The Financial Industry Regulatory Authority has fined Fifth Third Securities $4 million and required the firm to pay approximately $2 million in restitution to customers for failure to accurately consider and describe costs and benefits of variable annuity (VA) exchanges, and for recommending exchanges without a reasonable basis to believe they were suitable for customers.

As a result, the firm misstated costs and benefits of VA exchanges -- and in some cases omitted critical information altogether -- making the exchanges appear more beneficial to customers in 77 percent of the exchanges Finra reviewed for the period of 2013 through 2015. For instance, Fifth Third transgressions included telling customers that the new VA contracts being marketed had living rider benefits guaranteeing minimum payments to customers and their beneficiary when none existed, Finra said.

This is the second significant Finra enforcement action against Cincinnati-based Fifth Third involving the firm's unsuitable sale, disclosure and supervision of variable annuities.

Returning $2 million in restitution to harmed investors is a key part of Finra's investor protection mission, Finra's Executive Vice President and Head of Enforcement Susan Schroeder said.

"VA exchanges are subject to regulatory requirements to ensure that brokers have a reasonable basis to recommend them, and their supervisors have a reasonable basis to approve the sales. Finra remains vigilant in examining how member firms market variable annuities, which are complex products pitched to retirees and people saving for retirement,” Schroeder said.

“We are obviously entering into a consent order regarding our variable annuities business,” Fifth Third Bancorp Chief Reputation Officer Larry Magnesen told Financial Advisor magazine. “Under the AWC (acceptance with waiver and consent), we neither admit nor deny Finra’s findings, however we do accept their findings and we waive our opportunity to challenge them. The variable annuities business is not a large one for us, but our customers should have access to variable annuities when they are appropriate and suitable. We are committed to ensuring that we operate in full compliance with all applicable regulations,” Magnesen added.

Finra found that Fifth Third failed to ensure that its registered representatives obtained and assessed accurate information necessary to VA exchanges and that reps and principals were not adequately trained to conduct comparative analysis of the material features of VAs.

By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, Finra found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the firm’s VA exchanges.  For example, Fifth Third overstated the total fees to customers of the existing VA being exchanged or misstated fees associated with various additional optional benefits, known as riders.

Fifth Third failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.

Fifth Third represented that new, proposed VAs had living benefit riders even though the proposed VA did not, in fact, include a living benefit rider.

Finra found that the firm's principals ultimately approved approximately 92 percent of VA exchange applications submitted to them, but because of the firm's supervisory deficiencies, it did not obtain a reasonable basis to recommend and approve many of these transactions, Finra said.

This is the second go-found between Finra and the firm for VA transgressions. The regulator found that Fifth Third failed to comply with a term of its 2009 settlement with Finra which found that, from 2004 to 2006, Fifth Third entered into 250 unsuitable VA exchanges and transactions with inadequate systems and procedures governing its VA exchange business.

For more than four years following the 2006 settlement, up through 2010, the firm failed to fully implement an independent consultant's recommendation that it develop certain surveillance procedures to monitor VA exchanges by individual registered representatives, Finra said.