Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Great American Advisors, Inc. (Great American) concerning allegations that between December 2006, and December 2007, Great American failed to have an adequate supervisory system for the sale of variable annuities. FINRA alleged that two of the firm’s registered representatives recommended and effected 301 unsuitable variable annuity transactions involving 206 customers causing customers to pay $363,173 in unnecessary surrender fees and incur longer surrender periods.
Great American has been a registered firm with FINRA since 1994. From 1994 through August 2010, the Great American operated as a full service firm selling mutual funds and annuities, among other investment products. Since August 2010, the firm serves as a principal underwriter and distributor for annuity products and has 54 registered representatives.
As a background, a variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you based upon the chosen investments made in the annuity account. The investment options for a variable annuity are usually a selection of a group of mutual funds.
While annuities have the benefits of periodic payments for life, a death benefit where your beneficiary is guaranteed to receive payments, and tax deferment these benefits must be weighed against the risks and costs of the product. Variable annuities come with surrender charges, mortality and expense charges, management fees; and rider costs. Variable annuities are also high sales commission products and sometimes advisors push the product on investors who do not need them or cannot benefit from them.
In the case of Great American, FINRA alleged that between December 2006, and December 2007, one advisor switched 140 customers who held 214 fixed or variable annuities to a one issued by an unaffiliated third party insurance company costing the customers approximately $208,000 in unnecessary surrender penalties. The broker also earned $380,235 in commissions for the sales. FINRA also found a second broker switched 66 customers who held 87 fixed or variable annuities which cost the customers approximately $155,173 in surrender penalties and earned the broker $196,684 in commissions.
FINRA found that the two brokers employed a “one size fits all” investment strategy no matter the investment objectives, risk tolerance, age or financial situation of their clients were. For example, FINRA found that the clients were between the ages of 27 and 73, were working or retired, and had varied wealth and annual income. Nonetheless, according to FINRA, substantially all of the customers purchased the same variable annuity, the same rider, and the same asset allocation investment fund options. In fact, in order to justify the replacements, FINRA found that the one broker stated on virtually all the applications that the annuity had “better retirement options.” However, FINRA found that any benefits that the customers received from the new annuity did not outweigh the costs of the transactions, the commencement of a new 10-year surrender period, or justify the commissions received by the brokers for the replacements.
FINRA found that Great American’s written procedures generally addressed suitability considerations for variable annuity sales. However, FINRA concluded that the firm did not have an adequate supervisory system to ensure that the procedures were properly implemented or ensure that broker sales of annuities by the two brokers adhered to its written procedures. Moreover, FINRA was critical of the firm’s limited systems, written guidance, computer systems and other surveillance tools that deprived supervisors of the ability to detect misconduct.
The attorneys at Gana Weinstein LLP are experienced in representing investors in variable annuity matters. Our consultations are free of charge and the firm is only compensated if you recover.