Recent Regulatory Actions Against Broker-Dealers

Variable Annuity Exchanges:  $Six Million is the Costs for Failing to Consider and Accurately Describe their Costs and Benefits

Fifth Third Securities, Inc. Action

For the second time, the FINRA has sanctioned Fifth  Third related to its sale of variable annuities.  This time, Fifth Third failed to ensure that its reps obtained and assessed accurate information when recommending VA exchanges.  FINRA also found that the firm’s reps and principals were not adequately trained in how to conduct a comparative analysis of the material features of its VAs, causing the firm to misstate the costs and benefits of exchanges, thus making the exchange appear more beneficial to its customers.  To make matters worse, the firm’s principals approved approximately 92 percent of the exchange applications submitted for review. FINRA reviewed a sample of VA exchanges Fifth Third approved from 2013 through 2015, and found  that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the sample.

FINRA fined Fifth Third Securities, Inc. $4 million and required restitution to customers of approximately $2 million.  So what went wrong?  FINRA found Fifth Third’s practices included

  •  overstating the total fees for existing VA or misstating fees associated with various additional optional benefits, known as riders;
  • failing to disclose that existing VAs had an accrued living benefit value, or understating that a customer would forfeit a living benefit value, upon executing an exchange; and
  • representing that a proposed VA had a living benefit rider when it did not.

Compared to FINRA’s fine against MetLife Securities, Inc., ($20 million and order to pay $5 million to eligible customers,  for similar behavior, around the same time two years ago) Fifth Third fared better.  Do these firms believe that such fines (which could have easily been avoided) are simply a cost of doing business? Or maybe Fifth Third believes for namesake that, next time, a “third” time violation may be just the charm.

Recent Regulatory Actions Against Advisers

SEC v. Visium Asset Management LP

Visium has agreed to settle charges related to asset mismarking and insider trading by its managed hedge funds and portfolio managers who inflated the value of securities held by hedge funds it advised causing the funds to falsely inflate returns, overstate aggregate net asset value, and pay excess fees. Based on confidential information from a former FDA official working as a paid consultant to Visium, certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration. Among other violations, the SEC found that Visium failed to enforce its own valuation and insider trading policies and procedures that might have prevented mispricing and the insider trading.