Michael Jump of Somonauk, Illinois, a registered representative with Investment Planners, Inc., was fined $10,000 and suspended for two months from associating with any Financial Industry Regulatory Authority (FINRA) member in any and all capacities after consenting to findings that he negligently misrepresented information pertaining to fees associated with variable annuities, while also failing to have a reasonable basis for the recommendation of variable annuity exchanges. Letter of Acceptance, Waiver and Consent, No. 2014039222501 (Aug. 25, 2015).
According to the AWC, from April 2013 through April 2014, while Jump was associated with his firm, he prepared variable annuity switch forms in connection with thirty-two variable annuity transactions. The AWC reported that the switch forms, which his firm referred to as Variable Annuity Transmittal and Disclosure forms, contained information which explained the basis for replacing one variable annuity with another one, including the fees associated with policies that customers would be replacing.
Fees commonly associated with the variable annuities include mortality and expense charges, rider fees, and administrative charges. The AWC reported that the variable annuity switch forms were signed and acknowledged by Jump’s customers and submitted to his firm for review.
According to FINRA, Jump had provided incorrect information pertaining to the fees associated with the variable annuities that were being replaced, despite claiming that the information contained in the switch forms were accurate. Jump reportedly commonly stated that fees associated with the variable annuities being replaced carried fees that were higher than they actually were. FINRA found that Jump’s conduct of negligently misrepresenting information pertaining to the fees on the customers’ old variable annuities was violative of FINRA Rule 2010.
The AWC further indicated that from June 2013 – February 2014, Jump had made unsuitable recommendations concerning five of the variable annuities that he recommended his customers surrender in order to transfer the proceeds into variable annuities that Jump was selling.
In one case, two of Jump’s customers were considering the switch of their variable annuities in an effort to avoid their variable annuity provider from moving funds into fixed accounts per the terms of an existing annuity rider that the customers had. Jump reportedly switched the customers’ annuities into new variable annuities, where the customers incurred surrender charges of $811 and $2,654. FINRA found that the switch was unsuitable because the customers could have simply cancelled their rider on the annuities at their existing insurance company without engaging in the transfer into new annuities.
The AWC reported that Jump engaged other customers in the aforementioned conduct of switching annuities when such switching was unsuitable, causing other customers to incur surrender charges while Jump would receive commissions in almost every transaction. FINRA found that Jump’s conduct was violative of FINRA Rules 2111 and 2330(b)(1), and Rule 2010. Per the terms of the AWC, Jump was required to disgorge $6,889 in commissions, plus interest.
FINRA Rule 2111 requires that associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. FINRA will generally find this rule to be violated, as is the case with Greenfield, when the individual does not have a basis to believe that the recommendation is suitable for at least some investors, that the recommendation is suitable for a particular customer considering the customer’s investment objectives and financial profile, and (for the accounts where the individual is exercising discretion) that a series of recommended transactions are not excessive and unsuitable even if each transaction alone would be deemed suitable.
Further, Rule 2330(b)(1) indicates that a registered representative like Jump must have a reasonable basis to believe that a recommended variable annuity exchange is suitable for the customer to whom the recommendation is made. According to FINRA, this requirement includes an adequate assessment of the impact of surrender charges, loss of existing benefits, and benefits of product enhancements and improvements.
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