Finra charges SWS with improper supervision of VA transactions

SWS allegedly failed to come up with procedures to approve VA sales generated in its offices that didn't have an onsite supervisor

Oct 2, 2014 @ 2:27 pm

By Darla Mercado

Finra on Monday charged SWS Financial Services Inc. with green-lighting numerous variable annuity applications with no principal review for suitability.

In its Sept. 29 complaint, the Financial Industry Regulatory Authority Inc.'s department of enforcement alleged that from Sept. 2009 to May 2011, SWS violated rules that require firms to have supervisory systems and written procedures to supervise VA transactions.

The five charges facing SWS include an allegation of inadequate supervisory systems and written supervisory procedures to supervise VA business, inadequate supervisory reviews of VA deals, failure to have registered principal review of VAs before submitting the application to the insurer, failure to have surveillance procedures to detect inappropriate VA exchanges, and failure to develop and document a specific training plan for supervisory review of VA deals.

(See also: Variable annuity scam architect settles with SEC, admits to wrongdoing)

Finra's enforcement department seeks disciplinary action, including unspecified monetary sanctions, and an order that SWS bear the costs of the proceeding.

A call to Ben Brooks, a spokesman for SWS, was not immediately returned.

According to Finra, while SWS was lacking in its supervisory framework for VAs, sales of variable annuities made up 16% to 20% of SWS' total revenue during the September 2009 to May 2011 review period.


SWS fell short when it allegedly failed to come up with specific procedures to approve VA sales generated in its offices that didn't have an onsite supervisor. These offices accounted for about 1,300 of more than 1,500 variable annuity transactions executed by SWS's reps during the relevant period.

Those applications were forwarded from these offices to SWS' affiliated insurance agency, where two workers who weren't registered with SWS were supposed to review the applications and then send them to a manager at SWS' regional office of supervisory jurisdiction for a final suitability review and approval, Finra alleged.

Afterward, the applications were to be sent to the insurer, where they would be processed.

According to Finra, SWS didn't follow this unwritten process. From September 2009 to May 2011, more than 70% of the VA business generated at the firm's offices with no onsite supervisor were sent to insurers without ever having been reviewed by an SWS securities principal.

Without the necessary supervisory review, some fishy VA deals slipped through the cracks. In one scenario, a rep recommended that 29 of his clients swap VAs issued by MassMutual Life Insurance Co. for those from Jackson National Life Insurance Co. because the former would no longer issue certain guaranteed living benefits, according to the Finra complaint.

At least three of the 29 exchanges may have been inappropriate because the clients hadn't reached the appropriate age of 45 to add the benefits offered by Jackson National, Finra said.

“Each of these customers incurred surrender charges and went into a VA contract with higher annual expenses, which may have been avoided in part if they had waited until age 45 to exchange their VA,” Finra noted.

(A previous version of this article incorrectly stated that Jackson National would no longer issue certain guaranteed benefits.)


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