FINRA Fines Firm for Reg BI Failures in Annuity Sales
A firm settled FINRA charges for Regulation Best Interest ("Reg BI") supervisory failures related to the sale of registered index-linked annuities ("RILAs").
According to the AWC, the firm failed to "reasonably consider various disadvantages of the exchanges" when recommending that customers surrender existing annuities or life insurance policies for RILAs. FINRA found that during the relevant period, the firm recommended 479 purchases totaling over $92 million; of these, 41 transactions—representing more than $7.9 million—were funded by exchanges from other insurance products. FINRA found that 19 of these 41 exchanges resulted in significant customer harm, including the forfeiture of insurance benefits and the incurrence of surrender charges. FINRA highlighted that "six customers gave up life insurance policies" with death benefits exceeding their surrender value, fifteen relinquished annuities with valuable riders, and eight incurred "surrender charges" totaling $38,591.39.
FINRA determined that the firm’s Reg BI policies and procedures were "not tailored to address recommendations" of RILAs. FINRA emphasized that although the firm maintained general guidance on Reg BI, it "did not have specific written policies ... or a supervisory system" reasonably designed to ensure compliance with the rule’s "Care Obligation." Further, FINRA determined that the firm failed to document or assess why customers would benefit from the recommended RILAs despite these losses. FINRA also said the firm did not have systems in place to identify or address red flags associated with these transactions, such as patterns of customers giving up valuable benefits.
As a result, FINRA said the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 3110 ("Supervision") and Rule 2010 (“Standards of Commercial Honor and Principles of Trade”).
To settle the charges, the firm agreed to (i) a censure, (ii) a $100,000 fine, (iii) restitution of $38,591.39, and (iv) undertake remedial measures, including written certification by senior management that corrective actions have been implemented.