FINRA Fines Securities America For Failure To Supervise
Securities America Inc. a brokerage firm headquartered in La Vista, Nebraska, has been censured and fined $175,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that it failed to supervise variable annuity recommendations made by the registered representatives of the firm. Letter of Acceptance Waiver and Consent No. 2016048243101 (Sept. 7, 2018).
According to the AWC, from August 4, 2014 to January 28, 2016, the firm reportedly failed to create and maintain supervision systems and written supervisory procedures with a view towards ensuring suitability of the recommendations of variable annuities made by the firm’s registered representatives.
The AWC stated that Securities America sold variable annuities containing various complex options and features, which has prompted FINRA to create Rule 2330. The AWC noted that firm like Securities America were required to make sure that the customer was informed about the annuity’s features, which included information about costs, fees, tax penalties and surrender charges.
One of the annuities offered by Securities America was the L-Share contracts which contained shorter surrender periods but carry higher fees. Customers paid a higher price than with B-Share contracts for not having to keep their money invested in the annuity for as long as the B-Share. Securities America’s sales of these contracts containing certain riders raised concerns by FINRA.
Particularly, L-share contracts raised concerns by FINRA because they have been sold with a rider providing guaranteed income (commonly referred to as a guaranteed minimum withdrawal benefit rider or guaranteed minimum income benefit rider). In order to provide the maximum benefit to the customer for guaranteed income, the riders typically required investors to keep their money invested for a longer period of time than the L-share contract surrender period.
The AWC revealed that the firm neglected to create and implement procedures that identified suitability concerns regarding the costs, fees, or surrender periods that were to be charged to investors depending on the type of variable annuity share class selected. In addition, the firm reportedly failed to develop adequate supervision procedures for determining when principals and supervisory personnel should take a closer look at the appropriateness of annuities and riders recommended by the registered representatives before approving of the recommendations.
The AWC stated that the written supervisory procedures and a compliance manual used by the firm at the time required the firm’s registered representatives to make sure customers completed and returned Variable Annuity Share Class Supplement Forms containing information about costs and fees pertaining to the annuities offered by the firm. However, the manual used by the firm did not identify the issues relating to the L-share contracts being sold with riders providing guaranteed income to customers.
The AWC further stated that registered representatives were insufficiently trained. They were apparently not provided enough information about the features of the annuity, which precluded them from being able to comply with FINRA Rule 2330(e). Evidently, the principals who reviewed the contracts were not provided enough guidance to ensure that they knew of the L-share contracts being problematic for investors who intended to invest on a long-term basis or who had plans to utilize the income riders.
Securities America apparently accumulated $53,000,000.00 from investors through selling variable annuities; $6,600,000.00 from 1,904 L-share contracts. FIRNA stated that the supervisory failures affected the suitability of the transactions, namely the large number of investors who may have been inappropriately placed in an L -share contract.
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