Finra said the firm failed to mandate and enforce its own written supervisory procedures, resulting in the unsuitable sale of L-share variable annuities tied to long-term riders.
The Financial Industry and Regulatory Authority Inc. fined H. Beck $400,000 Tuesday for failing to mandate and enforce its own written supervisory procedures, resulting in the unsuitable sale of L-share variable annuities tied to long-term riders.
For the past five years, Maryland-based independent broker-dealer H.Beck sold a considerable number of variable annuities to its clients. Between January 2013 and December 2014, for example, H. Beck sold more than 7,001 variable annuity contracts for nearly $34.9 million in revenue. That number includes nearly 2,835 L-share contracts, sold for about $13.3 million in revenue, many of which were tied to long-term riders and some of which were sold to customers with long-term investments horizons, according to Finra.
H. Beck, which is headquartered in Rockville, has about 681 registered employees and about 406 registered branch offices. It's been a member of Finra since 1954.
Variable annuity contracts with different share classes come with different surrender periods and fee amounts. B-share contracts, the most common share class, have a seven-year surrender period. Meanwhile, L-share contracts have shorter three- to four-year surrender periods and typically charge higher fees. L-share contracts are generally 35 to 50 basis points higher than most B-share contracts.
When combined with long-term riders, such as Guaranteed Minimum Income Benefit Riders, a high-fee, short-term L-share contract will get stretched to five years or longer for the holder to obtain the full benefit.
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Because H. Beck failed to set and maintain specific supervisory procedures in compliance with Finra, it failed to consider what is suitable in the sales of different variable annuity classes, according to Finra in a letter of acceptance, waiver and consent. H. Beck's WSPs did not address fees, costs and surrender periods in regard to different variable annuity share classes, specifically L-share contracts with long-term horizons.
Finra also said H. Beck failed to properly train its representatives to ensure they understood variable annuities and its suitability considerations.
In March 2015, H. Beck was fined $425,000 after it was similarly censured for failing to establish WSPs and a proper supervisory system, according to the Finra letter. Despite establishing new WSPs requiring "heightened reviews," H. Beck failed to enforce them the following years in 2016 and 2017.
H. Beck was fined and censured and is required to review and revise the firm's supervision in regard to multi-share class variable annuities.
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