Finra targets variable annuities as 'sweet spot' of scrutiny

Following record MetLife fine, regulator says VAs exist at a nexus of what they watch: complex products marketed to seniors

Jun 7, 2016 @ 1:40 pm

By Mark Schoeff Jr.

The term “variable annuities” may not appear in this year's list of Finra examination priorities, but that doesn't mean the broker-dealer regulator is taking it easy on the sector.

Two Financial Industry Regulatory Authority Inc. enforcement officials emphasized at an insurance industry conference that the products — which offer lifetime guaranteed income to investors but can be complicated and expensive — are still in their crosshairs.

“Variable annuities are just very frequently involved in our cases,” Russ Ryan, Finra senior vice president and deputy chief of enforcement, said Tuesday at an Insured Retirement Institute conference in Washington.

On Monday, James Day, Finra associate vice president and enforcement chief counsel, told an IRI audience that variable annuities exist at a nexus that Finra targets.

“They are at the sweet spot of complex products marketed to retirees and people about to retire,” Mr. Day said.

Both Finra officials highlighted the organization's recent enforcement action against MetLife. Finra hit the large insurer with a record $25 million penalty for misleading variable annuity sales.

Finra found that MetLife financial advisers made misrepresentations and omissions of fact in 72% of 35,500 applications the firm approved between 2009-14 to replace clients' existing variable annuities with new ones. The new products were touted as less expensive and more beneficial, when clients would have been better off keeping their existing investments, according to Finra.

Most of the problems centered on training and supervision of the advisers involved in the sales, according to the Finra officials. The same deficiencies are showing up in other cases, too.

Mr. Ryan encouraged the IRI audience to “be more vigilant, a little more skeptical, in reviewing these transactions.”

Brian Rubin, a partner at Sutherland Asbill and Brennan, pointed out that Finra did not charge MetLife with fraud or unsuitable sales.

“I'm not sure what kind of lessons you can take away, other than to be careful about replacements and have good policies and procedures in place,” said Mr. Rubin, who appeared on a panel with Mr. Ryan on Tuesday.


Another area where Finra will be cracking down is on L-share variable annuities, products that offer increased liquidity and a shorter surrender-penalty period of about three years instead of seven.

Mr. Rubin estimates Finra is poised to bring about 20 L-share cases, several of which focus on L-shares that are attached to long-term riders or living benefits.

“If you do have a fairly high percentage of L-shares with long-term riders, you may want to institute some sort of heightened procedures,” Mr. Rubin said.

Mark Quinn, director of regulatory affairs at Cetera Financial Group, also warned IRI conference participants about the Finra crackdown on L-shares.

“The direction that Finra is going in terms of enforcement activity is something that can have a really major financial impact on anybody who sells a lot of VAs and, particularly, a lot of L-shares,” Mr. Quinn said on a Monday panel at IRI.

During his panel on Tuesday, Mr. Ryan declined to comment on Finra's upcoming enforcement activities.

The IRI is a trade group representing the retirement income industry, and naturally there were defenders of variable annuities in the audience.

During a question-and-answer period with Mr. Ryan's panel, Joseph Jordan, a consultant, author and former adviser, pointed out the benefits of continuous income and equity positions that VA holders experienced during the financial crisis and the high withdrawal rates they consistently achieve.

“VAs have a very bad reputation, and it's wrong,” Mr. Jordan said in an interview.

He said he established the annuity program at MetLife but left the company in 2010. When he was there, the variable annuities the firm sold were simpler than today's versions, he said.

He acknowledged that bad advisers are casting a shadow on all VA sales.

“There are some scumbags in the business, and they deserve to be prosecuted out,” Mr. Jordan said.


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