Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, April 14, 2009

FINRA Fines Fifth Third Securities for Unsuitable Variable Annuity Transactions

FINRA announced today that it 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.  In settling this matter, FTS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

 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.

 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. 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.

 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

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It hard to imagine why these issues continue to slip through compliance systems. Perhaps it's that the mid-sized groups don't have a dedicated team of analysts researching and watching for these issues. My company Lansare ( has a solution that can help prevent these issues by monitoring age/product mix and Rule 2821 conditions for variable annuities after the sale. This ensures that if front-end compliance systems don't catch a transaction(which they obviously didn't in 5/3's case) a backup system is in place to catch the transaction.

Posted by: Andy | Apr 21, 2009 12:40:30 PM

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