Christopher Michael Herrmann of Greenwood Indiana a stockbroker formerly registered with Key Investment Services has been fined $10,000.00 and suspended for nine months from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity based upon consenting to findings that he made unsuitable investment recommendations to Key Investment Services customers and concealed information about annuity transactions submitted to the firm. Letter of Acceptance Waiver and Consent No. 2016051817601 (Oct. 19, 2018).
According to the AWC, in September of 2013, MG – an elderly and retired customer – had been advised by Herrmann to liquidate two of MG’s fixed annuities so that a variable annuity could be purchased in MG’s name. The AWC stated that Herrmann’s recommendations were pursued by MG – she surrendered one fixed annuity to procure $256,023.17 and the other to procure $112,657.26. Those funds had been utilized by MG on September 24, 2013 to buy the annuity that Herrmann recommended.
In another case, on October 30, 2014, customer BF – another elderly and retired customer – had been advised by Herrmann to sell a variable annuity, and to use the proceeds from the variable annuity sale to buy a fixed annuity. That recommendation was reportedly followed by BF. Evidently, BF used some of the $160,027.60 from the variable annuity liquidation to buy a fixed annuity.
In the cases of MG and BF, their annuity liquidations resulted in unreasonable tax consequences because the customers could have executed a 1035 Exchange – a non-taxable transfer of assets from their existing annuities to the new annuities. Apparently, the risk of unnecessary tax consequences was known to Herrmann at the time that he made the recommendations. Herrmann also reportedly knew about the 1035 Exchange being available to customers. Notwithstanding Hermann’s knowledge of the tax-free transfer as an available option to the customers, he recommended that customers sell their investments, causing them unwarranted tax consequences.
FINRA stated that it was not appropriate for Herrmann to have made the taxable annuity switch recommendations for the customers because of the tax consequences incurred by them as a result. Consequently, FINRA found that Herrmann’s conduct was violative of FINRA Rule 2010 and 2111.
The AWC additionally revealed that Herrmann evaded the firm’s supervisory procedures in the handling of the annuities purchased by the customers. Specifically, from 2013 to 2014, Key Investment Services required brokers such as Herrmann to comply with a Switch Disclosure Policy. Because the firm viewed annuity purchases as long-term investments, brokers were required to complete a Switch Disclosure when a proposed transaction involved the liquidation of an annuity and subsequent placement of the proceeds into another long-term investment containing surrender charges or sales charges. The firm evidently incorporated the Switch Disclosure Policy to ensure that customers were cognizant of the benefits and costs relating to the replacement of the existing annuities. The procedures were also meant to ensure that supervisory personnel at the firm could review its brokers’ proposed transactions to determine their appropriateness for customers.
The AWC stated that Herrmann bypassed the supervisory procedures used by Key Investment Services because he never submitted the Switch Disclosure Forms even though he knew that customers MG and BF were substantively replacing existing annuities with new annuities. Moreover, Herrmann failed to be forthcoming in the documents he submitted to the issuers of the annuities because Herrmann wanted to effect those annuity purchases. In particular, Herrmann misrepresented on MG’s annuity application that the purchase of the new annuity was not being consummated by way of a switch from an existing annuity. In addition, on BF’s paperwork that was submitted to the issuer, Herrmann misrepresented the nature of the new annuity purchase, claiming that BF was using income from earnings to fund the annuity. FINRA found that Herrmann’s conduct in this regard was violative of FINRA Rules 2010 and 4511.
FINRA Public Disclosure reveals that Herrmann has been identified in nine customer initiated investment related disputes pertaining to accusations of his violative conduct while employed with Key Investment Services and Morgan Keegan & Company, Inc. Specifically, a customer initiated investment related arbitration claim concerning Herrmann’s conduct was resolved for $72,000.00 in damages founded on allegations that fiduciary duties owed to the customer had been breached, misrepresentations had been made to the customer, and mutual fund transactions were effected in the customer’s account that were not suitable for the customer. FINRA Arbitration No. 07-03144 (Jan. 16, 2008).
Then, a customer initiated investment related complaint concerning Herrmann’s activities was settled for $12,018.20 in damages based upon accusations that Herrmann misrepresented risks associated with the customer’s RIBCX investment holdings. Subsequently, a customer initiated investment related arbitration claim regarding Herrmann’s conduct was resolved for $210,000.00 in damages supported by allegations that transactions were executed in the customer’s account that were not suitable for the customer and misrepresentations had been made to the customer concerning the customer’s investments in mutual fund and money market products. FINRA Arbitration No. 09-06273 (May 27, 2010).
On December 8, 2015, another customer initiated investment related complaint involving Herrmann’s activities was settled for $18,726.00 in damages founded on accusations that Herrmann made investment recommendations to the customer that were not suitable in regard to the sale of two fixed annuities and purchase of a variable annuity because of those transactions not having been placed on a tax-free basis. Thereafter, on April 21, 2016, a customer initiated investment related complaint concerning Herrmann’s conduct was settled to resolve allegations that misrepresentations were made to the customer concerning the customer’s replacement of Victory Diversified Stock Fund Class A shares with Putnam Capital Spectrum Fund Class A shares.
Moreover, on February 22, 2017, a customer initiated investment related complaint regarding Herrmann’s activities was settled for $22,339.24 in damages based upon accusations of unsuitable recommendations relating to the customer’s Great American Assurance Select 7 fixed annuity purchase, and unwarranted tax liabilities being occurred by the customer as a result of following those recommendations.
Herrmann was discharged from Key Investment Services LLC on April 28, 2015 supported by allegations that he accumulated complaints from customers in reference to transactions handled in contravention of the firm’s policies.
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