In or about May 2010, a registered representative who concentrated in variable annuities became registered with Matrix Capital Group, Inc. (Matrix) and remained with Matrix until April 2011. According to FINRA, during a one year period the representative recommended 17 customers surrender their existing variable annuities and replace them with another annuity product. FINRA alleged that each customer purchased a new annuity and paid a surrender charge of at least $1,000. In sum, FINRA found that in total the customers paid a total of $70,000 in surrender charges. In addition, FINRA alleged that in 16 of the 17 transactions, the customer forfeited significant death and/or living benefits through the switch.
Matrix’s primary business involved equity agency transactions, mostly for institutional customers and high net worth individuals. Christopher Anci (Anci) joined Matrix in 1996. He has been dually registered with three other firms at various times while registered with Matrix. Anci has been President and a director of Matrix Capital Group since 2004.
As President of the Matrix, Anci had overall supervisory responsibility for the firm’s operations. Also, during the time Anci served as Chief Compliance Officer, until November 2010, Anci was designated in the firm’s written supervisory procedures as the person responsible for reviewing and approving variable annuity sales and exchanges. Even after Matrix hired a new Chief Compliance Officer, according to FINRA Anci remained responsible for the supervision and review of variable annuity transactions.
FINRA found that even though the customers varied widely in age (40 to 80 years old), net worth ($400,000 to $10,000,000), and liquid net worth ($200,000 to over $1,000,000) the representative recommended that all 17 customers replace their existing variable annuities with the exact same product. FINRA also alleged that each customer was recommended that they select the same optional living benefit rider, the same underlying subaccount selection, and purchase the 6% bonus option.
According to FINRA, the representative provided Matrix with switch forms for each customer. On each switch form, FINRA alleged that the representative wrote the same three reasons for the recommended exchange including: to obtain a guaranteed income benefit, to obtain tax deferral, and to lock in gains daily instead of annually. However, FINRA found these reasons insufficient to explain why the customers should incur substantial surrender charges to purchase the new variable annuity. In addition, FINRA found the reasons provided untrue in that the new product did not offer a guaranteed income benefit, the tax treatment on the new product did not differ from the tax treatment for the surrendered product, and the new product locked in the gains on a quarterly basis, not a daily basis.
Accordingly, FINRA found that Matrix and Anci failed to exercise reasonable supervision over the variable annuity exchanges recommended by the representative. FINRA found that Matrix and Anci failed to recognize or address red flags of misconduct including the sale of the same product with the same features to a divergent group of customers, failing to recognize or address the representative’s use of the same justifications for all the exchanges, and his use of justifications that were untrue.
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