Kestra Financial Advisors, a broker-dealer headquartered in Austin, Texas, was censured and fined $475,000.00 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed to supervise its variable annuity sales. Letter of Acceptance, Waiver and Consent, No. 2014039418401 (Nov. 2, 2016).
According to the AWC, the firm failed to supervise recommendations made to customers by the firm’s registered representatives of certain share classes of variable annuities, failed to effectuate reasonable training measures for principles and registered representative designed for supervision and sales of variable annuities containing multiple share classes, and failed to supervise consolidated reports transmitted to customers.
The AWC revealed that recommendations of variable annuities made by the firm were not properly supervised pertaining to multi-share classes of variable annuities. The AWC stated that from October 1, 2013 to June 30, 2014, approximately 1,873 in variable annuity contracts were created, in which the firm accumulated at least $280,000,000.00 in principal payments from customers. The AWC further stated that $52,000,000.00 of the principal payments were associated with L share contracts that the firm had sold.
The AWC indicated that L share contracts carried up-front fees which ranged from thirty-five to fifty basis points more than B share contracts, in order for customers to be subject to a shorter commitment period. The firm’s B shares contained longer term surrender periods.
FINRA stated that Kestra did not reasonably create and maintain supervisory protocols and systems pertaining to multiple share classes of variable annuities. Apparently, principals and registered representatives went without training; and failed to understand suitability based upon different share classes, as well as the features, penalties, and various fees. Consequently, principals and registered representatives reportedly failed to take reasonable measures to address suitability when taking into account the different classes of shares.
The AWC additionally stated that Kestra failed to adequately did not adequately consider the suitability pertaining to L shares as part of the firm’s general variable annuity suitability analysis, namely in cases where investors with longer term investment horizons were positioned products such as longer term guaranteed income riders while also being positioned with L shares – designed for investors to benefit from short term liquidity needs.
The AWC stated that customers were unable to compare Kestra products based on surrender penalties and fees pertaining to the L share class. The firm reportedly failed to effect written protocols pertaining to training staff on the L share classes. As such, FINRA found that the firm’s supervisory failures were violative of NASD Rule 3010(a) and 3010(b), in addition to FINRA Rules 2010, 2330(d), and 2330(e).
The AWC further stated that Kestra did not supervise consolidated reports that contained information about customers’ financial holdings both inside and outside of the firm’s auspices. Apparently, approximately four-hundred reports were reportedly disseminated to firm customers. However, FINRA stated that the firm did not take steps to confirm whether the values stated in such reports were accurate.
The AWC stated that Kestra did not have a requirement in place that prompted a supervisory review of the consolidated reports before they were transmitted to the firm’s customers. Further, the firm’s procedures as applied to consolidated reports apparently failed to specify the nature in which the reviews were conducted and the person tasked with reviewing such documents. FINRA found that Kestra’s supervisory failure in this regard was violative of FINRA Rule 2010 and NASD Rule 3010(a) and 3010(b).
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