The Advisor Group Firms (FSC Securities Corporation,
SagePoint Financial, Inc., Royal Alliance Associates, Inc. and Woodbury
Financial Services, Inc.) consented to being fined and censured by Financial
Industry Regulatory Authority (FINRA) according to their submission of a Letter
of Acceptance, Waiver and Consent #: 2016047636601, accepted by FINRA on July
24, 2018. FINRA found that the Advisory Group Firms failed to reasonably
supervise sales of multi-share class variable annuities.
The AWC stated that SagePoint, FSC and Woodbury (from
January 2013 to December 2014) and Royal Alliance (from February 2014 to
December 2015) sold variable annuity contracts with the choice of different
share classes, which included B-share contracts and L-share contracts.
B-share contracts – the most common share class sold to
customers – contain lower fees than L-share contracts but longer surrender
periods. Customers typically pay up to 50 basis points more for L-shares in
return for increased liquidity. FINRA Department of Enforcement indicated that
suitability concerns could arise when L-share contracts are sold to customers
who have indicated their plans to hold their investment on a long-term basis.
Those concerns, according to FINRA, become more obvious when an L-share
contract is purchased with a long-term rider (e.g. Guaranteed Minimum
Withdrawal Benefit or Guaranteed Minimum Income Benefit) since those riders
require the annuity to be held by the customer for at least five years, if not longer,
to provide the customer with the complete benefit.
FINRA stated in the AWC that the Advisor Group Firms had to
comply with Rule 2330’s standards, which preclude a registered representative
from recommending that a variable annuity be purchased or exchanged unless the
representative has a reasonable basis to believe that: the customer has been
provided information about the variable annuities’ features, surrender periods,
fees, expenses and tax implications; the customer would derive a benefit from
some of the variable annuities’ features (e.g. tax-deferral, a guaranteed
income stream, or a death benefit); and that the selected variable annuity and
rider(s) are suitable for that customer.
The AWC detailed the Advisor Group Firms’ failure to establish
and enforce a supervisory systems and written supervisory procedures
constructed to ensure registered representatives conformed to Rule 2330.
According to the AWC, the procedures failed to identify suitability issues
concerning the various surrender periods, costs and fees of the share classes.
There was apparently no mention of the suitability issues within the Advisor
Group Firms’ procedures concerning L-share contracts being sold with long-term
income riders or sold to customers with long-term investment horizons. FINRA
cited the Advisor Group Firms for failing to address within their written
supervisory procedures any instances in which further scrutiny was justified in
the mandated principal review and approval stage due to the suitability issues stemming
from the selected variable annuity share class.
The AWC stated that registered representatives and
principals were also not provided sufficient training by The Advisor Group
Firms to ensure that the variable annuity features were understood. The Advisor
Group Firms, according to the AWC, used training modules that were not
constructed to confirm that registered representatives and principals
understood suitability concerns stemming from L-share contracts being sold with
long-term income riders or sold to customers with long-term investment
horizons.
FINRA Department of Enforcement found that the Advisor Group
Firms violated FINRA Rules 2330(d), 2330(e), 3110, 2010 and NASD Rule 3010
based on their foregoing supervisory failures.
Royal Alliance also consented to findings that it failed to
appropriately supervise the rates that variable annuities were exchanged.
Specifically, the AWC mentioned that from February 2014 to March 2016, Royal
Alliance had not established and maintained a supervisory system and written
supervisory procedures appropriately constructed to supervise exchanges of
variable annuities. The AWC stated that only a limited number of
representatives had been reviewed, and the determination of which
representatives were reviewed did not depend on the rates in which annuity
recommendations were made. Evidently, there were no surveillance procedures
included within the firm’s supervisory procedures that had been constructed to
identify alarming rates of exchanges. The AWC stated that Royal Alliance
violated FINRA Rules 2330(d), 3110, 2010 and NASD Rule 2010 as a result of its
failure to supervise in this regard.
The AWC stated that from January 2013 to December 2014, FSC
generated more than $51,500,000.00 in variable annuity sales. $12,200,000.00 of
those sales (more than 23% of total variable annuity transactions) consisted of
L-share contract sales. FSC was fined $200,000.00 and censured.
SagePoint generated more than $52,700,000.00 in variable
annuity sales from January 2013 to December 2014. L-share contracts comprised
$11,500,000.00 of those sales (more than 21% of total variable annuity
transactions). SagePoint consented to sanctions including a $200,000.00 fine
and censure.
From February 2014 to December 2015, $61,900,000.00 in
variable annuity sales had been generated by Royal Alliance. $15,600,000.00 in
sales were due to sales of L-share contracts (more than 28% of total variable
annuity transactions). Royal Alliance consented to sanctions including a
$350,000.00 fine and censure.
Woodbury generated more than $107,100,000.00 in variable
annuity sales between January 2013 and December 2014. L-share contract sales
totaled $18,800,000.00 (19% of total variable annuity transactions). Woodbury
consented to sanctions including a censure and $250,000.00 fine.
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