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FINRA Fines Hornor, Townsend & Kent $275,000 Over L-Share Variable Annuity Sales Practices

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.

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, the VA contract 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 (only after expiration of a surrender period may an investor exit their VA investment without incurring a surrender charge).

Because L-share VA contracts typically carry higher commissions and fees, there is a very real concern with some financial advisors choosing to sell L-share contracts in order to earn enhanced commissions and fees.  Before recommending an investment product, applicable rules and regulations mandate that a financial advisor must first conduct a suitability analysis in order to determine whether the product best meets the investor’s stated objectives and profile.  Moreover, under applicable industry rules and regulations, brokerage firms like HTK are charged with supervising their registered representatives.  FINRA’s recent $275,000 fine against HTK demonstrates that sellers of L-share VA contracts can expect significant regulatory scrutiny going forward..

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in recovering funds on behalf of investors who have suffered losses due to unsuitable investment recommendations by stockbrokers and financial advisors, including cases involving variable annuities.  Investors who wish to discuss a possible claim may contact our office at (866) 966-9598 or for a no-cost, confidential consultation.

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