Florida firm hit with six-figure fine for non-compliant RILA recommendations

A Florida-based firm has been censured and hit with a six-figure penalty by the Financial Industry Regulatory Authority, which found it failed to ensure hundreds of annuity recommendations made by its representatives were in their clients' best interest.

AAG Capital has agreed to pay $138,591.39 in penalties and restitution after FINRA found that the firm’s practices surrounding registered index-linked annuities fell short of the Regulation Best Interest standard.

Founded in 1962 and operating out of Wesley Chapel, AAG Capital has 35 registered representatives and focuses on private placements, mutual funds, and annuity products.

In a settlement finalized on May 20, FINRA stated that from February 2021 through April 2023, the Florida-based firm recommended 479 RILA transactions totaling over $92 million in principal.

Of those, 41 were funded through the exchange of existing insurance or annuity contracts, totaling more than $7.9 million.

FINRA determined that AAG Capital did not maintain policies and supervisory procedures sufficiently tailored to address the complexities of RILA products, which are tied to the performance of an external market index and often include both upside limits and downside protection.

RILAs have seen an explosion in popularity over the past several years, with preliminary LIMRA figures estimating first-quarter RILA sales amounted to $17.5 billion on the strength of a 21% year-on-year increase. 

"These products are attractive to both insurers and investors, providing investors the ability to mitigate equity market downturns and allowing companies greater flexibility to hedge against risk," Bryan Hodgens, senior vice president and head of LIMRA research, said in the latest report.

LIMRA's latest finalized annual data from 2024 showed RILA sales hitting $65.4 billion last year, marking a 38% increase from 2023.

While AAG Capital had adopted general written procedures addressing best interest recommendations, FINRA said they were not adequately designed to ensure compliance when it came to RILAs.

According to the letter, AAG’s system lacked specific instructions for supervisors to assess whether proposed annuity exchanges were in the customer’s best interest.

“The firm’s written policies and procedures failed to reasonably describe the steps that supervisors must take to evaluate whether the registered representatives had a reasonable basis to believe that the RILA recommendations were in the customers’ best interest,” the letter stated.

Aside from failing to spell out potential red flags of suitability versus a customer's investment profile, FINRA said AAG Capital's policies and procedures failed to consider potential downsides from exchanging an insurance product for a RILA, "such as the loss of a living benefit or death benefit, or the imposition of surrender fees."

Because of this lack of information, FINRA said supervisors at AAG Capital were hampered from making informed evaluations.

In 19 of the 41 RILA exchanges AAG Capital's representatives recommended, customers reportedly lost living or death benefits from their prior contracts or paid surrender charges.

FINRA noted that six customers exchanged life insurance policies for RILAs and forfeited death benefits valued at over $100,000 more than their contracts’ surrender value in some cases. Eight clients incurred surrender charges totaling $38,591.39, which the firm has been ordered to repay with interest.

“The firm’s written procedures and supervisory system were not reasonably designed to ensure that the firm’s supervisors would conduct reasonable follow-up before approving the exchanges,” the letter added.

Those gaps in compliance at AAG Capital constituted a breach of Exchange Act Rule 15l-1(a)(1), as well as FINRA Rules 3110 and 2010, FINRA concluded.

In addition to a censure and the penalty – which includes a $100,000 fine and more than $38,000 in restitution plus interest – the firm must provide FINRA with a certification from a senior executive within 180 days affirming that it has implemented a compliant supervisory system. This includes a narrative description and exhibits detailing the corrective measures taken.