finra

FINRA

For Release:
Contacts:
Tuesday, January 29, 2008
Nancy Condon (202) 728-8379
Brendan Intindola (646) 315-7277

 



FINRA Fines Banc One for Unsuitable Variable Annuity Sales, Inadequate Supervision of Fixed-to-Variable Annuity Exchanges

Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that as part of its ongoing efforts to curb abuses in the sale of variable annuities, it has fined Banc One Securities Corporation (BOSC) of Chicago $225,000 for making unsuitable sales of deferred variable annuities to 23 customers and for having inadequate systems and procedures governing annuity exchanges. Twenty-one of the 23 customers were over 70 years old.

In addition to the fine, FINRA is requiring the firm to allow each of the 23 customers to sell their variable annuities without penalty. Ordinarily, these variable annuities would have been subject to a six-year "surrender period" during which time the customers would have been required to pay surrender charges as high as 7 percent of the amount invested if they were sold in the first two years. The firm will also pay restitution of about $6,500 to two customers who incurred surrender charges when exchanging annuities.

In 2006, BOSC merged with J.P. Morgan Securities, Inc.

"Variable annuities are complicated products with features such as surrender charges that can limit the customer's ability to access the invested funds," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "When firms are recommending annuities or annuity exchanges to elderly customers, they must act in the customers' best interests, taking into account all relevant factors - including the customers' ages and liquidity needs, surrender charges, product expenses and investment features. The exchanges at issue in this case appeared to have no real benefits to the customers, while subjecting them to new sales charges and locking up their money for a new, six-year surrender period."

FINRA found that in each of the 23 transactions between January 1, 2004, and June 30, 2005, BOSC representatives recommended that the customers exchange their fixed annuities then paying a minimum of 3 percent, for variable annuities. Following the exchange, the customers placed 100 percent of their assets into the fixed rate feature of the variable annuity, which paid a maximum of 3 percent - as recommended by BOSC representatives. All but one of the fixed annuities were beyond the surrender period - that is, the customers were not subject to any financial penalties if they withdrew any of their funds from the fixed annuity. Each of the newly purchased variable annuities was subject to a six-year surrender period requiring the customers to pay a penalty if they withdrew more than the sum of their earnings and 10 percent of their principal. FINRA found that each of these 23 recommendations was unsuitable, given the customer's age, investment objective, financial situation and income needs.

The settlement cites one example of an 80-year old customer who exchanged a fixed annuity earning 3 percent for a variable annuity, in which he invested the entire $80,000 balance in the fixed income feature, which also paid 3 percent interest. This new variable annuity was subject to a six-year surrender period. Within the first year of owning the variable annuity, the customer withdrew $9,000. Sixteen months after buying the variable annuity, the customer liquidated it and incurred a $4,628 surrender fee.

FINRA further found that BOSC failed to adequately supervise these transactions and that the firm's supervisory system and procedures failed to require firm supervisors to obtain or consider certain critical information, such as the costs and benefits of features of the new and exchanged product, which are necessary for conducting the required suitability review of a variable annuity exchange.

In concluding this settlement, BOSC neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.

FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business with the U.S. public. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.