FINRA Fines Brokerage Firm Over Misleading Variable Annuities Disclosures and Failure to Supervise

The Financial Industry Regulatory Authority (FINRA) fined brokerage firm Financial West Investment Group, Inc. d/b/a Financial West Group (Financial West Group) over allegations between March 2009 and May 2010, the firm did not provide accurate variable annuity disclosures to customers concerning certain fees and charges.  FINRA also alleged that Financial West Group failed to have an adequate written supervisory procedure to ensure that customers received accurate disclosures about these fees and charges.  Finally, FINRA alleged that Financial West Group did not adequately enforce its policies for reviewing emails.  In resolving these allegations Financial West Group paid a $35,000 fine.

Financial West Group’s main offices are in Westlake Village, California.  The firm has approximately 116 registered branch offices and employs 290 registered brokers.

FINRA alleged that between March 2009, and May 2010, the Financial West Group used forms called variable annuity disclosure and investment form, request to switch investments form, and the product comparison worksheet to inform customers of various features of deferred variable annuities.  The forms included information concerning the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2, mortality and expense fees, the potential charges for and features of riders, the investment options, death benefits, payment options, and risks disclosures. However, according to FINRA, Financial West Group did not provide accurate disclosures to customers in 28 out of 93 (30%) of the variable annuity transactions and exchanges reviewed by the regulator.

The forms were used to make suitability recommendations and allegedly contained inaccuracies when compared to the disclosures in the variable annuity prospectuses that included inaccuracies between the amount of mortality and expense fees, inconsistencies between the surrender schedule, surrender charges and related withdrawal charges, and incorrect amounts reflected as the total rider and/or benefit fees.  FINRA found that the foregoing conduct violated FINRA Rules 2330 and 2010

The FINRA rules also required Financial West Group to reasonably supervise its brokers under Rule 3010(b).  The rule requires a member to “establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives, registered principals, and other associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules.”

FINRA alleged that Financial West Group failed to have adequate written supervisory procedures in place to verify that its brokers made accurate disclosures in connection with variable annuity transactions.  Financial West Group’s procedures required the firm’s designated principal and supervisor to review the customer application and variable forms to determine that the paperwork was sufficient and the variable contract was a suitable for the client.  However, FINRA alleged that the firm’s written supervisory procedures failed to require the firm to review the forms to ensure they accurately disclosed to customers fees and charges consistent with the respective variable annuity prospectus.

Finally, NASD Rule 3010(d)(2) requires firms to develop written procedures for the review of incoming and outgoing correspondence, including emails, with the public relating to securities business.  Financial West Group utilized a vendor for electronic storage media.  The vendor used key words to flag emails that required supervisory review.  However, according to FINRA, Financial West Group did not comply with its existing policies and procedures for review of email and did not review 277,879 out of 342,866 emails flagged for review.

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.