Financial Advisors Have an Obligation to Provide Truthful Information When Selling Securities

The Financial Industry Regulatory Authority (FINRA) recently barred broker Scottie Brent Chitwood (Chitwood) from the securities industry over allegations that he sold clients variable annuities by making false and misleading representations concerning the securities features.  Chitwood was also accused of exercising discretionary authority in clients’ accounts.  FINRA’s action reinforces the regulator’s rules that brokers have an obligation to disclose truthful and balanced information in the sale of securities products to investors.

A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date.  The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

Variable annuities offer a range of investment options to invest in and the value of the investment will vary depending on the performance of the investment options selected.  The investment options typically include mutual funds that invest in stocks and bonds.  Variable annuities distribute periodic payments for the rest of the investor’s life (or any other person you designate).  Most variable annuities encourage investors to remain invested for a period of years and discourage early termination through expensive surrender fees.  The insurance company can charge investors in some cases up to 7% of the investment for early termination.

In addition, variable annuities have a death benefit where the investor’s beneficiary will be paid if at the time of death the account value is less than the guaranteed amount.  Finally, variable annuities are tax-deferred and taxes on the income and investment gains only occur when money is withdrawn.  However, when money is withdrawn out of a variable annuity the investor is taxed on the earnings at ordinary income tax rates rather than lower capital gains rates.

FINRA alleged that Chitwood inaccurately represented to at least six investors that their variable annuity principal would be principally protected from loss.  FINRA also alleged that Chitwood failed to adequately disclose the surrender fees associated with customers’ variable annuities.  Chitwood was also alleged to have made inaccurate investment objective entries on new account documents for customers. On these occasions, Chitwood marked the clients as “aggressive” or “aggressive income” when the clients sought capital preservation.

Variable annuities are complex products with terms and features that are difficult to understand.  In addition, since each insurance company offers multiple annuity products with varying features it is important that a broker explain all the risks and rewards of variable annuities and ensure that the variable annuity is otherwise appropriate for the customer.  In some instances brokers have over committed a client’s financial resources into a variable annuity.  These improper recommendations can cause an investor substantial hardships if the investor has an immediate liquidity need and does not want to pay the high surrender charges.

The attorneys at Gana LLP are experienced in investigating claims concerning the sale of securities, including variable annuities, through misleading statements.  Our attorneys can help you detect and uncover suspicious activity in your accounts.  Our consultations are free of charge and the firm is only compensated if you recover.