Orders Restitution, Rescission Offers to Affected Customers, Investigation Continues as to Individuals Involved
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Fifth Third Securities, Inc., (FTS) of Cincinnati, OH, $1.75 million for a series of violations related to variable annuity sales and exchanges. FINRA found that FTS made 250 unsuitable sales and exchanges to 197 customers through 42 individual brokers. FINRA also found that FTS's supervisory systems and procedures were inadequate for policing the firm's variable annuity sales and exchanges.
FINRA's investigation into the activities of individuals involved in the sale, approval and supervision of the unsuitable VA transactions is continuing.
In addition to the fine, FINRA ordered FTS to pay more than $260,000 in restitution to 74 customers to compensate them for surrender charges incurred in the unsuitable transactions. The firm must also offer all 197 customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase plus interest and any surrender charges required, adjusted for any withdrawals made.
"Variable annuities are complex investments that are designed to be retirement savings vehicles and are meant for the long-term investor," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "Firms must be diligent in their efforts to ensure VA sales and exchanges are suitable and the firm's systems and procedures are robust enough to adequately supervise their sales force, particularly in connection with brokers newly acquired from other firms. FTS failed to meet this standard and as a result, their customers — including those who were elderly and needed access to their money — were subjected to needless expenses and long surrender periods."
FINRA found that between January 2004 and December 2006, FTS effected 250 unsuitable VA exchanges or transactions through 42 brokers, who, in many cases, worked in Fifth Third Bank branches. They used lists provided by the bank of customers with maturing CDs and referrals from bank employees to identify new customers — some of them elderly and/or unsophisticated and with conservative investment objectives — to purchase VAs.
One broker had 74 customers enter into 118 unsuitable exchanges shortly after he joined FTS in early 2005. To avoid leaving substantial customer assets at his prior firm, he switched his customers into VAs issued by the same insurance company with the same riders. In recommending these cookie cutter transactions, the broker ignored substantial differences in his customers' ages, incomes, investment objectives and investment sophistication. The customers paid, in aggregate, at least $260,000 in charges to surrender their old annuities and were locked into essentially identical VAs that were more expensive and had new surrender periods.
The commissions earned on these transactions enabled the broker to win a firm sales contest and he and his supervisor were each awarded a 42" flat screen TV. The settlement announced today requires FTS to reimburse the broker's customers for these surrender charges.
FINRA found that FTS knew the broker was engaging in a mass switch and approved each of the broker's transactions, failing to adequately respond to red flags indicating that the exchanges were unsuitable. The clearest red flag was the broker's "cookie cutter" approach to the transactions — recommending and selling each of his customers the exact same VA with the exact same riders, which should have caused the firm to question whether the broker adequately considered whether the transactions were appropriate for each customer. Moreover, the paperwork submitted by the broker in support of the transactions contained other red flags. The broker filled out all the paperwork (other than the customers' signatures) personally and the paperwork contained numerous inaccuracies.
FINRA also found that 41 other FTS brokers recommended and effected 132 unsuitable VA purchases for 123 customers. These customers used cash from CDs or bank accounts to purchase the same VA and they put their entire investments into the fixed rate sub-account of the VA. Many of these customers were elderly and/or possessed limited financial sophistication, and had conservative investment objectives. FINRA found these identical transactions, in which customers traded liquid assets for a VA with a seven-year surrender period and annual fees, to be unsuitable given the customers' financial situations, needs, and investment objectives.
As part of the settlement, FINRA is requiring the firm to retain an independent consultant to review the adequacy of and recommend modifications to the firm's supervisory system and procedures and training relating to VA transactions.
The firm also violated FINRA registration rules by allowing improperly registered representatives to buy and sell equities and bonds and by allowing at least one Fifth Third Bank employee to maintain his securities license with FTS even though he did no work for FTS and FTS did not pay him. FINRA also found that the firm failed to maintain accurate books and records related to its VA business.
In settling this matter, FTS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
In February 2007, FINRA issued Notice to Members 07-06, Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products, in which firms were reminded of the potential risks that may arise when brokers change firms and recommend that their clients switch out of an existing mutual fund or variable annuity holding.
Investors can learn more about VAs and the potential risks of VA exchanges by consulting the FINRA Investor Alerts Should You Exchange Your Variable Annuity? and Variable Annuities: Beyond the Hard Sell. Both are available on the Investor pages of FINRA's Web site, www.finra.org.
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 2008, members of the public used this service to conduct 11.6 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 independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms; writing and enforcing 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 firms.
For more information, please visit our Web site at www.finra.org.