425 Broadhollow Road
Suite 416
Melville, NY 11747

Freiberger Haber LLP
420 Lexington Avenue
Suite 300
New York, NY 10170


FINRA Continues to Focus on Variable Annuities

Print Article
  • Posted on: Oct 23 2017

Last year was a banner year for fines levied by the Financial Industry Regulatory Authority (FINRA) regarding the sale of variable annuities. In 2016, $30.3 million in fines were assessed over 30 variable annuity cases. Now, the industry watchdog is continuing its crackdown on these financial products, with an emphasis on annuity exchanges.

Annuity Exchange Abuses

Recently, FINRA’s enforcement unit suspended two brokers and ordered the disgorgement of more than $185,000 in commissions for causing financial harm to investors related to Section 1035 exchanges. Under Section 1035 of the Internal Revenue Code, variable annuities can be replaced with a like investment without incurring additional tax liabilities. At the same time, these transactions generate broker commissions, which often leads to account churning of annuity products.

The recent cases saw clients incur higher annuity fees and excessive surrender charges relative to the exchanges. Moreover, the brokers in question tried to cover their tracks by not categorizing the annuity replacements as 1035 exchanges, which resulted in significant tax liabilities for these investors.

Although FINRA and other regulators have been focused on exchange-traded funds and derivative transactions in recent years, variable annuities were prioritized beginning in 2016, the first time since 2009. Last year, the number of variable annuity cases rose by 20 percent,  while fines increased by more than 190 percent over the prior year. In fact, FINRA levied its largest fine ever involving variable annuities against MetLife Securities Inc., to the tune of $25 million. (Here.)

The pace of enforcement has moderated this year with 12 variable annuity cases and $510,000 in fines reported through the first 6 months. FINRA is still on the case, however, as the self-regulatory organization tries to stay ahead of what some believe will be an inevitable crash in the annuity market.

While FINRA has not explicitly cited variable annuities in its recent announcements of examination priorities, ongoing enhanced regulatory scrutiny on these complex products is likely given the fact that they are often marketed to retirees. Annuity exchanges are a high-value target because there is often little justification for these transactions, other than generating broker commissions.

Why This Matters

Today, investing in annuities has become more complex, with new products being introduced. This includes hybrid annuities – which combine the features of fixed and variable products, and “No-Load” variable annuities, which have become increasingly popular due to the Labor Department’s fiduciary rule. (Discussed here.) As such, the potential for abuses and harm to investors is growing.


Freiberger Haber LLP
Copyright ©2022 Freiberger Haber LLP | Disclaimer
Attorney advertisement | Prior results do not guarantee a similar outcome.
425 Broadhollow Road, Suite 416, Melville, NY 11747 | (631) 574-4454
420 Lexington Avenue, Suite 300, New York, NY 10017 | (212) 209-1005
Attorney Website by Omnizant