The Financial Industry Regulatory Authority (FINRA) announced recently that it has fined MetLife Securities, Inc. (MSI) $20 million and ordered it to pay $5 million to customers for making negligent material misrepresentations and omissions on variable annuity replacement applications for tens of thousands of customers. FINRA alleged that each misrepresentation and omission propounded by MSI made the replacement appear more beneficial to the customer, even though the recommended variable annuities were typically more expensive than customers’ existing variable annuity. According to FINRA, MSI’s variable annuity replacement business constituted a substantial portion of its business, generating at least $152 million in gross dealer commission for the firm over a six-year period.
FINRA advises that replacing one variable annuity with another involves a comparison of the complex features of each security. Accordingly, variable annuity replacements are subject to regulatory requirements to ensure a firm and its registered representatives compare costs and guarantees that are complete and accurate.
FINRA found that from 2009 through 2014, MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing variable annuity contracts in 72 percent of the 35,500 variable annuity replacement applications the firm approved, based on a sample of randomly selected transactions. Examples from FINRA’s review found that:
• MSI represented to customers that their existing variable annuity was more expensive than the recommended variable annuity, when in fact, the existing variable annuity was less expensive;
• MSI failed to disclose to customers that the proposed variable annuity replacement would reduce or eliminate important features in their existing variable annuity, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider; and,
• MSI understated the value of customers’ existing death benefits in disclosures.
According to Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, “Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning. Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate, and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling. These obligations take on even greater importance when a significant part of a firm’s marketing effort involves switching customers out of existing annuities.”
FINRA also found that MSI failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA replacements, and did not adequately train its registered representatives to compare the relative costs and guarantees involved in replacing one variable annuity with another. According to FINRA MSI’s principals did not consider the relative costs and guarantees of the proposed transactions. FINRA alleged that MSI principals ultimately approved 99.79 percent of variable annuity replacement applications submitted to them for review, even though nearly three quarters of those applications contained materially inaccurate information.
FINRA further found that MSI failed to supervise sales of the GMIB rider, the firm’s bestselling feature for its variable annuities. The rider was marketed to customers (many of whom were already holding MetLife annuities) as a means of providing a guaranteed future income stream. The GMIB rider is complex and expensive—annual fees during the relevant period ranged from 1 percent to 1.5 percent of the variable annuities notional income base value. FINRA found that a frequently cited reason for MSI’s recommendation of variable annuity replacements was to allow a customer to purchase the GMIB rider on the new variable annuity contract. Nevertheless, MSI failed to provide registered representatives and principals with reasonable guidance or training about the cost and features of the rider.
In addition, FINRA found that since at least 2009, MSI customers have received misleading quarterly account statements that understate the total charges and fees incurred on certain variable annuity contracts. Typically, the quarterly account statements misrepresented that the total fees and charges were $0.00 when, in fact, the customer has paid a substantial amount in fees and charges.
If you have suffered investment losses as a result of investing with MetLife Securities, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s or brokerage firm’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.