There is an old saying, “investors do not buy variable annuities, investors are sold variable annuities.” Along with this, ought to come the saying that a broker never met an annuity sold by another firm that he or she did not like.”
Variable annuities are securities and are a notorious vehicle for abusive sales practices. The reason many brokers are prone to commit these abuses is that the combined commissions from the sale of a typical variable annuity are generally between 6% and 7%, and are substantially higher than the commissions from almost any other product.
Because of the hefty up front commissions earned through the sale of variable annuities, customer selling or surrendering their variable annuities are charged a surrender penalty of up to 6% to 7%, or the broker’s commissions, which decreases every years so that the annuity company can earn their money back. Moreover, since most of these annuities contain certain “bells and whistles” including stepped up death benefits, the charges or really premiums associated with these features become more costly as the customer gets older, or is older, when he or she switches from one variable annuity to another.
Many brokers engaged in these activities, when their customers are confronted with surrender penalties of higher administrative charges, will offer their customer a “bonus.” But customers should probably also read the fine print, because in most cases these bonus are only included upon annuitization, sometimes only if the customer owns the annuity for 10 to 20 years, so that once again the annuity company can earn its money back.
So when a broker recommends that a customer sell an annuity to purchase another annuity, and pay in connection therewith a surrender penalty and a new commission, together with other charges, FINRA suitability rules, and specifically, Rule 2330, that the exchange is consistent with the suitability determination of this Rule, taking into consideration whether (i) the customer would incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living, or other contractual benefits), or be subject to increased fees or charges (such as mortality and expense fees, investment advisory fees, or charges for riders and similar product enhancements); (ii) the customer would benefit from product enhancements and improvements.
Accordingly, broker-dealers are required to specially supervise these exhanges or “switches.”
However, broker-dealers cannot supervise these activities if their brokers cheat, or lack sufficient supervisory controls to prevent their brokers from cheating.
Such is the case of MML Investors broker Peter M. Terlecky
Peter M. Terlecky Named in FINRA Complaint
Terlecky was named in a FINRA complaint alleging that he circumvented MML’s supervisory and compliance procedures by concealing and failing to process variable annuity purchase transactions totaling approximately $2.3 million as annuity replacement trades, even though each purchase was funded by the sale of a fixed or variable annuity. The complaint alleges that Terlecky concealed the variable annuity replacements from his firm’s supervisory review by structuring them as separate trades through a two-step process, rather than through annuity exchanges. He accomplished this by transferring the sale proceeds from the replaced annuity to a firm brokerage (money market) account and then, after waiting a short period, usually seven days or less, used the funds in the brokerage account to purchase the new variable annuity.
Terlecky allegedly prepared and submitted new account forms and annuity documents to the firm for each of the variable annuity replacements containing numerous misrepresentations and items of false information that further disguised the true nature of these transactions.
Terlecky earned greater commissions and avoided supervisory scrutiny by circumventing firm procedures and concealing the annuity replacements. Conversely, the customers suffered harm as a result of this misconduct by, among other things, being deprived of receiving firm-mandated disclosures of material facts regarding annuity replacements and the opportunity of performing a meaningful comparison between the annuities they were selling and those they were considering for purchase, and, in some instances, unnecessarily incurring new seven year surrender periods with their replacement.
Given that these sales are alleged to total $2.3 million, Terlecky would have made approximately $160,000 in commissions. However, in connection with these activities, Terlecky agreed to a $10,000 fine and a one year suspension.
Guiliano Law Group
Investors suffering losses or damages caused variable annuity switching may be able to recover damages. Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.