracts usually carry even higher commissions and fees than standard VAs, due to the fact that L-share contracts have shorter surrender periods (after expiration of a surrender period, an investor in a VA can exit their investment without incurring a surrender charge).

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Recently, the Financial Industry Regulatory Authority (“FINRA”) has devoted significant regulatory oversight to one financial product that is rife with potential for abuse: the variable annuity (“VA”).
As a general rule, annuities are treated as insurance products.  Accordingly, annuities are subject to regulation at the State level.  Specifically, each State maintains a guarantee fund that will act as a backstop to annuity policies, up to a certain dollar amount, in the event that an insurance carrier experiences insolvency or similar inability to honor its financial obligations.  Additionally, each State has its own insurance commissioner, an individual responsible for overseeing all annuity business within that State.  Fixed annuities, fixed indexed annuities, single premium immediate annuities, and longevity annuities (a/k/a deferred income annuities) are all regulated at the State level.

VAs are also monitored at the State level.  However, because VAs are considered a hybrid insurance / security product, they receive additional scrutiny and regulatory oversight at the federal level.  As investment products, VAs are subject to monitoring by both the Securities and Exchange Commission (“SEC”), as well as the Financial Industry Regulatory Authority (“FINRA”).

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The Financial Industry Regulatory Authority (FINRA) has filed two recent enforcement actions that may signal a crackdown on variable annuity (VA) misconduct this year, continuing a 2016 trend of high fines related to VA sales in 2016.
In the first disciplinary proceeding, FINRA reportedly suspended broker Cecil E. Nivens for two years and ordered the broker disgorge nearly $186,000 in commissions for causing “considerable monetary harm” to customers related to VA exchanges.  According to FINRA filings, while working for New York Life, Mr. Nivens allegedly made unsuitable recommendations that several of his clients purchase variable universal life insurance policies, also known as VULs, using use the proceeds of annuities that they already owned.   According to the allegations, Mr. Nivens also failed to follow certain technical requirements of Section 1035 of the Internal Revenue Code (IRC) that allows people to transfer funds from one life insurance policy or annuity to a new policy without incurring a tax penalty, resulting in substantial negative tax implications for his customers.

In the second disciplinary proceeding, filed Oct. 6, FINRA charged former Legend Equities broker Walter Joseph Marino with recommending unsuitable variable annuity replacements that benefitted him to the tune of $60,000 in commissions while his customers—including a 78-year-old retired widow—suffered financial harm, including incurring surrender charges and tax liabilities, due to the unsuitable recommendations.  The FINRA complaint alleges that Marino recommended that two customers replace their non-qualified variable annuities (VAs) issued by Jackson National Life and The Variable Annuity Life Insurance Company, resulting in unnecessary surrender charges and commissions.   FINRA alleges that Marino also failed to utilize a 1035 exchange that would have saved his clients substantial taxes, and pocketed $60,000 in commissions while causing substantial financial harm to his customers.

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The State of Illinois Securities Department (“Department”) recently initiated enforcement proceedings against Thrivent Investment Management, Inc. (“Thrivent”) (CRD #18387) for allegedly violating the Illinois Securities Law of 1953 in connection with sales of unsuitable variable annuity (“VA”) products to certain of its clients who already held Thrivent VA’s.

Abstract Businessman enters a Dollar Maze.Specifically, the Department alleges that Thrivent violated the Act by “… replacing its clients’ existing variable annuities for new variable annuities which required the clients to pay surrender charges and various fees.”   According to the Department, possible violations of law in the case include (i) failure to maintain and enforce a supervisory system with adequate written procedures to achieve compliance with applicable securities laws and regulations, (ii) failure to adequately review the sales and replacements of VA’s for suitability, (iii) failure to enforce its written procedures regarding documentation of sales and replacements of VA’s, and (iv) failure to adequately train its salespersons, registered representatives and principals.

Prior to 2012, Thrivent rolled out a new feature to its VA.  This feature consisted of adding a Guaranteed Lifetime Withdrawal Benefit (“GLWB”) to the VA in return for a rider fee.  During the time period of January 2011 – June 2012 and July 2013 – June 2014, Thrivent allegedly recommended that certain customers purchase new variable annuities with GLWB riders to replace existing variable annuities, without performing any analysis of whether the customers would economically benefit from the variable annuity switch.  Some customers who were advised to switch allegedly would have received greater payments over the life of the policies if they had kept their original variable annuities in place.

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Securities arbitration attorneys are currently investigating claims on behalf of investors who suffered significant losses in AXA Equitable Life Insurance Company Equi-Vest or Accumulator variable annuity contracts — specifically those invested in the managed funds, AXA Tactical Manager Strategy or ATM-managed funds.

Equi-Vest, Accumulator Variable Annuity Investors Could Recover Losses

Reportedly, the New York State Department of Financial Services (“DFS”) launched an investigation in 2011 concerning alleged omissions on the part of AXA Equitable regarding its applications for approval to alter the Equi-Vest and Accumulator variable annuities.  The change would substitute ATM-managed funds for previous managers.  According to DFS’ allegations, AXA Equitable misled DFS regarding the change’s impact and failed to disclose the underperformance of the ATM funds under the previous managers.  Allegedly, these actions resulted in a reduced return for investors, especially for those who paid fees to receive guaranteed minimum benefits and those who wanted to be more aggressive in their investment strategy. In order to settle the investigation, AXA Equitable agreed to pay $20 million on March 17, 2014. 

Some AXA Equitable investors may have been misled about the variable annuity contract changes. In addition, certain characteristics of variable annuities, including high penalties for early withdrawal, long surrender periods and low rate of return, make these products unsuitable for many investors. Many brokers are motivated to make unsuitable recommendations because of the large commissions associated with variable annuities.

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Securities attorneys are currently investigating claims on behalf of the customers of Christopher B. Birli and Patrick W. Chapin, who suffered significant losses as a result of misrepresentations and unsuitable recommendations of variable annuities. Reportedly, Birli and Chapin received significant sales commissions for allegedly unsuitable recommendations to their customers.

Customers Could Recover Losses for Unsuitable MetLife Variable Annuity Recommendations

On March 27, a complaint was filed with the Financial Industry Regulatory Authority Office of Hearing Officers against Birli and Chapin regarding the State University of New York retirement program. According to the complaint, Birli and Chapin recommended their customers switch MetLife variable Annuities with new ones held outside the retirement plan in MetLife IRA accounts.

Allegedly, Birli and Chapin circumvented their firm’s general prohibition of direct annuities exchange by recommending to their customers that they surrender their annuities to purchase another product available within the retirement program, wait 90 days, and then sell the second product in order to purchase the MetLife IRA annuity.

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Securities fraud attorneys are currently investigating claims on behalf of investors who suffered significant losses in variable annuities. Variable annuities are insurance products tied to an investment portfolio, which typically consist of mutual funds that hold bonds and stocks. In many cases, brokers receive commissions as high as 8 percent when selling variable annuities, which may motivate them to make recommendations that are unsuitable for investors.

Two MetLife Brokers Accused of Unsuitable Variable Annuity Sales

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against two MetLife Securities Inc. brokers, Patrick Chapin and Christopher Birli. According to the complaint, Chapin and Birli focused on advising State University of New York employees on their retirement plan. Both were terminated in 2012 and do not work in the securities industry at this time.

According to the complaint, Chapin and Birli allegedly made recommendations to 45 of their customers to unload their plan’s MetLife variable annuities by cashing in their annuities, purchasing another security within the plan to be held for 90 days, and then selling that security to switch to new variable annuities outside the university plan, held in IRAs. The alleged misconduct took place between 2004 and 2007. According to FINRA, this scheme generated commissions for the brokers amounting to hundreds of thousands of dollars.

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Securities fraud attorneys are currently investigating claims on behalf of investors — especially older, retired investors — who suffered significant losses because of the unsuitable recommendation of variable annuities. Variable annuities are a type of insurance product. With this product, the investor pays into an account now in exchange for the guarantee of a future payout. The investment is tied to a stock index return, making it variable.

Variable Annuities Unsuitable for Many Investors, Especially Retirees

According to stock fraud lawyers, variable annuities typically offer large sales commissions to brokers and, as a result, some brokers make unsuitable recommendations. Furthermore, tax deferrals associated with variable annuities make them particularly unsuitable for retirees if the retirees’ assets are already held in an account that provides tax deferral (such as an IRA).  Reportedly, an arbitration panel recently awarded $112,000 to one investor who was sold variable annuities which then were put into the investor’s tax-deferred IRA account.  This strategy negates or renders irrelevant any tax benefit that would have been provided by the variable annuity.

InvestmentNews recently reported that individuals who invest in variable annuities are facing a risk of forced annuitizations.  If so, the annuitizations will eliminate some death benefits, which are a primary reason many investors have chosen to invest in variable annuities. A report by the Wall Street Journal states that while variable annuity claims lagged in 2013 after surging in 2012, the 2013 claims were still higher than the number of mutual fund and stock lawsuits.

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Investment fraud lawyers are currently investigating claims on behalf of individuals who suffered significant losses as a result of the unsuitable recommendation of non-traded REITs and variable annuities from Royal Alliance Securities- and LPL Financial-registered representatives.

Investigations into Unsuitable Sales of REITs, Variable Annuities by Royal Alliance Securities, LPL Financial Representatives

Reportedly, a claim has already been filed on behalf of one investor against Kathleen Tarr, a former representative of Royal Alliance Securities. Allegedly, Tarr recommended taking an early retirement option and then sold the investor unsuitable variable annuities and non-traded REITs. Prior to taking the early retirement option, the investor’s portfolio consisted of diversified retirement investments.

In addition, securities arbitration lawyers are investigating recommendations made by Brian Brunhaver, a former registered representative for LPL Financial. Allegedly, Brunhaver unsuitably recommended the purchase of the non-traded REITs, specifically Inland American and Inland Western, to a client. This client was seeking to make investments that would fund future college expenses. Because of the illiquidity of non-traded REITs, the investments could not be sold in time to meet the client’s needs.

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