Voya Financial Advisors, a broker-dealer headquartered in Des Moines, Iowa, was censured and fined $2,750,000.00 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. 2014039172901 (Nov. 2, 2016).
According to the AWC, the firm’s supervisory failures pertained to three aspects: failure to supervise sales effected for the firm’s multi-share class variable annuity; failure to investigate issues posing risk within their sales of variable annuities; and failure to effectuate reasonable supervisory measures and set forth procedures associated with exchanges of variable annuities.
The AWC stated that recommendations of variable annuities effectuated by the firm were void of proper supervision when associated with the multi-share class of variable annuities that the firm sold to customers. The AWC revealed that from July of 2012 to August of 2014, nearly twenty-five percent of the firm’s overall revenue came from variable annuities sales. Apparently, an estimated 18,514 in variable annuity contracts were created, with 4,688 coming from L share contracts sold by the firm. The AWC indicated that nearly half of the revenue generated by Voya Financial Advisors from July of 2012 to August of 2014 came from these L share contracts or derivatives of revenues from other products sold.
The AWC stated that the firm failed to set forth adequate supervisory procedures and systems which could enable the firm to be certain that products were suitable for customers. Particularly, FINRA found that red flags were not investigated by Voya, there were no supervisory measures to ensure that registered representatives would be properly trained, and that exchanges would be subject to reasonable supervision.
FINRA took issue with the firm’s L share, which enabled customers to be subject to shorter surrender periods to accommodate shorter term investment horizons. Critically, at the same time, investors were purchasing income riders that were designed for investors with longer term investment horizons. Because of this inconsistency, FINRA found that the firm should have taken more steps to ensure that products were suitable for prospective investors.
The AWC stated that L share contracts were different than other share classes of variable annuities sold by the firm in that the investors were required to pay higher up-front fees ranging from thirty-five to fifty basis points more than B share contracts in order to be subject to a shorter commitment period, where the firm’s B shares carried longer term commitment periods.
The AWC stated that in Voya’s case, investors could add on extra lifetime income protection to their policies via long term income riders, where customers could receive an income stream which the insurance company reportedly guaranteed. Yet, the costs associated with this income protection ranged from 1% to 1.5% based upon the variable annuity’s face value. For investors to have benefited from the rider, there was an expectation that the investor not liquidate their position in the annuity for at least five years. The AWC also stated that prospective investors were unable to access the income stream portion of the insurance rider until ten years have elapsed.
According to FINRA, the conflicting aspects of the L share contract should have drawn scrutiny and further review by Voya, especially after nearly 1,315 of these contracts had been sold through the firm from July of 2012 to August of 2014. Apparently, the firm knew that in nearly seventy percent of the transactions effected, prospective investors expected to keep their holdings for seven years, warranting the B share annuity as more appropriate for investors than the higher cost L share.
FINRA also stated that the firm did not properly create and maintain supervisory protocols and systems associated with multiple share classes of variable annuities. Principals and registered representatives seemingly failed to receive training on these products; particularly how to ascertain suitability based upon different share classes, features, penalties, and various fees. This apparently led to principals and registered representatives failing to reasonably address suitability concerns regarding the different classes of shares.
Further, the AWC stated that the firm did not adequately address the L share suitability as part of the variable annuity suitability analysis, namely in cases where investors with longer term investment horizons were positioned more expensive products designed for investors to benefit from short term liquidity needs. The AWC indicated that this deprived customers of the ability to compare the products, based on surrender penalties and fees pertaining to the L share class. The firm reportedly failed to impose written procedures regarding the adequate training on the L share classes and long term income rider suitability, especially when used together. FINRA found that Voya’s conduct was violative of NASD Rule 3010, and FINRA Rules 2010, Rules 2330(c), 2330(d), and 2330(e).
Further, FINRA found that Voya failed to bring into effect adequate supervisory protocols and systems pertaining to the supervision of variable annuity exchanges. The AWC stated that a surveillance report was the only mechanism Voya had in place for supervision of variable annuities; however, in twenty-one out of twenty-two months, the firm failed to properly review the report.
The report would have detected circumstances in which high exchange rates had occurred, but the firm’s failures led certain registered representatives to evade review. Through the firm’s registered representatives (totaling an estimated 1,914 individuals), eleven thousand variable annuity exchanges were effected through the firm. Apparently, the exchange activity of only thirty registered representatives was reviewed through the firm. As such, the firm was found to have violated NASD Rule 3010 as well as FINRA Rule 2330(d).
This is not the first time that Voya has been sanctioned for misconduct by FINRA. Particularly, the firm was previously censured and fined $325,000.00, and ordered to provide restitution of $41,853.20 based upon findings that the firm did not detect and apply sales charge and volume discounts to customers in connection with sales of unit investment trusts, business development companies, and non-traded real estate investment trusts; and failed to supervise transactions associated with such. Letter of Acceptance, Waiver, and Consent, No. 2014042939401 (July 20, 2015).
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