Transamerica Financial Advisors agreed to pay $8.8 million in sanctions for unsuitable sales of variable annuities, mutual funds and 529 college savings, Finra announced Monday.
Transamerica’s settlement with the Financial Industry Regulatory Authority Inc. includes a $4.4 million fine and $4.4 million in restitution to approximately 2,400 customers. The broker-dealer self-regulator charged Transamerica with failing to adequately supervise its registered representatives in making recommendations involving the three products for various time periods from 2009 through 2016.
From May 2010 to May 2016, the firm sold approximately 51,000 variable annuity policies, generating $591 million in commissions — or more than 40% of Transamerica’s revenue.
But the firm failed to detect at least one misstatement by its reps regarding more than half of the 3,781 variable annuity exchanges it approved. That resulted in customers swapping the VAs they were holding for new ones. The transaction generated commissions but harmed the customer.
Finra also alleged Transamerica failed to detect when its reps recommended inappropriate high-fee variable annuity share classes.
From January 2009 to November 2015, Transamerica did not supervise mutual fund sales adequately, resulting in the firm’s reps failing to apply approximately $438,239 in available waivers to customers.
The third prong of the settlement involved sales of 529 college savings plans. Finra alleged that from May 2010 through May 2015 the firms reps recommended unsuitable 529 share classes because they failed to take into account the age of beneficiaries and the number of years until expected withdrawals.
“It is imperative that FINRA member firms selling variable annuities, mutual funds, and 529 plans exercise particular care and diligence in training and supervising those representatives who recommend them to customers,” Jessica Hopper, Finra executive vice president and head of enforcement, said in a statement. “FINRA will continue to fulfill its mission of investor protection by making sure harmed customers receive restitution.”
Transamerica, which did not admit nor deny the charges, said it has corrected the problems Finra cited.
“Since this investigation began in 2015, TFA has enhanced its training, guidance, policies and procedures, and oversight of its registered representatives and has enhanced its disclosures to customers,” a Transamerica spokesperson said in a statement. “The settlement impacts a very small number of the total number of customer accounts held by TFA between 2009 and 2016. TFA is confident in its investment recommendations and remains committed to continuously improving its business practices.”
The sanctions regarding 529 plan share-class recommendations are not directly related to the 529 share-class initiative Finra launched in 2019. The violations were detected during a cycle examination, Finra said.
Finra and the Securities and Exchange Commission have been cracking down on share-class violations. Finra announced a $12 million settlement with several broker-dealers in 2019 over 529 share-class selections. Last year, the SEC concluded its share-class initiative that resulted in investment advisory firms returning about $139 million to customers.
The regulators have long been targeting the harm to investors related to high-fee share-classes, said Emily Gordy, a partner at the law firm McGuireWoods. “This is another chapter in the SEC’s and Finra’s focus on costs to investors,” said Gordy, a former Finra senior vice president for enforcement. “If customers are put into higher-fee share classes, there needs to be an assessment that that is suitable for them. We’ll be seeing more cases in this area.”
The crackdown on variable annuity sales also follows a long pattern of cases, said Brad Bennett, a former Finra enforcement chief.
“VA exchanges are ripe for abuse due to the surrender charges and the sometimes lack of advantages to customers,” Bennett said.
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