VALIC Financial Advisors, Inc., headquartered in Houston, Texas, was censured and fined $1,750,000.00 in damages by Financial Industry Regulatory Authority (FINRA) after consenting to findings that, inter alia, the firm failed to supervise its variable annuities business, and failed to create supervisory protocols pertaining to multiple share classes of variable annuities. Letter of Acceptance, Waiver and Consent, No. 2014042360001 (Nov. 28, 2016).
According to the AWC, between October of 2011 and December of 2014, the firm did not uphold reasonable supervisory procedures and systems geared to supervise variable annuity sales to the firm’s retail customers. Particularly, prior to April of 2014, the firm’s supervisory systems deprived principals of essential information concerning the customers’ holdings and assets during suitability reviews associated with variable annuity transactions before prospective transactions were approved by principals. The AWC stated that the firm’s Customer Account Form did not contain information concerning products held by customers, or fees and surrender penalties associated with outside products.
The AWC also revealed that from October of 2011 and December of 2014, the firm did not enforce existing supervisory procedures concerning the review of pertinent customer details contained within the firm’s Annuity Transaction Disclosure Form. Apparently, the firm’s registered representatives, on numerous occasions, provided incomplete Annuity Transaction Disclosure Forms, depriving supervisory personnel with information necessary to examine whether the firm’s annuities would be suitable for customers.
Particularly, registered representatives omitted information concerning customers’ existing annuity information, such as the fees, insurance riders, and charges and penalties associated with exchanges. FINRA found that the firm failed to make sure that the Annuity Transaction Disclosure Form was completed properly, and contained information which was accurate.
Apparently, the firm failed to enforce written procedures calling for a heightened suitability review pertaining to variable annuity transactions during occasions in which customers had planned on utilizing more than thirty-five percent of their net worth in the purchase of annuity products. The AWC stated in one case, seventy percent of the customer’s net worth was used in the purchase of annuity; another customer utilized seventy-eight percent of her net worth. FINRA found that VALIC Financial Advisors’ aforementioned conduct was violative FINRA Rules 2010, 2330(c), 2330(d), 3110(a), 3110(b), 2110, and NASD 3010(a) and 3010(b).
Additionally, The AWC revealed that VALIC did not create supervisory procedures concerning multiple share classes of variable annuities. Specifically, from January of 2013 to December of 2014, the firm sold $466,000,000.00 worth of L share contracts. L share contracts, according to the AWC, are typically designed to provide investors with shorter commitment periods (shorter surrender penalty schedule), but often require customers to pay annual fees of thirty-five to fifty basis points more than with B share contracts – which carry longer surrender penalty periods.
Apparently, the firm did not provide registered representatives and the firm’s principals with training regarding supervision of sales pertaining to multiple share classes of variable annuities. Apparently, the training procedures which the firm utilized did not provide the staff any guidance for assessing suitability associated with different share classes of variable annuities. Additionally, the firm failed to train registered representatives regarding features, penalties, and fees pertaining to such share classes in order to assess suitability.
Consequently, the firm’s registered representatives did not compare L share contracts with other share classes in order to determine whether one share class was more suitable. The firm additionally did not create and maintain supervisory procedures and practices concerning training and guidance for registered representatives pertaining to L share contracts purchased along with longer term guaranteed income riders. FINRA found that the firm’s conduct in this regard was violative of FINRA Rules 2010, 2330(d), 2330(e), 3110(a), 3110(b), and NASD 3010(a) and 3010(b),
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