As 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).