The Financial Industry Regulatory Authority (FINRA) sanctioned broker David Herlicka (Herlicka) concerning allegations that from 2003 through 2011 Herlicka made unsuitable trade recommendations to seven customers in connection with the sales of Variable Universal Life (VULs). FINRA found that Herlicka also made misstatements and failed to adequately disclose information regarding VULs, including the fact that they have surrender fees. FINRA also alleged that Herlicka recorded false information regarding customer net worth and annual income on VUL applications for four of these customers and that he, in 2011, also effected an unauthorized trade of a VUL for a customer.
VUL are complex insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. Monthly charges for the life insurance policy, including a cost of insurance charge and administrative fees, are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the sub-account investments. In addition, the VUL policy terminates, or lapses, if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. Upon termination of the policy, the remaining cash value becomes worthless.
Given the costs involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. For example, if a policy is too expensive for the client to continue to make premium contributions to the policy could lapse over time. This is precisely what FINRA alleges that Herlicka failed to consider in some recommendations to his clients.
In the case of one investor, the investor was a 52 year-old owner of a small moving company earning approximately $140,000 annually. Another investor was 55 years old and worked as an assistant earning approximately $13,000 annually. At the time the investors paid their initial premiums on these VULs, they had no other investments or savings. FINRA alleged that Herlicka and another representative sold the two investors a VUL with face amounts of $500,000 and $250,000, respectively. FINRA found that Herlicka and another advisor represented to that the two investors would not have to worry about being able to afford their premiums because they could use the funds invested in the VUL sub-accounts to pay the premiums.
FINRA found this statement was inaccurate and misleading since Hcrlicka failed to disclose that taking such action would adversely affect the net cash surrender value of their policies and their’ policies could eventually lapse if there wasn’t sufficient funds to cover the monthly deductions. The planned premiums for the two policies were $12,000 and $6,000 annually. One investor needed liquidity to take care of unexpected costs of business while the other investor’s $6,000 premium was nearly 50% of her gross income. FINRA found that the VULs Herlicka recommended were unsuitable since the premiums they needed to pay to prevent their policy from lapsing were higher than they could afford given their financial situation and needs. In addition, FINRA determined that the VUL did not meet the investor’s liquidity needs.
The attorneys at Gana Weinstein LLP are experienced in representing investors in securities litigation matters concerning variable annuities and VULs. Our consultations are free of charge and the firm is only compensated if you recover.