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Regulatory Sanctions

Unsuitable Variable Annuities Switches: Let's Ban the Broker

December 28, 2018

by Howard Haykin


A registered rep was barred from the industry for having made material misrepresentations and omitting material information in an unsuitable recommendation to his customer. Yet, something about this case gnaws at me.
Variable annuities switches, like the ones ‘pushed’ by the registered rep in this case, are usually subjected to a most rigorous review process in the retail brokerage environment. Why then, was FINRA the one to detect the violative conduct – and not the broker-dealer or the registered rep’s direct supervisor? And why did FINRA not make mention of this apparent supervisory failure - when the registered rep's conduct was so serious that it led to his being barred? And for that matter, why was the broker-dealer in this case never sanctioned for its deficient supervison? Yes, I’ve got a problem with this – as discussed below.



In November 2015, a registered rep with Navy Federal Brokerage Services apparently convinced his customer to surrender 2 variable annuities and use the proceeds to purchase 2 new variable annuities. While the registered rep represented that the new annuities provided the customer with the same benefits as the original annuities, he knew, yet intentionally omitted to disclose, several material adverse facts to the customer - namely:


  • that she would lose the enhanced living and death benefits to which she was entitled under the original annuities if she surrendered the original annuities – and never mentioned the value of these enhanced benefits;
  • that she would forfeit the enhanced growth features of the original annuities by switching to the new annuities;
  • that the accumulation values for her living and death benefits under her original annuities were higher than the cash surrender values (CSV);
  • that cashing out her original annuities would cause her to realize certain losses based on the performance of her various subaccount investments that she would not otherwise incur.


Based on the foregoing omissions, FINRA concluded that the registered rep “engaged in securities fraud” and “made unsuitable recommendations.” He did so …


  • by effecting the annuity exchanges without having a reasonable basis to believe that such sales and purchases were suitable for the customer in view of her age, retirement status, financial needs, and her desire to have guaranteed lifetime income streams and enhanced death benefits to pass on to her beneficiaries.


  • while knowing that the new annuities did not provide her with product enhancements or improvements, but rather caused her to forfeit significant benefits and become subject to a new surrender period.


FINANCIALISH TAKE AWAYS.    Navy Federal Brokerage Services U5’d the registered rep in April 2016 for having engaged in the practice of having his customers sign certain forms, reusing the original signatures from those forms to complete new forms, and then submitting those new forms to Navy Federal and to mutual fund and insurance companies as original documents. And because Navy Federal made no mention of the unsuitable variable annuities, it’s fair to surmise that the transactions were never fully flagged by Navy Federal or its supervisory personnel.


But wouldn't Navy Federal have sent a Switch Letter to the customer, to acknowledge her understanding of the terms of the respective contracts? And wouldn't a supervisory principal understood the pros and cons of the switches and sought a viable explanation/justification from the registered rep? If both control procedures had been followed, the firm might have recognized that there were problems with the transactions.


Instead, it’s likely that FINRA investigated the registered rep after receiving notice of Navy Federal’s ‘termination for cause’, which in turn led to the regulator’s discovery of the questionable annuities switches. And in case you're wondering if FINRA ever cited or sanctioned Navy Federal for enabling a registered rep to cut and paste his customers’ signatures on account documentation over a 5-year period, the answer is NO! According to FINRA's CRD records, Navy Federal has never been disciplined in its 12+ years as a FINRA member. 

►  An enviable record for a broker-dealer.

►  An unenviable record for a regulator - though FINRA was, at least, able to pin the tail (or the sanctions) on some donkey (or on someone in this case).



This case was reported in FINRA Disciplinary Actions for July 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016050142601.