FINRA Suspends Broker for Unsuitable Annuity Recommendations
Commentary by Jeff Ziesman
FINRA suspended a broker for recommending unsuitable variable annuity exchanges.
According to the AWC, the broker recommended seven unsuitable variable annuity exchanges to three senior customers. FINRA determined that the broker failed to consider the loss of benefits resulting from the liquidation of the customers’ existing annuities. FINRA stated that five of the exchanges depleted or eliminated the accumulated benefit bases on living benefit riders, contrary to the customers’ investment goals and financial needs. FINRA further found that two of the exchanges reduced the value of a customer’s death benefit, inconsistent with the customer’s stated objectives.
FINRA determined that the broker violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 2111 ("Suitability"), and 2330 ("Members' Responsibilities Regarding Deferred Variable Annuities").
The broker consented to a two-month suspension from associating with any FINRA member in all capacities and a $5,000 fine.
Commentary
Regulators have been discussing issues with "complex products" since the Great Recession. The list of such products is ever-expanding – today, in the regulator’s eyes, virtually anything other than a simple mutual fund or equity is a complex product. Complex products generate enhanced scrutiny from regulators. Variable annuities were the first complex product (even prior to the Great Recession and even before "complex product" was a regulatory term-of-art). They have been a regulatory focus for more than two decades.
In this matter, the representative recommended seven exchanges to three senior retail customers without a reasonable basis to believe that these transactions were suitable given the customers’ investment profiles and objectives. Several things stand out. First, the underlying conduct is extremely old – February 2017-June 2020 – the oldest transaction is going on nine years old, and the conduct is so old the SEC Regulation BI does not even apply to the transactions (instead, FINRA Rule 2111 does). Second, and relatedly, the sanctions were extremely modest relative to the number of alleged problematic transactions (seven) – this presumably is a byproduct of the age of the underlying conduct. Third, while the AWC recites that the customers lost certain benefits through the replacements, it does not state what benefits they gained with the new products.
In short, likely largely because of the age of this matter, more questions were created than answered by the language in the AWC.