FINRA Nails Broker-Dealers for Sales to Elderly

The Financial Industry Regulatory Authority (FINRA) said it fined five bank broker/dealers a total of $1.65 million for deficient supervision and procedures related to variable annuity (VA), mutual fund, and unit investment trust (UIT) transactions.

The five firms that FINRA fined are:

• McDonald Investments (now KeyBanc Capital Markets, Inc.) ($425,000)
• IFMG Securities ($450,000)
• Wells Fargo Investments, LLC ($275,000)
• PNC Investments ($250,000)
• WM Financial Services, Inc. (now Chase Investment Services Corp.) ($250,000).

Brokers at each of the firms operated out of branches of affiliated banks, selling VAs, mutual funds or UITs to bank customers, who, in many instances, were elderly, FINRA said. The brokerage customers were referred by bank personnel, and sales of these financial products represented a significant portion of each firm’s business.

McDonald Investments, now KeyBanc Capital Markets, also was charged with unsuitable variable annuity sales to elderly customers.

“Today’s actions underscore the need for firms operating bank branches to have effective systems and procedures in place to monitor sales of variable annuities, mutual funds, and UITs,” said Susan Merrill, executive vice president and chief of enforcement at FINRA, in a news release. “Bank broker/dealers have access to a broad customer base through their retail bank branches. Proper care must be taken to appropriately supervise sales to those customers, particularly the elderly who can be unfamiliar with securities products as they seek alternatives to certificates of deposit and other bank offerings.”

Background

In the case against McDonald, FINRA found that, between June 2004 and January 2006, a former broker at the firm made 32 unsuitable sales to 25 elderly bank customers, recommending each customer purchase a VA with an enhanced death benefit rider. The customers, all 78 years old or older, were either too old to be eligible for the rider, or very close to the ineligible age. Those customers who purchased the VA with the enhanced death benefit rider received little or no benefit from the rider despite paying higher fees for it over the life of the annuity, FINRA said.

FINRA ordered the firm to offer the 25 affected customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase, plus interest and any surrender charges required, adjusted for any withdrawals made.

FINRA also found that McDonald failed to take adequate steps in response to red flags indicating that the broker was engaging in unsuitable VA transactions, including nine customer complaints filed against the broker, and the broker's pattern of selling elderly bank customers the same variable annuity with the same enhanced death benefit rider.

The firm placed the broker under heightened supervision, but then continued to approve 32 unsuitable transactions and from the broker. FINRA also found that McDonald failed to implement adequate VA supervisory systems and procedures.

As for IFMG Securities, FINRA found that the firm used trade blotters to assess suitability and approve VA and mutual fund transactions that did not capture necessary information to conduct a suitability review—such as the customer's investment time horizon, risk tolerance, and other financial assets. Furthermore, suitability information did not reflect customers’ true income or net worth.

In the Wells Fargo, PNC Investments, and WM Financial Services cases, FINRA found that the firms did not provide adequate guidance to principals who approved variable annuity transactions, or in the case of WM Financial, UIT transactions.
 
In settling each of these matters, none of the firms admitted nor denied the charges, but consented to the entry of FINRA's findings.