World Equity Group Inc. a brokerage firm headquartered in Arlington Heights Illinois has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) supported by accusations that the company failed to supervise its registered representatives’ variable annuities recommendations to ensure that they were suitable for customers in compliance with securities regulations and FINRA Rules. Letter of Acceptance Waiver and Consent No. 2015043641901 (Aug. 23, 2018).
According to the AWC, World Equity Group sold variable annuity policies containing several share classes between April of 2013 to March 2017. Among them, the firm reportedly sold L share contracts, which provided the customer with a shorter surrender period. Customers were required to commit to keeping their money in the annuity for a shorter period of time than with other share classes including the B share contracts. The AWC stated that customers had to pay more on L share contracts because of the shorter commitment period, and the expenses for the L shares were higher than the B share contracts.
The AWC stated that FINRA has raised concerned about L share contracts being unsuitable for investors when investors intend to keep money invested in the annuity for the long-term. FINRA stated that additional concerns have arose when L share contracts have been sold with riders that provide guaranteed income for investors. FINRA indicated that those riders that provide guaranteed income typically require investors to keep the money invested for periods that are longer than the surrender period on an L share contract. The AWC suggested that investors who have plans to keep the money aside and generate a guaranteed income may be paying unnecessary costs for the L share contract, because the benefit it affords is potentially not important to an investor that is not requiring liquidity.
The AWC stated that World Equity Group was also required to comply with Rule 2330, which has required that registered representatives have a reasonable basis to conclude that the customer has become apprised of the terms and conditions of the annuity; would benefit from features of tax-deferred variable annuity; and that annuity and riders recommended are suitable for the customer. FINRA stated that the firm was obligated to conduct a review of the recommendations made by the registered representatives to identify if annuity transactions have been suitable.
Yet, the AWC stated that between April of 2013 to March 2017, there had been no supervision system and written supervisory procedures adequately constructed to make sure that the firm did not violate FINRA Rule 2330. FINRA stated that the procedures and systems used by World Equity Group were deficient in that the firm put the supervisory responsibility on a home office principal that lacked experience supervising variable annuity sales. That principal was apparently responsible for overseeing the recommendations made by one hundred fifty of its registered representatives.
The AWC stated that the home office principal had not been provided reasonable training, and lacked the necessary tools to make determinations. Critically, the firm had a tool that was meant to compare variable annuity products; however, that tool was not furnished to the home office principal – the person responsible for ensuring that variable annuity exchanges were appropriate. The AWC stated that the principal approved many annuity transactions despite failing to conduct a reasonable review. The AWC particularly stated that the home office principal did not comprehend the significant features of the riders and annuities that had been exchanged in several transactions that he approved.
The AWC further revealed that the firm’s supervision systems were deficient in making determinations if registered representatives had been excessively exchanging variable annuity contracts. Before October of 2015, the firm apparently used a supervision system that called upon a principal to detect when exchanges were unsuitable or unusual; however, the principal was never provided guidance on what constitutes unsuitable or unusual exchanges. The AWC further stated that the firm depended on a Master Log in monitoring the variable annuity exchange rates; however, this Log was often inaccurate and incomplete.
The AWC also stated that from April of 2013 to April of 2015, the written supervisory procedures had not been adequately designed to ensure that the firm complied with Rule 2330. The firm apparently utilized general terminology in describing variable annuities, failing to specifically address suitability considerations when factoring in the surrender periods, costs, and fees for the various share classes. The AWC detailed that there were no procedures utilized by World Equity Group to ensure that supervisory personnel checked if it was appropriate when L share contracts had been sold with a long-term guaranteed income rider, or when an L share contract was sold to a customer that planned on investing in the long-term.
According to the AWC, twenty-two percent of the firm’s revenue consisted variable annuity sales. Forty-three percent of the variable annuity sales had been comprised of L share contracts. Moreover, nine out of ten L share contracts were coupled with long-term riders. FINRA determined that the firm failed to address critical suitability concerns pertaining to the L share contracts being sold with long-term riders. Consequently, FINRA found the firm’s failure to supervise violative of FINRA Rules 2010, 2330(c), 3110 and NASD Rule 3010.
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