Farmers Financial Solutions LLC a securities broker dealer headquartered in Westlake Village California has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings that the securities broker dealer failed to supervise its mutual fund business and its variable universal life insurance business. Letter of Acceptance, Waiver and Consent No. 2017052173001 (June 21, 2021).
According to the AWC, Farmers Financial Solutions sold $11,500,000.00 in mutual funds between June of 2016 and November of 2017. Those sales were at least one-fifth of the revenue generated by the securities broker dealer. During this period Farmers Financial Solutions neglected to create and maintain a supervision system that was geared towards complying with securities regulations and rules on mutual fund transactions.
According to the AWC, exception reports used by Farmers Financial Solutions were meant to flag possibly unsuitable mutual fund transactions including switch transactions. The reports were also supposed to identify when breakpoint discounts were not applied to customer transactions and when stockbrokers established customers’ mutual fund accounts without supervisory approval. But the securities broker dealer lacked the resources that were necessary to ensure that the reports on switches, breakpoints and other noncompliance issues were tended to. Instead the firm depended on its supervisory personnel to manually review transactions to identify whether they were unsuitable.
FINRA pointed out that the breakpoint and switches reports contained incomplete or inaccurate information. For example, a report only identified part of a transaction that called for suitability reviews. The breakpoint report had inaccurate data points which precluded the securities broker dealer from identifying whether breakpoints were missed. FINRA indicated that the firm’s report was meant to determine if stockbrokers did not follow protocol. It produced hundreds of alerts on transactions that required manual reviews. But those reviews were not done in a timely manner.
According to the AWC, Farmers Financial Solutions also neglected to supervise its variable universal life insurance business between June of 2016 and December of 2018 during which time the firm generated $30,000,000.00 in revenue. The AWC stated that there was no supervisory system that had been created and maintained by Farmers Financial Solutions to ensure that the company complied with federal securities laws for these types of transactions.
FINRA indicated that Farmers Financial Solutions had information that showed that its customers’ variable universal life insurance policies were lapsing. There were no reasonable steps taken by the firm to determine the reason behind the policies lapsing. There were no reasonable steps taken to identify if customers’ VUL purchases were suitable. No tools or exception reports were used to determine if there were high lapse rates associated with certain stockbrokers. This precluded Famers Financial Solutions from identifying stockbrokers who might have executed unsuitable transactions.
In one case, there was a 40 percent lapse rate associated with a stockbroker’s 200 VUL sales. There were repeat VUL sales made by that stockbroker for those customers whose policies already had lapsed.
FINRA determined that Farmers Financial Solutions failed to supervise its mutual fund business and variable life insurance business in violation of FINRA Rules 2010 and 3110(a).
