FINRA Reports VA Fines Down; Amounts Up

By Cyril Tuohy

The number of Financial Regulatory Authority (FINRA)-related cases involving variable annuities are way down, but the fine amounts are way up.

FINRA is on track to finish the year with just 16 cases involving VAs. This is a drop of 36 percent compared to last year, a projection by the law firm of Sutherland Asbill & Brennan shows.

However, projected fines assessed by FINRA in connection with variable annuity cases will reach a record $30.7 million, a number driven by a huge MetLife fine. This is an increase of nearly 200 percent over 2015.

Sutherland tracks cases and fines levied by FINRA, the industry-financed self-regulatory organization.

There were 25 variable annuity-related cases last year, a 26 percent decline from the 34 cases in 2014, according to Sutherland. In 2013, there were 35 FINRA variable annuity-related cases, down from a record 51 cases in 2012, the Sutherland statistics show.

With three months left in the year, however, “I know there will be some other large variable annuity cases FINRA will bring this year,” said Brian L. Rubin, head of Sutherland’s Washington litigation practice group.

FINRA investigators are looking into the sale of L-share variable annuities with long-term riders that offer more liquidity and a shorter surrender period.

The drop in the number of cases also may have to do with slower variable annuity sales due to shifting demand from consumers and advisors. It also may be that FINRA investigators are turning their attention to other areas of enforcement.

Slower Sales, Fewer Cases Connected?

In the first half of 2016, variable annuity sales tanked by 22 percent to $53.5 billion compared with the year-ago period. That's according to the U.S. Individual Annuity Sales Survey by the LIMRA Secure Retirement Institute.

Tougher regulations, annuity companies cutting back on benefits and low interest rates that make annuities less attractive relative to other financial products have proven obstacles to VA sales.

Variable annuities by themselves rarely appear as a top-five enforcement issue for FINRA, said Rubin, former deputy chief counsel of enforcement at FINRA and senior enforcement counsel at the Securities and Exchange Commission.

Not this year so far.

In the first half of 2016, FINRA-related cases involving variable annuities were the No. 1 enforcement issue, racking up $20.7 million in fines among seven cases.

By comparison, due diligence-related cases racked up $19.7 million in fines among 24 cases. This was followed by anti-money laundering disputes with $18.6 million in fines among 18 cases, according to Sutherland’s compilation.

VA Fines Skewed by One Case

Fines paid in connection with variable annuity sales procedures in the first six months were driven by one “ginormous” $20 million fine against MetLife Securities, the broker-dealer subsidiary of MetLife.

MetLife Securities, which was sold to MassMutual Financial Group earlier this year, was fined for negligence and supervisory failures in connection with the costs and benefits on tens of thousands of variable annuity exchanges over a five-year period ending in 2014.

In addition to the fine, the MetLife Securities has agreed to restitution of $5 million.

Between 2005 and June 2016, there were 31 FINRA cases, or about two-and-a-half cases a year on average, involving variable annuity misrepresentations and omissions. During that period, broker-dealers and their representatives paid $20.5 million in fines, statistics compiled by Sutherland show.

Between 2005 and June 2016, there were 97 suitability cases, or about eight cases a year on average, involving variable annuity and suitability issues. Broker-dealers or their representatives paid $11.7 million in fines, according to Sutherland.

So long as variable annuity sales remain an important part of a company’s business, it isn’t likely that the company will back away from variable annuity sales just because of a mammoth fine levied in one case, Rubin said.

“Enforcement actions cause firms to look more closely at what they are doing,” Rubin also said. “If variable annuities are an important part of a firm’s business, I don’t think enforcement actions would stop that.”

Overall Fines to Shatter Previous Record

Record fines in connection with variable annuity cases dovetails with record fines ordered by FINRA across many enforcement categories.

During the first half of the year, FINRA reported $79.4 million in fines, more than double the $37.5 million during the first half of 2015.

At the current rate, FINRA fines across all categories could reach $159 million by the end of the year, a 69 percent increase compared with 2015, Sutherland said.

FINRA levied separate fines totaling $17 million against two Raymond James affiliates in connection with lax anti-money laundering procedures connected to the firm’s growth from 2006 to 2014.

“This isn’t your mother’s (or father’s) FINRA,” Rubin said. “Firms and individuals will need to adjust their mindsets regarding fine levels in disciplinary cases.”

Broker-dealers and their representatives who focus on “nuts and bolts” issues like product marketing and suitability, anti-money laundering, trade reporting, supervisory policies and procedures are most likely to avoid feeling the wrath of FINRA supervisors, he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].