Principal client wins $7 million claim involving annuities

A foundation based in Wisconsin last week won a $7.3 million arbitration claim that alleged misuse of variable annuities, along with other charges, against Principal Securities Inc.

The Rosenau Family Research Foundation filed its claim against Principal Securities in 2022, alleging the broker-dealer "failed to reasonably supervise its registered representative," and that the firm recommended that the foundation "invest a majority of its assets in unsuitable variable annuities and variable life insurance policies."

The foundation also alleged that Principal Securities failed to disclose investment costs to the Rosenau Family Research Foundation, which funds research and does advocacy for Krabbe Disease and Cystic Fibrosis, according to the foundation's website.

The three-person arbitration panel, under the aegis of Finra Dispute Resolution, gave no reasoning for its award. The Principal Securities financial advisor involved in the alleged unsuitable sale of annuities was not named in the arbitration award.

The foundation initially asked for at least $20 million in damages. Variable annuities are typically high-commission investment products.

A spokesperson for Principal Securities did not return a phone call Monday morning to comment.

"There's a lack understanding around these products, variable annuities, and they are rarely the best option for investors," said Scott Siler, a plaintiff's attorney. "It has been and still is a massive problem for investors. And the insurance companies and broker-dealers that focus on annuities are trying to punch holes in new standards, like Regulation Best Interest, that protect investors."

InvestmentNews in March first reported that Principal Securities was potentially on the hook for up to $5 million over an unnamed ex-broker’s alleged churning of variable annuities, an expensive and often misunderstood investment product. Principal Securities made the disclosure of the potential legal expense in its Focus Report, or annul audited financial statement, to the Securities and Exchange Commission.

Principal Financial Group maintains it is conservative, but the facts presented over the time covered by this claim that Principal Financial and its broker-dealer, Principal Securities were more concerned with sales and commissions than what is in the best interest of the customer, wrote Gabriel Cohn, executive director of the foundation, in an email.

"Their lack of supervision allowed their broker, who is now deceased, expose these flaws," Cohn wrote. "Instead of supervising the broker, they rewarded him with the title 'agent of the year.'"

"As a non-profit trying to find a cure for Krabbe disease, we expected our broker to provide an investment model that was prudent," Cohn wrote. "Instead, the investment model had the foundation, a tax exempt entity, purchase over 21 variable annuities. Principal Securities had large supervisory lapses over these sales."

"The evidence further reflected a pattern of churning, when these variable annuities were surrendered and then, 30-days later, a new variable annuity was purchased," he added. "We maintained and proved that these surrenders and purchases were done to generate fees and commissions, and resulted in lost growth of the foundation's principal in the millions."