H.D. Vest Investment Securities, Inc., headquartered in Irving, Texas, was censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed to adequately supervise variable annuity transactions, and failed to effectively utilize surveillance procedures to detect rates of annuity exchanges.
According to the AWC, from May of 2010 through September of 2012, the firm’s supervisory personal had approved of eighteen separate variable annuity transactions at minimum, despite not having adequate information and documentation to determine that the annuities were actually suitable for those investors who purchased them.
The AWC stated that HD Vest’s procedures called for its staff to complete an IPED form in connection with recommendations made to investors to exchange annuities from an outside institution to HD Vest. The form was apparently supposed to have been provided, in conjunction with the customer’s annuity application, to the firm’s principals to review and approve. The AWC stated that the IPED form was required to note specific information regarding the customer’s existing annuity or other assets, and the customer was required to authorize the form by signing it.
FINRA found that the firm lacked the requisite information to ensure that the aforementioned IPED form was completed properly. The firm’s supervisory procedures reportedly failed to require that the staff provide documentation from third parties concerning the surrender of the asset to HD Vest’s principals in order for such reviewing principals to verify that information contained in such forms were accurate. The firm additionally was found by FINRA to have lacked any procedures that guided principals in the course of the verification process.
The AWC further stated that the firm’s written procedures called for additional review of certain proposed variable annuity transactions when certain characteristics were met. Such procedures, according to the AWC, required that the firm’s principals document an explanation of any additional review, sources utilized throughout the principal’s review, and the principals’ explanation as to why the proposed transaction would be approved. Yet, the firm’s principals seemingly had no guidance provided through the written procedures for such principals to perform the additional reviews.
The AWC stated that in sixty-four transactions, the firm did not adequately document the aforementioned reviews as required by the firm’s written procedures. Particularly, in nearly half of the sixty-four transactions, the principal merely noted the subordinate representative’s explanation pertaining to the purpose of the annuity exchange. In the other half of the sixty-four transactions, there was no proof that that a principal’s review even took place. As such, FINRA found the firm to have violated FINRA Rules 2330(c), 2330(d), and NASD Rule 3010.
FINRA also found that the firm’s surveillance procedures pertaining to inappropriate annuity exchanges was flawed. The AWC stated that from May of 2010 through September of 2012, the firm failed to have any systematic measures that would detect when inappropriate rates of variable annuity exchanges had occurred.
The firm’s reliance, according to the AWC, was solely on the principals to review trends and higher volume transactions. Yet, there was no guidance or mechanisms that would involve an analysis or report that could help the principal in evaluating whether such exchanges were excessive.
FINRA also stated in the AWC that the firm’s procedures did not identify what constituted an inappropriate variable annuity exchange rate. According to the AWC, in 2012, the firm’s principals reviewed an estimated eight to ten transactions in a given day. The firm apparently rested upon the principals to be familiar with the thousands of transactions that the principal was responsible for reviewing in the course of each year. However, as the AWC stated, the firm did not list any historical details pertaining to rates of exchange.
FINRA found that the firm acted unreasonably in expecting the principals to detect an excessive amount of exchanges given the aforementioned lack of historical detail, and unreasonably through the firm’s expectations that such principals would be able to detect the trends concerning sales without having any historical details. As such, FINRA found the firm to have violated FINRA Rule 2330(d) and NASD Rule 3010.
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