On July 23, 2009, FINRA announced that it had fined five bank broker-dealers a total of $1.65 million for deficient supervision and procedures. Brokers at each of the firms operated out of branches of affiliated banks and sold variable annuities (“VA”), mutual funds or unit investment trust (“UIT”) transactions to bank customers. The brokerage customers were referred by bank personnel, and sales of these products represented a significant portion of each firm’s business. FINRA made numerous findings of inadequate supervision related to these products.
• At one firm a former broker “made 32 unsuitable sales to 25 elderly bank customers, recommending each customer purchase a VA with an enhanced death benefit rider. The customers, all 78 years old or older, were either too old to be eligible for the rider, or very close to the ineligible age. Those customers who purchased the VA with the enhanced death benefit rider received little or no benefit from the rider despite paying higher fees for it over the life of the annuity.” FINRA found that the firm “failed to take adequate remedial steps in response to red flags indicating that the broker was engaging in unsuitable VA transactions, including nine customer complaints filed against the broker about her annuity sales, and the broker’s practice of consistently engaging in a pattern of selling elderly bank customers the same variable annuity with the same enhanced death benefit rider.”
• At another firm which used trade blotters to assess suitability and approve VA and mutual fund transactions. FINRA found that such procedures “did not capture key information, such as the customer’s investment time horizon, risk tolerance and other financial assets – all details that are necessary for the principal to conduct an adequate suitability review.” Further, “important suitability information on the blotters was presented in a way that did not reflect customers’ true income or net worth; the blotter reflected only the highest number in the range of values from which it was taken.”
• Another firm “instructed its principals to consider factors such as a customer’s source of funds, health and investment time horizon without collecting or recording all the information necessary for principals to assess suitability and to consider factors such as the client’s age, need for tax deferral and liquidity without providing guidance on how to apply such factors in their suitability review.”
• Still, other firms “provided no factors to guide principals in determining suitability.”
In settling these matters, none of the firms admitted nor denied the charges, but consented to the entry of FINRA’s findings.
