Fifth Third Securities Inc. a brokerage firm headquartered in Cincinnati Ohio has been censured and fined $4,000,000.00 by Financial Industry Regulatory Authority (FINRA) founded on the firm’s consent to findings that it (1) made misstatements and omissions in the course of effecting variable annuity business (2) effected variable annuity exchanges that were not suitable for customers and (3) failed to supervise its variable annuity business to ensure that registered representatives procured correct information about customer’s existing and prospective variable annuities. Letter of Acceptance, Waiver and Consent, No. 2013035051401 (May 8, 2018).
According to the AWC, the firm had been previously censured and fined $1,750,000.00 by FINRA based upon the firm’s consent to findings that it violated National Association of Securities Dealers (NASD) Rules 2310 and 3010 by effecting variable annuity transactions that were not suitable for customers and for failing to supervise sales of variable annuities. Letter of Acceptance, Waiver and Consent, No. 2005002244101 (Apr. 15, 2009). As part of resolving that regulatory infraction, Fifth Third Securities Inc. consented to an undertaking wherein the firm was responsible for strengthening its supervisory protocol to reduce the risk of harming customers. The AWC stated that the firm failed to comply with the undertaking because they never implemented recommendations made by an independent consultant in regard to the adoption of procedures for supervising and reviewing registered representatives’ variable annuity exchanges.
The AWC stated that between 2013 and 2015, the firm executed sales of at least $165,000,000.00 worth of variable annuities through one thousand four hundred thirty-one exchanges. The AWC stated that $8,290,000.00 in dealer concessions had been generated as a result of the sales. However, FINRA determined that the firm continued to commit regulatory infractions in the administration of the firm’s annuity business.
The AWC stated that between 2013 and 2015, omissions and misrepresentations were made to customers regarding the benefits and costs relating to exchanges of variable annuities. FINRA also concluded that the firm failed to have an adequate basis for concluding that recommendations and approvals should be made in reference to most exchanges that FINRA reviewed. The AWC further stated that omissions and misstatements had been made concerning seventy-seven percent of the two-hundred fifty exchanges that FINRA had reviewed from a total of one thousand four hundred thirty one.
Particularly, registered representatives were required to complete a variable annuity exchange form along with other forms when a variable annuity exchange would be recommended to the investor. The AWC stated that a comparative chart was utilized by the firm to apprise prospective investors about the benefits and costs relating to the existing annuity versus the new annuity. Those forms also contained sections where registered representatives would provide rationale for exchanging the annuities. The firm’s registered representatives were reportedly required to sign documentation regarding their recommendations and have it reviewed and approved by a principal before the transactions could be consummated.
Evidently, omissions and misstatements had been made regarding the benefits or costs of variable annuity exchanges so that it would appear as though the customer would be better off in pursuing the exchanges to annuities offered through Firth Third Securities. The AWC stated that some of the forms contained overstated fees or incorrect fees on the customers’ existing annuities. The AWC revealed that in other cases, the forms understated or omitted values of customers’ existing living benefit riders which those customers would be give up by transferring to the new annuities offered through Fifth Third Securities. The firm’s forms even contained confirmations that the annuities that would be proposed to customers contained living benefit riders when the customers’ prospective annuities would not actually contain the living benefit riders.
The AWC stated that the failure of the registered representatives to procure accurate information concerning the benefits and drawbacks of the annuities caused the registered representatives to be unable to adequately evaluate the suitability of the exchanges. As a result, the registered representatives were reportedly in no position to determine that the exchanges were suitable for the customers that the representatives recommended the products to.
Moreover, FINRA stated that the firm neglected to set forth a reasonable mechanism by which supervisory personnel could make sure that the firm’s registered representatives procured the correct information on existing and prospective annuities. FINRA further stated that the firm did not adequately train registered representatives to compare features and benefits of annuities. Consequently, ninety-two percent of the annuity exchanges had been approved, and of those that were approved, several contained one or more omissions or misstatements on the annuity exchange forms.
FINRA found that the firm’s conduct was violative of FINRA Rules 2010, 2330(b), 2330(c), 2330(d), 2330(e) and NASD Rules 2110 and 2821(d).
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