November 28, 2016

Life Insurance Subsidiary Settles Conflict of Interest and Supervisory Failure Charges

A financial advisory subsidiary of a life insurance company agreed to pay a $1.75 million fine to settle FINRA charges that it failed to: (i) identify and reasonably address certain conflicts of interest in the firm's compensation policy for instances when customers elected to move assets out of their variable annuities ("VAs"), many of which were held in retirement accounts; and (ii) adequately supervise its VA business, including the sale of VAs with multiple share classes.

Specifically, FINRA found that the insurance corporation:

  • failed to have a reasonable system to address and review the conflict of interest created by its compensation policy;

  • created a conflict of interest by providing registered representatives a financial incentive to recommend that customers move their funds from the life insurance company's VAs to the firm's fee-based platform or into a fixed index annuity at the insurance company;

  • further incentivized the conflict by prohibiting its registered representatives from receiving compensation when moving customer funds from a VA with the insurance company to VAs, mutual funds or other products outside of the insurance company;

  • moved a significant volume of assets from the insurance company's VAs to the advisory platform;

  • failed to maintain systems and procedures to adequately supervise certain aspects of sales of individual VAs;

  • failed to provide its principals reviewing VA transactions with sufficient information to consider the customer's other assets;

  • failed to enforce its procedures relating to the review of required VA disclosure forms;

  • allowed principals to review and approve transactions without all required documentation in certain instances;

  • failed to enforce its procedures relating to the review of VA transactions that exceeded customer concentration levels; and

  • failed to have adequate procedures relating to the supervision of multi-share class VAs, particularly L-shares.

FINRA Executive Vice President and Chief of Enforcement Brad Bennett remarked that:

Compensation policies that reward representatives for moving customers from one complex proprietary product to other potentially higher cost products must include monitoring and supervision that ensure that the representatives are not putting their own financial interests ahead of their obligation to their customer.

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