A small, Texas-based broker-dealer has been fined $100,000 for failures in monitoring variable annuity exchanges, within months of firm executives being targeted in a pair of multimillion-dollar customer disputes involving variable annuities and real estate investment trusts.
The Financial Industry Regulatory Authority Inc. handed down the fine to IMS Securities Inc., a firm with approximately 110 registered representatives, due to a lack of “adequate supervisory procedures for problematic rates of exchange” in variable annuity transactions, according to the broker-dealer industry watchdog.
A recent analysis of Finra's enforcement activity estimates the group is on pace this year to break the previous record for level of fines against broker-dealers and their reps.
An annuity exchange — also known as a 1035 exchange, named after a provision in the tax code — allows brokers to transfer funds in an annuity to a new policy without subsequent tax penalties.
Finra requires firms have surveillance procedures in place to ensure brokers don't abuse the practice by performing frequent exchanges to benefit themselves through upfront commissions at the expense of a customer.
From July 15, 2013 through July 8, 2014, IMS Securities relied upon its chief financial officer to review annuity exchanges, but “provided him with no guidance or tools such as exception reports or trend analysis to assist with reviews for problematic rates of exchange,” according to a Finra enforcement document filed Sept. 30.
Instead, the reviews were limited to the annuity application and the order records for the exchange, and IMS consequently “failed to investigate potentially problematic patterns of variable annuity exchanges,” according to Finra.
In addition to violations regarding variable annuity exchanges, the firm also failed to enforce written supervisory procedures around consolidated reports, which combine account information regarding customer assets, Finra said.
The firm neither confirmed nor denied Finra's allegations.
Jackie Wadsworth, the owner and chief executive of IMS Securities, didn't respond to a request for comment.
Over the summer, Ms. Wadsworth, along with her firm's chief financial and compliance officers, were subjects of a $3 million Finra arbitration complaint over the sale of variable annuities and real estate securities, as well as a separate $1.7 million complaint over REIT sales, according to BrokerCheck records.
The cases are pending.