H. Beck Inc. a brokerage firm headquartered in Rockville Maryland has been censured and fined $400,000.00 by Financial Industry Regulatory Authority (FINRA) founded on accusations that (1) the firm failed to supervise the variable annuity recommendations made by its registered representatives and (2) failed to supervise consolidated reports that were disseminated to customers. Letter of Acceptance Waiver and Consent No. 2017052326501 (Nov. 20, 2018).
According to the AWC, between January of 2013 and August of 2018, variable annuities had been sold by the firm which contained several share classes. Among them, B-Share and L-Share contracts were commonplace. B-Share contracts contained longer surrender periods than L-share contracts but charged less. The L-Share contracts were apparently engineered by insurance companies so that customers could take advantage of increased liquidity. However, sales of L-Shares have raised concerns by FINRA when sold with riders that require customers to invest for longer periods in order to receive the full benefit of the rider.
The AWC stated that throughout the 2013 and 2018 time period, many annuities had been sold by the firm. Indeed, FINRA noted that over 7,000 variable annuity contracts had been sold by H. Beck just between January of 2013 and December 2014, where the firm accumulated $34,900,000.00 in revenues as a result. Critically, $13,300,000.00 of the firm’s revenue during that period came from the sale of L-Share contracts – and a substantial amount of L-Share contracts were sold with long-term riders.
Despite the large revenue figures, H. Beck reportedly neglected to create and implement a supervision system and written supervisory procedures that were reasonably capable of helping the firm comply with FINRA’s suitability rules pertaining to the recommendations of annuities made by the firm’s registered representatives. Specifically, the written supervisory procedures used by the firm did not identify the concerns for suitability based on the various annuity share classes available.
Evidently, there were no written supervisory procedures which took into account the impact of costs, surrender penalties and fees of the share classes on the overall suitability of the annuities with multiple share classes. In addition, the firm did not address the suitability issues that arose from customers being sold L-Share annuity contracts when those investors had long-term investment horizons or when the investors possibly had shorter-term investment horizons but were sold a long-term rider.
Moreover, the firm’s registered representatives and principals were seemingly left without any legitimate training to confirm that they were cognizant of the important annuity features. Those representatives and principals were not properly trained to pick up on suitability concerns relating to the L-Share contracts coupled with long-term income riders.
Consequently, FINRA found that the firm’s conduct was violative of FINRA Rules 2010, 3110, 2330 and NASD Rule 3010.
In addition, FINRA stated that the firm, for a second time, failed to supervise consolidated reports that were disseminated to customers. Particularly, the firm was previously censured and fined $425,000.00 by FINRA based upon the firm’s consent to findings that it failed to supervise consolidated reports used by its registered representatives. Letter of Acceptance Waiver and Consent No. 2012031552601 (Mar. 2015).
As a result of that AWC, the firm reportedly created new procedures that mandated registered representative-created reports (reports containing representatives’ manual entries) to be passed along to the firms compliance department so that the reports could be screened before being disseminated to customers. After that step was completed, the firm’s representatives were apparently responsible for providing the reports to the firm’s principals who were supposed to scrutinize them to make sure the reports were accurate, appropriate disclosures had been made, and that the representatives maintained documents that substantiated the entries they placed in the reports. Further, the firm’s procedures evidently disallowed any manual calculations from being made by representatives on the reports with respect to investment performance data. Finally, the firm mandated branch auditors to conduct reviews of the reports to ensure that the firm’s compliance measures had been properly implemented.
Nevertheless, between March of 2016 and April of 2017, those written supervisory procedures were not enforced by the firm. Particularly, no heightened review of the reports had been conducted by the firm. Consolidated reports still contained performance data that had been manually calculated by representatives. Plus, the reports had neither been accompanied by supporting documentation from the representatives nor reviewed by the branch auditors. Consequently, the firm’s registered representatives’ failure to comply with the reports went undetected. FINRA found the firm’s failure to supervise consolidated reports to be violative of FINRA Rules 2010 and 3110.
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