NEW YORK — A securities law firm is seeking class action status for clients who may have been financially damaged by an insurer’s threats and commission incentives designed to skew adviser judgment in favor of proprietary products.
The case was filed against New York-based
MetLife Inc. on Jan. 31 in the U.S. District Court for the Western District of Oklahoma in Oklahoma City, alleging that the threats and incentives violated rules of Washington-based NASD and the Securities and Exchange Commission, and federal and state laws, and caused substantial financial loss to clients.
MetLife and its subsidiaries made both proprietary and non-proprietary mutual funds and life insurance policies available to clients but forced its investment advisers to sell at least a certain amount of proprietary products in order to keep their jobs, said William Federman, a partner with Federman & Sherwood, the Oklahoma City law firm that filed the case.
“We just received the complaint, and we are reviewing it,” said Holly Sheffer, a spokeswoman for
MetLife. She added that the company had no further comments.
“This could be a historic case, because it is challenging a culture that crosses over into every firm,” said Bill Singer, a securities attorney with Lawrenceville, N.J.-based Stark & Stark, who is not connected to the
MetLife case. “The compensation system is tilted, with advisers paid more to sell house products,” added Mr. Singer, who works in the firm’s New York office.
In order to meet these “quotas,” proprietary products were recommended by some company advisers even if better, more competitive non-proprietary products were available, according to the complaint filed in the case.
MetLife also paid its advisers higher commissions, additional benefits, “awards” and “prizes” to favor its proprietary products, the complaint states.
For instance, the commission was 2% of the front-end fee for proprietary funds and 0.75% for non-proprietary funds, according to the complaint. Regarding life insurance, advisers almost always sold Met-
Life policies, which were favored by the insurer’s commission-and-distribution structure.
‘Conflict of interest’
The alleged quotas were not disclosed to MetLife clients, who were led to believe that the advisers were offering products based on the clients’ unique financial needs and goals, and not on which products generated the most investment fees and other profits for MetLife, according to Mr. Federman. “That’s an unlawful conflict of interest,” he said.
An insurer incentive that encourages the sale of a certain product or the meeting of volume targets can be a potential conflict, according to Stephan Christiansen, director of research for Conning Research and Consulting Inc. in Hartford, Conn., and author of a report on producer incentives.
“We are still trying to sort out the class time period, how many people are in the potential class and the extent of the damages,” said Mr. Federman. But given the size of MetLife, he noted, the class would be “in the thousands” and damages “in the many millions.”
MetLife’s mutual funds were “mediocre performers,” compared with non-proprietary ones, according to the complaint, which does not offer statistics to back that assertion.
An undated “disclosure statement” to clients that is an exhibit in the case — which Mr. Federman said was a belated attempt by MetLife to inform clients of its compensation practices — stated that MetLife advisers “receive additional compensation for the sale of proprietary mutual funds.” The statement also said that advisers receive more pension benefits and 401(k) contributions when they sell proprietary products, because those commissions are considered income.
The disclosure statement also noted that advisers “have the ability to recommend any mutual fund,” provided that MetLife has a selling agreement with the fund group.
But whether this case is alleging conduct that is merely “questionable” or amounts to “illegal coercion” of advisers is a key issue, Mr. Singer said. He is unsure whether a court would rule that the precise details about an adviser’s compensation would need to be disclosed to the client, as long as the amount actually paid by the client were disclosed by prospectus or otherwise. Whether MetLife had a fiduciary duty to make such disclosures — as the complaint alleges — needs to be determined by a court, Mr. Singer added.
“It is not only MetLife that is doing this,” said Mr. Federman, implying that other companies may face similar suits in the future.
