variable annuities

Brokerage Firms Profit Off of 401(k) Rollovers at Investors’ Expense

June 23, 2014 | by Staff Attorney

A recent article by Bloomberg highlighted a disturbing trend whereby brokers of independent brokerage firms have been able to make substantial profits while providing allegedly unsuitable investment advice and potentially tanking the retirement savings of potentially hundreds and maybe thousands of blue collar workers. These brokerage firms have been able to tap into large corporations with thousands of employees with 401(k) plans and convince them to rollover their accounts to their firm into IRAs. Once there, the brokers recommend unsuitable investments in an already tax-deffered account such as municipal bond funds and variable annuities. Some of the investments are extremely speculative and carry huge commissions and fees. In the end the brokers make hundreds of thousands in commissions while the investor is left with a depleted retirement account.

How the practice works is that brokers form connections with large employers in order to pitch their investment services to employees. Because the employer allows the broker to use their offices and facilities to pitch their investment services, employees often mistakenly believe that the company endorses or has otherwise evaluated the broker. In fact, these companies often have little to no relationship with the broker or a defined screening process.

According to Bloomberg, employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012. As a result, IRAs account assets are up to $6.5 trillion, more than the $5.9 trillion contained in 401(k)-style accounts. However, the shifts have been used by some Wall Street firms to profit at their client’s expense. IRAs often charge higher fees than 401(k) plans which provides brokers an incentive to promote rollovers.

Two MetLife Advisors Alleged to Have Wrongfully Exchanged Variable Annuities

May 14, 2014 | by Staff Attorney

On March 27, 2014, the Financial Industry Regulatory Authority (FINRA) filed a regulatory complaint against two former brokers from MetLife Securities, Inc., a unit of MetLife Inc. According to the complaint, Christopher Birli (Birli) and Patrick Chapin (Chapin), who both worked for MetLife in Williamsville, New York, until 2012, participated in a seven-year scheme to inflate commissions. According to the allegations, the advisors preyed on the employees of the State University of New York, having these retirement-plan participants switch $21 million in annuities. The specific allegations claim that from a period spanning from 2004 to 2011, Birli and Chapin encouraged forty-five of their customers to switch the MetLife variable annuities that they held in their respective accounts in exchange for new variable annuities held in individual retirements accounts, which were outside of the university plan that the State University of New York employees should have adhered to.

MetLife has certain policies in place. One such policy prohibits exchanging certain types of variable annuities. It has been alleged that the two MetLife advisors deceptively designed the deals for their customers in a manner explicitly intended to circumvent this policy. Birli and Chapin allegedly evaded detection by utilizing a three-step process. First, they advised their clients to sell their retirement plan annuities and take the cash. Next, the two advisors had their clients purchase a different security within the retirement plan, which they were required to hold for ninety days. Finally, Birli and Chapin instructed their clients to sell that security in order to buy a variable annuity through an individual retirement account.

Over the seven-year period, a total of $21 million was craftily shifted from the MetLife retirement plan product into the TIAA-CREF plan product, then subsequently placed into the MetLife retail annuities. All the while, Birli and Chapin allegedly reaped commissions of 7.15% for transferring the money into the retail annuities. If the two brokers had followed protocol and sought an exception with MetLife to allow the internal exchange of the retirement plan annuity product for a retail variable annuity, they would have only earned the standard 2% gross dealer concessions. The advisors’ alledged improprieties essentially netted them nearly four times the commissions that they were rightfully entitled to, generating hundreds of thousands of dollars for their own pockets. According to the filings, MetLife terminated Birli and Chapin in 2012. Neither individual presently works in the securities industry, according to filings.

The Risks of Investing In Variable Annuities

May 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Mark R. Talley (Talley) formerly of Fifth Third Securities, Inc. concerning allegations of misrepresenting the properties of a variable annuity product to a customer. Our firm has received complaints concerning variable annuities from a number of clients complaining that their broker failed to explain the risks of these complex products.

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. The SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.”

A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you. The investor chooses investments to be made in the annuity and the value of the variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.

Colorado Financial Service Fined By FINRA Over Private Placement Supervisory Failures

April 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined Colorado Financial Service Corporation (Colorado Financial) concerning allegations that the firm violated NASD Rule 3010, and FINRA Rule 2010, among other violations, by failing to establish, maintain, and enforce supervisory procedures reasonably designed to ensure compliance with the securities rules pertaining to the supervision of electronic communications and due diligence review of new private placement offerings.

Colorado Financial is based in Centennial and became a FINRA member in 2000. Currently, there are approximately 82 persons registered with Colorado Financial in thirty six branches. The firm’s primary lines of business include investment banking, private placements, mutual funds, and variable life insurance or annuities.

FINRA alleged that Colorado Financial did not establish, maintain, and enforce adequate procedures to supervise and review electronic communications for the period of February 2009 to September 2012. According to FINRA, Colorado Financial only manually reviewed between .1% and 1.5% out of approximately 325,900 archived e-mails during the period of January 2012 to September 2012. FINRA found that Colorado Financial’s written supervisory procedures relating to electronic communications did not indicate who at the firm was responsible for the supervisory review, how the review would be conducted and documented, or establish protocols for escalating regulatory issues in e-mails.

New York State Fines AXA Equitable $20 Million Over Variable Annuity Products

April 23, 2014 | by Staff Attorney

Governor Andrew M. Cuomo announced on March 17, 2014, that AXA Equitable (AXA) agreed to a consent order to pay a $20 million fine to the New York Department of Financial Services (DFS) for violations relating to certain variable annuity products. The DFS investigation uncovered that AXA made changes to certain variable annuity products that limited potential returns for existing customers without providing adequate notice to New York. New York stated that AXA’s omissions limited the DFS’ ability to protect consumer by requiring existing customers to affirmatively “opt in” to the altered product rather than remaining in that investment by default. According to New York, AXA’s actions affected tens of thousands of New Yorkers with variable annuity products at AXA.

A variable annuity is complex bundled financial and insurance product. A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you and the investor chooses the investments made in the annuity. The value of your variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.

The Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. In the publication, the SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.” Often times the benefits of variable annuities are outweighed by the other provisions including surrender charges, mortality and expense charges, management fees, and rider costs. Variable annuities are also high sales commission products for financial advisors and sometimes advisors push these products on persons who do not need them or cannot benefit from them. For example, since an IRA account is already tax deferred it makes little sense to use an IRA account to hold a variable annuity investment.

Matrix Capital and Christopher Anci Sanctioned by FINRA Over Variable Annuity Practices

February 27, 2014 | by Staff Attorney

In or about May 2010, a registered representative who concentrated in variable annuities became registered with Matrix Capital Group, Inc. (Matrix) and remained with Matrix until April 2011. According to FINRA, during a one year period the representative recommended 17 customers surrender their existing variable annuities and replace them with another annuity product. FINRA alleged that each customer purchased a new annuity and paid a surrender charge of at least $1,000. In sum, FINRA found that in total the customers paid a total of $70,000 in surrender charges. In addition, FINRA alleged that in 16 of the 17 transactions, the customer forfeited significant death and/or living benefits through the switch.

Matrix’s primary business involved equity agency transactions, mostly for institutional customers and high net worth individuals. Christopher Anci (Anci) joined Matrix in 1996. He has been dually registered with three other firms at various times while registered with Matrix. Anci has been President and a director of Matrix Capital Group since 2004.

As President of the Matrix, Anci had overall supervisory responsibility for the firm’s operations. Also, during the time Anci served as Chief Compliance Officer, until November 2010, Anci was designated in the firm’s written supervisory procedures as the person responsible for reviewing and approving variable annuity sales and exchanges. Even after Matrix hired a new Chief Compliance Officer, according to FINRA Anci remained responsible for the supervision and review of variable annuity transactions.

Ronald Anglin Investigated by the SEC Over Charges of Securities Fraud

January 15, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) instituted administrative proceedings against broker Ronald Gene Anglin (Anglin), formerly of Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch), on allegations that Anglin engaged in securities fraud by forging letters of authorization from a Merrill Lynch customer to be sent by mail to addresses designated by Anglin.

From 2004 through October 2008, Anglin was a registered representative of Citigroup Global Markets, Inc. Thereafter, Anglin was a registered representative of dually registered broker-dealer and investment adviser Merrill Lynch until May 2011. Anglin also was an investment adviser representative for Merrill Lynch. Anglin is 38 years old and is a resident of Canyon Country, California.

On October 4, 2012, Anglin pleaded guilty to one count of mail fraud before the United States District Court for the Central District of California in U.S. v. Ronald Gene Anglin, 2:12-CR-00232-SJO. On March 25, 2013, Anglin was sentenced to three years of probation including 27 months in home detention, and ordered to make restitution in the amount of $73,000.

Darrell Frazier Accused of Selling Variable Annuities by Misleading Customers

September 28, 2013 | by Staff Attorney

Darrell G. Frazier (Frazier) was recently barred from the securities industry by the Financial Industry Regulatory Authority (FINRA) over allegations that Frazier made fraudulent statements in the sales of variable annuities. Frazier is also alleged to have made unsuitable variable annuity sale recommendations to customers.

Frazier first became registered with a FINRA member firm in March 1988. Frazier was registered with Park Avenue Securities LLC from July 2002 through June 2010. From August 2010 through May 2011, Frazier was associated with MML Investors Services, LLC.

FINRA alleged that from 2004 to at least 2009, Frazier made materially false and misleading statements in connection with recommending customers purchase variable annuity products issued by Guardian Insurance & Annuity Company, Inc. A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date. The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

Financial Advisors Have an Obligation to Provide Truthful Information When Selling Securities

September 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Scottie Brent Chitwood (Chitwood) from the securities industry over allegations that he sold clients variable annuities by making false and misleading representations concerning the securities features. Chitwood was also accused of exercising discretionary authority in clients’ accounts. FINRA’s action reinforces the regulator’s rules that brokers have an obligation to disclose truthful and balanced information in the sale of securities products to investors.

A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date. The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

Variable annuities offer a range of investment options to invest in and the value of the investment will vary depending on the performance of the investment options selected. The investment options typically include mutual funds that invest in stocks and bonds. Variable annuities distribute periodic payments for the rest of the investor’s life (or any other person you designate). Most variable annuities encourage investors to remain invested for a period of years and discourage early termination through expensive surrender fees. The insurance company can charge investors in some cases up to 7% of the investment for early termination.