On January 8, 2021, without admitting or denying the findings, VALIC Financial Advisors, Inc., (VALIC) entered into a settlement with FINRA Enforcement, through an Acceptance, Waiver and Consent (AWC) where the factual allegation was that between January 1, 2017, and October 31, 2018, the broker-dealer failed to “establish a reasonably designed system and written supervisory procedures for the surveillance of rates of [Variable Annuities] exchanges and for corrective action in the case of inappropriate exchanges, in violation of FINRA Rules 2330(d), 3110, and 2010.” VALIC agreed to a censure and a $350,000 fine. See VALIC Financial Advisors, Inc. AWC No. 2018060548501.
VALIC was acting as a retailer of mutual fund shares, variable life insurance, annuities, and corporate debt securities. It also acted as a municipal securities broker and provided investment advisory services. As evidence of FINRA’s tenacity in reviewing variable annuities activities, this was the second AWC in just over two years between FINRA and VALIC relating to variable annuities activity. In the first, on November 28, 2018, VALIC had accepted a censure, a $1,750,000 fine, and the entry of findings that (i) from October 2011 through December 2014, VFA failed to establish, maintain and enforce a system reasonably designed to supervise the sale of variable annuity contracts, and (ii) from October 2011 through December 2014, VFA failed to establish, maintain and enforce a system reasonably designed to comply with FINRA Rule 4530. See VALIC Financial Advisors, Inc. AWC No. 2014042360001.
VALIC’s January 8, 2021, AWC was the result of a FINRA 2018 cycle exam. It notes that the previous FINRA Rule 2330 was adopted to address concerns that customers were confused about when to exchange one variable annuity for another. FINRA Rule 2330(d)(1) specifically requires a member firm to “implement surveillance procedures to determine if any of the member’s associated persons have rates of effecting deferred variable annuity exchanges that raise for review whether such rates of exchanges evidence conduct inconsistent with the applicable provisions of this Rule, other applicable FINRA rules, or the federal securities laws (‘inappropriate exchanges’).”
FINRA conducts cycle exams every one to four years. It completes between 1,500 and 2,000 cycle examinations each year “to assess identified risks and controls and determine whether firms are in compliance with federal securities laws, rules and regulations.” It assesses “firm’s business activities, the risks associated with those activities and any factors that may influence or otherwise impact FINRA’s assessment of risk to determine whether your firm’s cycle examinations will be conducted on a one, two, three or four-year cycle.”
For the last several years, FINRA’s Priority Letters have indicated that variable annuity exchanges are priorities for FINRA’s reviews. This includes FINRA’s new 2021 report on Risk Monitoring and Examination Activities. It has entered into a number of AWC’s concerning variable annuities with other members over the years. See Metlife Securities, Inc., AWC No. 2014040870001; National Planning Corporation, et al., AWC No. 2015047177001. It appears that variable annuities and factors related to their switches will continue to be a priority for FINRA. With the SEC’s adoption of “Reg BI” and the completion of its initial Reg BI examinations in 2020, we should expect this to be a priority shared by the SEC’s Division of Enforcement.
For further information regarding FINRA’s disciplinary proceedings in general or enforcement involving Rule 2330 and variable annuities and/or the adequacy of your written supervisory and surveillance procedures, please contact one of the authors above.