Recently, the Financial Industry Regulatory Authority, Inc. (FINRA) has made it clear that it is keeping a close eye on the variable annuity (VA) sector.  The impetus for this scrutiny was the record setting fine related to variable annuities against MetLife Securities, Inc.  MetLife was fined $25 million for negligent misrepresentations and omissions in connection with variable annuity replacements.  To understand why this case lead to FINRA targeting variable annuities, it is important to look into the details of the case.

In order to recommend replacing a variable annuity with another variable annuity, one must be knowledgeable about the complex features involved.  There are costs and guarantees associated with variable annuities.  When advising a client to replace their current variable annuity with another, the costs and guarantees associated with both must be compared. This comparison was the crucial step that MetLife failed to take.

FINRA determined that from 2009-2014, MetLife made negligent misrepresentations and omissions in 72% of the VA applications the firm approved.  This determination was based on several findings.  Among the findings was the fact that MetLife represented to customers that their existing VA was more expensive than the recommended VA which was false.  In fact, their existing VA was less expensive.  MetLife also failed to disclose to customers that the proposed VA replacement would reduce or eliminate important features in their existing VA, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider.  FINRA also found that MetLife understated the value of customers’ existing death benefits in disclosures mandated by Reg. 60.

After the findings in the MetLife case, FINRA Vice President and Enforcement Chief Counsel stated that variable annuities exist at a nexus that FINRA targets.  He also stated that “They are at a sweet spot of complex products moviebox for macmarketed to retirees and people about to retire.” The increased scrutiny of the sale of variable annuities may make a major impact on those who sale a large amount of variable annuities.  Firms should make sure to have good policies and procedures in place to ensure that the complex features of variable annuities are understood before advising a client.