SII Investments Inc. a broker-dealer headquartered in Appleton Wisconsin has been censured and fined $325,000.00 by Financial Industry Regulatory Authority (FINRA) based upon the firm’s consent to findings that the firm (1) failed to supervise its registered representatives’ variable annuity recommendations to customers and (2) failed to supervise its unit investment trust business to ensure that eligible customers were provided discounts on unit investment trust purchases. Letter of Acceptance Waiver and Consent No. 2015047177001 (July 24, 2018).
The AWC stated that the firm sold multiple share classes of variable annuities, one of which, the L-share, raised considerable suitability concerns that the firm failed to address. Particularly, the L-share contracts required investors to commit for a shorter time frame than B-share contracts, but investors had to pay between thirty-five and fifty basis points more for the L-share due to the shorter commitment. FINRA indicated in the AWC that sales of L-share contracts were problematic when: (1) they were sold to investors with long-term investment horizons; and (2) they were sold along with a guaranteed minimum income benefit rider which called for the investor to maintain their annuity for approximately five years or more to receive the full benefit.
According to the AWC, from January of 2013 to June of 2015, the firm neglected to create and implement adequate supervision systems and written supervisory procedures aimed at supervising recommendations of variable annuities made by registered representatives. Particularly, the firm reportedly failed to make sure that its registered representatives had adequate foundations for concluding that: a recommended annuity was suitable; the tax-deferred, annuitization or death benefit features of the annuity would provide a benefit to the customer; and that the customer was educated regarding the terms, features, costs, and surrender periods of the annuities.
The AWC stated that the supervisory procedures utilized by the firm did not cover the concerns about suitability pertaining to L-share contracts coupled with guaranteed minimum income benefit riders or L-share contracts sold to investors that had long-term investment horizons. Moreover, principals of the firm were apparently not provided enough guidance on whether and to what extent a registered representative’s proposed annuity ought to be scrutinized for suitability based on the share class. The AWC even revealed that registered representatives were not provided adequate training regarding the variable annuity features and suitability considerations referenced within FINRA Rule 2330.
Evidently, from April of 2013 to April of 2015, more than $117,000,000.00 in variable annuity sales had been generated by SII Investments. An estimated 3,700 L-share contracts had been sold by the firm. FINRA found that it was unreasonable for the firm to have neglected its supervisory duties in light of the large amount of sales pertaining to L-share contracts. In addition, risks pertaining to L-share contracts had apparently gone undetected by the firm; the firm neglected to conduct any investigation into whether it was not appropriate for an L-share contract to be recommended along with the long-term income rider. FINRA found that the firm violated FINRA Rules 2010, 2330, 3110 and National Association of Securities Dealers (NASD) Rule 3010.
The AWC also revealed that the application of unit investment trust sales charge discounts had been inadequately supervised by SII Investments. The AWC stated that sponsors of unit investment trusts typically reduced fees through breakpoints (for bulk purchases) as well as discounts on exchanges and rollovers. Yet, from April 1, 2010 to March 30, 2015, the firm did not create and implement written supervisory procedure and supervision systems adequately geared towards ensuring that sales charge discounts were provided to eligible customers.
Evidently, the firm depended on its registered representatives to make sure that customers obtained a sales charge discounts when appropriate; however, the firm provided those registered representatives with inadequate information and guidance pertaining to the identification of sales charge discounts and application of them for eligible customers. Moreover, the firm failed to utilize any mechanisms for determining situations when unit investment trusts discounts were not provided to customers.
The AWC stated that sales charge discounts had not been applied by SII on one thousand nine hundred fifty nine purchases. According to the AWC, customers had overpaid by nearly $242,000.00. FINRA found the firm’s supervisory failure in this regard to be violative of FINRA Rules 2010, 3110 and NASD Rule 3010.
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