A FINRA member firm agreed to pay a $4 million fine to FINRA, and approximately $2 million in restitution to affected customers, for making unsuitable trading recommendations regarding exchanges of variable annuities ("VAs").
VAs are considered by FINRA to be complex investments that are frequently marketed and sold to retirees and people saving for retirement. The process of exchanging one VA with another requires a comparison of the complex features of each VA. As a result, VA exchanges are subject to FINRA Rule 2330 ("Members' Responsibilities regarding Deferred Variable Annuities") to ensure that brokers have, among other things, a "reasonable basis" to recommend exchanges of VAs, and their supervisors have a "reasonable basis" to approve the transactions.
FINRA stated that Fifth Third Securities, Inc. ("Fifth Third") "misstated the costs and benefits of [VA] exchanges, making the exchanges appear more beneficial to the customer" than was actually the case. According to FINRA, approximately 77% of the transactions reviewed included a "material misstatement or omission about the costs or benefits of the VAs at issue." As a result, FINRA determined that the registered representatives did not have the necessary accurate and complete information regarding the specific VAs to have a reasonable basis to recommend, nor could their supervisors have a reasonable basis to approve, the VA exchanges.
In accordance with this settlement, Fifth Third neither admitted to nor denied the allegations. This is the second enforcement action that FINRA has issued against the firm concerning the recommendation and sale of VAs.
Commentary / Steven Lofchie
Whatever happens with the SEC's Best Interest Requirement proposal (see Cadwalader Memorandum), broker-dealers should pay far more attention to employee training.
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