The Financial Industry Regulatory Authority (FINRA) filed a complaint against brokerage firm SWS Financial Services, Inc. (SWS Financial) over allegations that from September 2009, to May 2011, SWS Financial had inadequate supervisory systems procedures to supervise its variable annuity (VA) securities business. Specifically, FINRA alleged that SWS Financial: (1) failed to establish and maintain supervisory systems to supervise its VA securities business in violation of NASD and FINRA Rules; (2) failed to implement rules requiring a registered principal review and approval prior to transmission of a VA application to the issuing insurance company for processing and that a registered principal only approve VA transactions that he or she has determined that there is a reasonable basis to believe that the transaction is suitable for the customer; (3) failed to implement surveillance procedures to monitor a broker’s recommended exchanges of VAs to identify inappropriate exchanges; (4) failed to have policies and procedures to implement corrective measures to address inappropriate VA exchanges; and (5) failed to develop and document specific training policies or programs to ensure that principals supervisors who reviewed VA transactions had sufficient knowledge to monitor the transactions.
SWS Financial is a registered broker/dealer since 1986 and is headquartered in Dallas, Texas. The firm employs 313 registered personnel. From September 2009, to May 2011, SWS Financial derived the majority of its income from its business lines selling equities, mutual funds, variable life insurance or annuities, and municipal securities.
FINRA alleged that from September 2009, to May 2011, SWS Financial derived 16% to 20% of its total revenues from sales of VAs to customers. However, despite this fact, FINRA alleged that SWS Financial failed to establish and implement adequate supervisory systems for this aspect of its securities business. FINRA alleged that the firm’s brokers sold VAs both in branch offices where a registered branch manager was onsite as well as in offices where there was no onsite supervisor. FINRA alleged that the firms procedures required that VA transactions initiated by representatives in branch offices with a branch manager were reviewed and approved by the banch manager and then forwarded to SWS Financial’s home office for final review and approval employees at an affiliated insurance company, Southwest Insurance Agency (Insurance Agency).
However, FINRA alleged SWS Financial procedures failed to provide specific procedures for approval of VA transactions originating in offices without a registered principal. According to FINRA, these transactions totaled approximately 1,300 of the more than 1,500 VA transactions executed by SWS Financial brokers during the review period. FINRA alleged that these transactions were sent directly from the offices to the Insurance Agency employees for initial review and approval for completeness and conducted a preliminary suitability review. FINRA alleged that those who at the Insurance Agency who reviewed the VA applications held insurance and securities principal licenses with other entities but were not registered with SWS Financial in any capacity.
FINRA concluded that SWS Financial failed to establish and maintain procedures that were specifically tailored to its VA securities business causing the firm to submit over 70% of its non branch manager office initiated VA applications to the issuing insurance company without the applications ever having been reviewed by an SWS Financial securities principal. FINRA also alleged that when the VA applications were eventually reviewed by SWS Financial securities principals the supervisory reviews were deficient because the firm failed to develop specific training policies to ensure that principals had adequate knowledge to monitor in compliance with the FINRA rules.
Investors who have suffered losses through a brokerage firms’ failure to supervise their brokers may be able recover their losses through arbitration. The attorneys at Gana LLP are experienced in representing investors in cases where brokerage firms fail to supervise their representatives sale of unsuitable investment products such as variable annuities. Our consultations are free of charge and the firm is only compensated if you recover.