Brokerage Firms Sanctioned $6.2 Million Over Sale of L-Share Variable Annuities

shutterstock_94127350The Financial Industry Regulatory Authority (FINRA) announced that it has fined eight brokerage a total of $6.2 million for failing to supervise sales of variable annuities (VAs).  Five of the firms were required to pay more than $6 million to customers who purchased L-share variable annuities that came with potentially incompatible, complex and expensive long-term minimum-income and withdrawal riders.

FINRA’s enforcement actions were against the following firms.

  • VOYA Financial Advisors Inc. – fined $2.75 million.
  • Cetera Advisor Networks LLC – fined $750,000.
  • Cetera Financial Specialists LLC – fined $350,000.
  • First Allied Securities, Inc. – fined $950,000.
  • Summit Brokerage Services, Inc. – fined $500,000.
  • VSR Financial Services, Inc. – fined $400,000.
  • Kestra Investment Services, LLC – fined $475,000.
  • FTB Advisors, Inc. – fined $250,000.

FINRA ordered the firms to pay the following to investors.

The L-share VAs are complex investment products that combine insurance and investment features designed for short-term investors willing to pay higher fees in exchange for shorter surrender periods.  L-shares also have the potential to pay greater commissions to brokers than traditional share classes.

FINRA found that in many cases the broker’s recommendation for the L-shares simply made no sense for the client.  FINRA found that the L-share annuities were often bundled into a complex product with expensive guaranteed income and withdrawal riders that are designed to provide benefits over longer holding periods.

Brad Bennett, Finra executive vice president and chief of enforcement stated that “when a firm cannot explain why a significant number of clients are paying up for the short-term flexibility of L-shares while at the same time buying riders that only have value over the long term, it is clear that these supervisory obligations are not being met.”

FINRA found that each of the firms lacked an adequate system to supervise variable annuities with multiple share classes and failed to provide brokers and supervisors with reasonable guidance regarding the narrow class of customers for whom the costs and features of L-share variable annuities were suitable.

These enforcement actions come on the heels of another action FINRA brought against Metlife Securities Inc., fining the firm $20 million for compliance failures in switching clients from one variable annuity to another.

Variable annuities have long been problem products for regulators.  In fact, the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know encouraging investors to ask questions about the variable annuity before investing.  In many cases, the benefits of variable annuities are often outweighed by the terms of the contract that include exorbitant expenses such as surrender charges, mortality and expense charges, management fees, market-related risks, and rider costs.

Gana LLP represents investors who have suffered securities losses in complex investment products such as variable annuities.  Our investment attorneys bring the majority of these claims in FINRA arbitration.  Our consultations are free of charge and the firm is only compensated if you recover.