Finra Orders Eight Broker-Dealers to Pay $8.7 Mln Over Unsuitable Annuity Sales
(Updated with comment from an LPL spokesman.)
The Financial Industry Regulatory Authority has ordered eight independent broker-dealers to pay a combined $8.7 million in fines and restitution for failing to properly supervise and educate brokers on sales of variable annuities, according to two letters of settlement issued Wednesday.
The firms include National Planning Holdings broker-dealers National Planning Corporation, Investment Centers of America, SII Investments and INVEST Financial Corporation, which agreed to pay a total of $1.69 million in fines and $6 million in restitution. (NPH was acquired last year by LPL Financial.)
In a second settlement, Advisor Group’s broker dealers Royal Alliance Associates, FSC Securities Corporation, SagePoint Financial and Woodbury Financial Services agreed to pay a combined $1 million fine.
From 2013 to 2015, all firms failed to monitor sales of L-share variable annuities, which have shorter surrender periods of three to four years and fees that are between 35 and 50 basis points higher than the more commonly sold B-share annuities, Finra said. Brokers improperly sold the products to clients with long-term investment goals or to those who had also purchased long-term riders indicating they planned to hold the investments for at least five years, according to the settlements.
The firms’ “failure to have these supervisory systems and procedures in place was unreasonable given the substantial volume of variable annuities sales,” Finra said in its settlement with NPH.
NPH firms derived between 19% to 30% of their annual revenue from variable annuity sales, Finra said. The largest single fine was $650,000 against Los Angeles-based NPC, which Finra said genated around 19% of its annual revenue from the sales of variable annuities and generated around $56 million from L-share contract sales between January 2013 and December 2014. INVEST agreed to pay $600,000. SII said it would pay $325,000, while ICA agreed to pay $115,000.
SII and ICA also failed to ensure clients were receiving sales charge discounts on Unit Investment Trust sales, but have since paid restitution to affected customers, Finra said.
LPL, which finished absorbing around 1,800 NPH brokers earlier this year, is not liable for the fines under the terms of its asset purchase agreement, an LPL spokesman said.
The Advisor Group firms agreed to pay a total of $1 million and provide certification that they have updated policies and procedures. Royal Alliance, which has 2,100 brokers, agreed to pay $350,000. Atlanta-based FSC agreed to pay $200,000. Sage Point agreed to pay $200,000 and Woodbury agreed to pay $250,000.
“Despite the significant role that variable annuity sales played in their overall business, the Advisor Group Firms failed to implement a supervisory system and procedures reasonably designed to ensure suitability,” Finra said.
While some of the firms had incomplete instructions and procedures in place to guide brokers on L-share sales, Woodbury’s written supervisory procedures “failed to address variable annuity share classes at all,” Finra said.
A spokesperson for Advisor Group, which is owned by private equity firm Lightyear Capital, did not return a request for comment.
The penalties continue a string of regulatory actions against independent firms in recent years and exceed the $6.2 million in fines and restitution that Finra levied against eight different independent broker-dealers in November 2016 over the same charges of unsuitable L-share sales. The firms in that case included Voya Financial Advisors, several Cetera Financial Group subsidiaries, Kestra Investment Services, and FTB Advisors.
In November, it also fined independent firms Next Financial Group $750,000, and Hornor, Townsend & Kent $275,000 over similar allegations.
A Finra arbitration panel in June ordered Woodbury to pay former San Diego Chargers lineman Kris Dielman and his wife $1.1 million for allegedly failing to prevent sales of several unsuitable investments, including variable annuities.