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Regulatory Sanctions

Broker Caught Dumping Unsuitable Annuities on Customer

September 19, 2017

by Howard Haykin


James Cox agreed to a $10K fine and a 4-month suspension, and he was ordered to pay $25K plus interest in disgorgement of commissions, to settle FINRA charges that he recommended unsuitable annuity transactions for a customer. Cox also failed to provide prior written notice of an outside business activity.


BACKGROUND.    Cox, a resident of Baton Rouge, LA, has 23 years’ experience with 5 firms. From 2009 until 4/26/17, Cox served as a General Securities Principal, General Securities Rep, and Variable Contracts Products Rep for Sterne, Agee & Leach and its successor firm, Stifel, Nicolaus $ Company.  Cox currently is not associated with a FINRA member firm.


FINRA FINDINGS.    In September 2014, Cox recommended the following unsuitable transactions to his customer:

  • Exchange an existing variable annuity (V/A) for a new variable annuity;
  • Sell an existing V/A to purchase 2 fixed equity-indexed annuities; and,
  • Liquidate 3 additional V/A’s.


The existing annuities all provided for guaranteed minimum income available upon annuitization that was equal to 3 times the premiums paid. The customer (“NR”) was 59 years old at the time of the recommendations, and the growth potential of the income streams was of primary importance to her.


The new V/A and 2 fixed annuities did not offer the same income growth potential. Furthermore, the liquidations provided no guaranteed income. In addition, in the event that NR chose not to annuitize, the existing products offered higher death benefits than the new products. Moreover, with regard to the exchange recommendation, NR was exposed to the risk of incurring surrender charges with the new 7-year surrender period.


Outside Business Activity.    That same month, September 2014, Cox charged NR $2,500 for consulting services that he provided in connection with the construction of a modular office building for her medical practice. Cox failed to provide prior written notice to the firm.


FINANCIALISH TAKE AWAYS.    Variable annuity contracts offer attractive commission payouts. For some brokers, that's an invitation to recommend contract exchanges - even when a replacement policy offers few if any advantages over the existing contracts. So here's a customer who may or may not be repaid the $25,000 in commissions she paid out for 'inferior' annuity contracts, and she's essentially locked into a new 7-year surrender period. Wonder if Sterne Agee offered to rescind the transactions. FINRA offers no further details.  


This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015047812901.