CFD Investments Inc. a brokerage firm headquartered in Kokomo Indiana has been censured and fined $125,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that it failed to supervise variable annuity recommendations and exchanges made by CFD Investments Inc. brokers. Letter of Acceptance Waiver and Consent No. 2016048224201 (Jan. 10, 2019).
According to the AWC, the firm sold variable annuities containing a number of different options and features, making them complex products for investors to evaluate. At the time, FINRA required that firms including CFD Investments Inc. comply with FINRA Rule 2330, obligating brokers to educate the customers about annuity features, benefits, costs, charges, penalties when brokers recommended that the customers purchase the investments.
Apparently, between July 18, 2014 and July 18, 2016, the firm sold L share contracts and B share contracts. L share contracts provided customers shorter terms for investing in the annuity but were more expensive. B share contracts, on the other hand, required longer commitment periods but were less expensive than L shares. The AWC stated that a notable suitability concern existed when brokers sold customers L share contracts with features that required long commitment periods to generate full value.
CFD Investments reportedly failed to create and maintain supervision systems as well as written supervisory procedures aimed at ensuring brokers cooperated with FINRA Rule 2330. Apparently, procedures used by the firm failed to address any suitability concerns associated with the costs, fees, or surrender periods on the various variable annuity share classes offered by the firm. Additionally, the firm reportedly failed to consider the problems with L share annuities being marketed to investors with long-term riders. Further, none of the supervisory procedures used by the firm detailed when a supervisor should take a closer look at the brokers’ recommendations before authorizing the annuity transactions.
The AWC noted that the firm was deficient with regard to its training processes. Specifically, brokers and principals were supposedly not provided adequate training to ensure their comprehension of the important variable annuity features. Indeed, the firm reportedly failed in its training processes to make sure brokers and their supervisors grasped suitability concerns associated with L share contracts coupled with long-term income riders.
Evidently, 18% of the firm’s 1,574 variable annuity transactions between July 18, 2014 and July 18, 2016 came from the sale of L share contacts. Ultimately, FINRA stated that the firm failed to adequately supervise the suitability of those annuities transactions. The AWC stated that CFD Investments sold many L share contracts with riders that required long term investment horizons. The firm’s supervisory failures reportedly precluded the supervisors from having any procedure to utilize in determining suitability of those situations. Consequently, FINRA stated that the firm’s supervisory failures were violative of FINRA Rules 2010, 3110, 2330(d) and (e), and NASD Rule 3010.
Moreover, FINRA stated that the firm failed to supervise the rates of exchanges of variable annuity investments. Particularly, the firm was required under Rule 2330(d) to implement monitoring processes to assess whether the brokers were making excessive variable annuity exchanges. The AWC sated there was no guidance offered in the firm’s procedures concerning how excessive switching was defined or what supervisory protocol would be necessary for determining excessive switching.
The AWC also revealed that there were no monitoring processes or procedures for reviewing its brokers exchange rates. FINRA stated that the lack of supervision was egregious considering that exchanges accounted for twenty five percent of the variable annuity transactions effected by the firm. Consequently, FINRA found the firm’s conduct violative of FINRA Rule 2010, 3110, 2330(d), and NASD Rule 3010.
