The Cetera Firms, which include Cetera Advisor Networks LLC, (headquartered in El Segundo, California), Cetera Financial Specialists LLC (headquartered in Schaumburg, Illinois), First Allied Securities, Inc. (headquartered in San Diego, California), Summit Brokerage Services, Inc. (headquartered in Boca Raton, Florida), and VSR Financial Services, Inc. (headquartered in Overland Park, Kansas), were censured and fined by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the Firms failed to supervise sales associated with multiple share classes of variable annuities. Letter of Acceptance, Waiver and Consent, No. 2015045234401 (Nov. 2, 2016).
According to the AWC, between January of 2013 and December of 2014, Cetera Firms did not reasonably apply adequate supervisory procedures and systems to make sure that recommendations and sales associated with multiple share classes, namely L share contracts, were suitable for customers. FINRA noted that patterns of sales of long term income riders coupled with L share contracts should have raised concerns and heightened suitability review due to conflicting time horizons associated with such.
Per the AWC, from January of 2013 to December of 2014, Cetera Advisor Networks LLC generated sales of variable annuities totaling more than $187,000,000.00, which accounted for eighteen percent of the firm’s revenue. Apparently, an estimated $48,000,000.00 of the variable annuity sales pertained to contracts for L shares. The AWC stated that 1,095 of the 2,869 exchanged or new variable annuities consisted of the L share contracts.
Additionally, Cetera Financial Specialists LLC produced sales of variable annuities equating to more than $55,000,000.00, accounting for thirty-four percent of the firm’s revenue. The AWC reported that an estimated $13,000,000.00 of the variable annuity sales pertained to contracts for L shares. 786 of the 3,080 exchanged or new variable annuities apparently consisted of the L share contracts.
Per the AWC, First Allied Securities, Inc. generated sales of variable annuities totaling more than $118,000,000.00, which accounted for twenty-nine percent of the firm’s revenue. Evidently, an estimated $41,000,000.00 of the variable annuity sales pertained to contracts for L shares. The AWC revealed that 2,210 of the 6,207 exchanged or new variable annuities consisted of the L share contracts.
The AWC further stated that Summit Brokerage Services, Inc. produced sales of variable annuities equating to more than $45,000,000.00, accounting for thirty percent of the firm’s revenue. Apparently, an estimated $17,000,000.00 of the variable annuity sales pertained to contracts for L shares. The AWC stated that 1,123 of the 2,947 exchanged or new variable annuities consisted of the L share contracts.
Additionally, VSR Financial Services, Inc. generated sales of variable annuities totaling more than $13,000,000.00, which accounted for twenty percent of the firm’s revenue. Evidently, an estimated $13,000,000.00 of the variable annuity sales pertained to contracts for L shares. The AWC stated that 692 of the 2,097 exchanged or new variable annuities consisted of the L share contracts.
Per the AWC, L share contracts are designed to provide policyholders with commitment periods ranging from three to four years versus the typical seven-year commitment period associated with B shares. The AWC revealed that L share contracts; however, contain a thirty-five to fifty basis point increase for the benefit provided. As such, FINRA indicated in the AWC that L shares are most commonly geared for investors with shorter investment horizons.
The AWC revealed that prospective policyholders are normally offered an optional long term income rider on annuity policies, which is designed for the insurance company to provide guaranteed income to an insured person for life, with income paid at a future point (typically in retirement). As such, the long term income riders on deferred annuity policies are mainly geared for investors with longer term investment horizons.
Apparently, an estimated 2,900 L share contracts were approved by The Cetera Firms to be coupled with long term income riders, despite the Firms not adequately detecting and examining whether recommendations were suitable. The AWC revealed that many customers who purchased the long term income riders with L share contracts had an investment horizon exceeding seven years. FINRA stated that B share or other share contracts could have fit the investment horizons of customers more closely than L share contracts. Consequently, FINRA found that Cetera Financial Specialists LLC, First Allied Securities, Inc., Summit Brokerage Services, Inc., and VSR Financial Services, Inc. violated FINRA Rules 2010, 3110, 2330(c), and NASD Rule 3010.
The Cetera Firms were also found by FINRA to have failed to supervise sales of variable annuities. Apparently, the Cetera Firms failed to create and implement written supervisory procedures and supervisory systems which pertained to the various share classes of variable annuities. The AWC stated that principals and registered representatives were not sufficiently trained in this regard.
Specifically, the AWC revealed that written procedures and training materials used by Cetera Advisor Networks LLC did not enable the registered representatives and principals to have adequate guidance to address the considerations of suitability pertaining to the various share classes. The Firms reportedly failed to educate its staff regarding share class features, penalties, fees, which left such registered representatives without a foundation to make comparisons for purposes of determining suitability.
The AWC stated that the supervisory failures prevented the registered representatives tasked with reviewing transactions to properly assess suitability based upon the share classes, or detect the red flags pertaining to staff recommending L shares to investors who intended to invest their assets in the long term.
FINRA found that the registered representatives’ lack of knowledge and proper guidance from Cetera Firms caused them to be unable to help customers assess the significance of surrender penalties and fees based upon customers’ longer term investment horizons. FINRA found that The Cetera Firms’ supervisory failures in this regard constituted violations of FINRA Rule 2010, FINRA Rule 3110, 2330(d), and NASD Rule 3010.
The AWC further stated that Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and VSR Financial Services, Inc. failed to apply reasonable supervisory procedures and systems pertaining to the monitoring of variable annuity exchanges.
Particularly, the AWC stated that from April of 2011 to June of 2013, Cetera Advisor Networks LLC’s supervisory manual called for the firm to keep a log of variable annuity exchanges to be reviewed quarterly in order to determine abnormal exchange activity by the registered representatives. Apparently, Cetera Advisor Networks LLC’s log did not detect whether a variable annuity was exchanged versus purchased anew, causing the log to be inadequate for purposes of detecting inappropriate amounts of exchanges.
The AWC additionally stated that from July of 2013 to July of 2015, Cetera Financial Specialists LLC, and VSR Financial Services, Inc. failed to create and implement surveillance protocols designed to detect red flags based upon potentially probable variable annuity exchanges. The principals of such firms were purportedly tasked with determining problematic trends; however, the firms provided principals with no proper training and tools that would help principals evaluate excessive exchange rates. Apparently, the principals were deprived of trend analysis, exception reports, or historical data to help aid the determination of problematic exchanges.
FINRA found that supervisory failures committed by Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and VSR Financial Services, Inc. constituted violations of FINRA Rules 2010, 3110, and 2330(d), as well as NASD Rule 3010.
Based on the foregoing misconduct, Cetera Advisor Networks LLC was censured and fined $750,000.00; Cetera Financial Specialists LLC was censured and fined $350,000.00; First Allied Securities, Inc. was censured and fined $950,000.00; Summit Brokerage Services, Inc. was censured and fined $500,000.00; and VSR Financial Services, Inc. was censured and fined $400,000.00.
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