The Financial Industry Regulatory Authority said that MetLife Securities Inc. (MSI) would pay a $20M fine as well as $5M to customers for negligent and material misrepresentations that it purportedly made related to variable annuity replacement applications. According to the self-regulatory organization, these alleged omissions and misrepresentations were on tens of thousands of applications, and they made each replacement variable annuity seem of greater benefit to the customer despite the fact that the variable annuities that were recommended were usually more costly than the ones that the customers already owned. MetLife Securities made at least $152M in gross dealer commissions over six years through its variable annuity replacement business.
Based on a sample of transactions that were randomly examined, FINRA said that from ’09 through ’14, MetLife Securities omitted or misrepresented at least one material fact connected to the guarantees and costs of existing variable annuity contracts in 72% of the 35,500 replacement applications that it approved. Among the alleged misrepresentations:
· Existing variable were costing customers more than the variable annuities they were recommending, when the opposite was true.
· Customers were not told that the variable annuity replacements promised to them would lessen or get rid of key features that their current variable annuity possessed.
· In disclosures, the value of customers’ existing death benefits was understated.
FINRA also said that MetLife Securities did not make sure that its registered representatives evaluated or were given accurate data about the variable annuity replacements they were recommending. The firm is accused of not properly training registered representatives on how to compare the relative guarantees and costs involved in swapping one variable annuity with another variable annuity. Meantime, firm principals approved 99.7% of variable annuity replacement applications even though almost 75% of the applications had information in them that were materially inaccurate.
MetLife Securities is also accused of not supervising the sale of its bestselling variable annuity feature known as the GMIB rider, which is costly and complex. The rider was marketed to customers as a way to provide an income stream in the future that was guaranteed and it was one of the reasons cited by financial advisers for why a variable annuity that already had been purchased by a customer should be replaced with a new one. Many of these customers already held MetLife annuities.
FINRA contends that since at least 2009, MetLife Secuirites customers received quarterly account statements that understated the total fees and charges that they sustained on certain variable annuity contracts. Often, the statements made it appear as if there were zero such charges when in reality substantial charges and fees were paid by the customers.
By settling, MetLife Securities is not denying or admitting to the FINRA charges. It did, however, fully cooperate with FINRA’s probe. The fine the firm has agreed to pay is the largest the SRO has imposed related to variable annuities to date.
It was just in 2014 that FINRA filed a complaint against former MetLife brokers Christopher Birli and Patrick Chapin for their purported involvement in a seven-year scam to inflate commissions through the switching of $21M in annuities. The two men agreed to a permanent industry bar to settle the FINRA charges but did not admit or deny the allegations.
This is a type of insurance product that provides investors with steady income. Usually it is in exchange for an investment paid in lump sum. Variable annuities typically are made up of a combination of mutual finds, life insurance, and retirement plans. “Annuity switching” takes place when a broker recommends that a client exchange an older annuity for another one. This usually benefits the broker while costing the client.
Finra Alleges Annuity Scheme By Two Ex-MetLife Brokers, Financial Adviser, April 1, 2014