March 2, 2021

Volume XI, Number 61


March 01, 2021

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FINRA’s Focus on Variable Annuity Switches Continues

On January 8, 2021, without admitting or denying the findings, VALIC Financial Advisors, Inc., (VALIC) entered into a settlement with FINRA Enforcement, through an Acceptance, Waiver and Consent (AWC) where the factual allegation was that between January 1, 2017, and October 31, 2018, the broker-dealer failed to “establish a reasonably designed system and written supervisory procedures for the surveillance of rates of [Variable Annuities] exchanges and for corrective action in the case of inappropriate exchanges, in violation of FINRA Rules 2330(d), 3110, and 2010.” VALIC agreed to a censure and a $350,000 fine. See VALIC Financial Advisors, Inc. AWC No. 2018060548501.

VALIC was acting as a retailer of mutual fund shares, variable life insurance, annuities, and corporate debt securities. It also acted as a municipal securities broker and provided investment advisory services. As evidence of FINRA’s tenacity in reviewing variable annuities activities, this was the second AWC in just over two years between FINRA and VALIC relating to variable annuities activity. In the first, on November 28, 2018, VALIC had accepted a censure, a $1,750,000 fine, and the entry of findings that (i) from October 2011 through December 2014, VFA failed to establish, maintain and enforce a system reasonably designed to supervise the sale of variable annuity contracts, and (ii) from October 2011 through December 2014, VFA failed to establish, maintain and enforce a system reasonably designed to comply with FINRA Rule 4530. See VALIC Financial Advisors, Inc. AWC No. 2014042360001.

VALIC’s January 8, 2021, AWC was the result of a FINRA 2018 cycle exam. It notes that the previous FINRA Rule 2330 was adopted to address concerns that customers were confused about when to exchange one variable annuity for another. FINRA Rule 2330(d)(1) specifically requires a member firm to “implement surveillance procedures to determine if any of the member’s associated persons have rates of effecting deferred variable annuity exchanges that raise for review whether such rates of exchanges evidence conduct inconsistent with the applicable provisions of this Rule, other applicable FINRA rules, or the federal securities laws (‘inappropriate exchanges’).”

FINRA conducts cycle exams every one to four years. It completes between 1,500 and 2,000 cycle examinations each year “to assess identified risks and controls and determine whether firms are in compliance with federal securities laws, rules and regulations.” It assesses “firm’s business activities, the risks associated with those activities and any factors that may influence or otherwise impact FINRA’s assessment of risk to determine whether your firm’s cycle examinations will be conducted on a one, two, three or four-year cycle.”

For the last several yearsFINRA’s Priority Letters have indicated that variable annuity exchanges are priorities for FINRA’s reviews. This includes FINRA’s new 2021 report on Risk Monitoring and Examination Activities. It has entered into a number of AWC’s concerning variable annuities with other members over the years. See Metlife Securities, Inc., AWC No. 2014040870001National Planning Corporation, et al., AWC No. 2015047177001. It appears that variable annuities and factors related to their switches will continue to be a priority for FINRA. With the SEC’s adoption of “Reg BI” and the completion of its initial Reg BI examinations in 2020, we should expect this to be a priority shared by the SEC’s Division of Enforcement.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume XI, Number 53



About this Author

Bruce Ashton, Drinker Biddle Law Firm Los Angeles, Employment Benefits Attorney

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and...

Sandra Dawn Grannum, Finance, Securities Lawyer, Drinker Biddle Law Firm

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has tried more than 50 arbitrations before the NASD and FINRA through award represented brokerage firms, banks, clearing firms, and associated persons. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

David W. Porteous Corporate Attorney Faegre Drinker Biddle & Reath Chicago, IL

David Porteous routinely counsels clients in the investment management, broker-dealer and financial services industries on regulatory matters including examinations, investigations and enforcement proceedings as well as complex civil and securities-related litigation. In addition, he assists clients in developing and implementing compliance and regulatory risk management plans and represents clients in complex civil and securities litigation.

Regulatory Agency Background

Before entering private practice, David was a staff attorney in the Securities & Exchange Commission...

Fred Reis Faegre Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

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