The Financial Industry Regulatory Authority (FINRA) has fined five bank broker-dealers a total of $1.65 million for deficient supervision and procedures related to variable annuity (VA), mutual fund or unit investment trust (UIT) transactions.
Brokers at each of the firms operated out of branches of affiliated banks, selling VAs, mutual funds or UITs to bank customers, who, in many instances, were elderly. The brokerage customers were referred by bank personnel, and sales of these financial products represented a significant portion of each firm's business.
"Today's actions underscore the need for firms operating bank branches to have effective systems and procedures in place to monitor sales of variable annuities, mutual funds and UITs," said Susan Merrill, FINRA executive vice president and chief of enforcement. "Bank broker-dealers have access to a broad customer base through their retail bank branches. Proper care must be taken to appropriately supervise sales to those customers, particularly the elderly who can be unfamiliar with securities products as they seek alternatives to certificates of deposit and other bank offerings."
The five firms that FINRA fined are McDonald Investments (now KeyBanc Capital Markets Inc.), $425,000; IFMG Securities, $450,000; Wells Fargo Investments LLC, $275,000; PNC Investments, $250,000; and WM Financial Services Inc. (now Chase Investment Services Corp.), $250,000.
McDonald Investments, now KeyBanc Capital Markets, also was charged with unsuitable variable annuity sales to elderly customers. In the case against McDonald, FINRA found that, between June 2004 and January 2006, a former broker at the firm 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 ordered the firm to offer the 25 affected 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.
FINRA also found that McDonald 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.
The firm placed the broker under heightened supervision, but while under heightened supervision, the broker undertook all 32 unsuitable transactions and the firm approved them. FINRA also found that McDonald failed to implement adequate VA supervisory systems and procedures.
As for IFMG Securities, FINRA found that the firm used trade blotters to assess suitability and approve VA and mutual fund transactions that 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. Also, 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.
In addition to the blotter review, IFMG's Compliance Department performed a review of account documents approximately 10 days after transactions had been completed to further assess suitability and to ensure that all paperwork had been completed. However, because the transactions had been completed by that time, the Compliance Department often had difficulty obtaining the requested information and completing its review. As a result, FINRA found, a large backlog of unapproved transactions developed at IFMG from 2004 through 2006. That backlog delayed final approval of transactions for weeks, months and in some cases, for over a year. Despite knowledge of the growing backlog, IFMG failed to take effective action to address the problem, which continued until the firm changed to a pre-approval suitability review system between May and August of 2006. IFMG no longer operates as a broker-dealer.
In the Wells Fargo, PNC Investments and WM Financial Services cases, FINRA found that the firms did not provide adequate guidance to principals who approved variable annuity transactions, or in the case of WM Financial, UIT transactions.