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FINRA Charges Southwest Securities With Improper Variable Annuity Sales

The Financial Industry Regulatory Authority (FINRA) has filed a disciplinary action against SWS Financial Services Inc. (SWS) for failing to supervise unsuitable sales of variable annuities to investors, and failing to maintain and implement appropriate supervisory policies, according to a recent InvestmentNews article. FINRA is seeking undisclosed monetary sanctions for violations that occurred during the period from September 2009 to May 2011. During this time, sales of variable annuities made up to 20% of SWS’s total revenue.

With regard to the charge of failure to supervise, FINRA found that variable annuity sales were generated in SWS offices that did not have an on site supervisor to monitor compliance with FINRA rules regarding sales of variable annuities. The variable annuities in question were issued by an insurance company that is affiliated with SWS. More than 70% of these variable annuities were sold to investors without ever having been reviewed by an SWS securities principal to determine whether they were suitable for the investors.

Some of the variable annuity sales involved a practice known as switching in which an existing annuity is sold and replaced with another annuity. Improper switching is a form of churning in which a broker trades excessively for the purpose of generating commissions. Improper switching and failure to properly explain to investors the terms and risks of variable products have been long-term problems in the securities brokerage industry. In particular, brokers often fail to clearly explain the illiquidity and surrender charges, as well as the risks associated with the subaccounts that comprise the investment component of these products.

In one case, a SWS sales person recommended that 29 of his clients switch from MassMutual Life variable annuities into new ones issued by Jackson National Life Insurance Co., which had higher annual expenses, according to the article. In addition to paying higher expenses, some of the investors incurred surrender charges as a result of the switching.

Generally speaking, sales of variable annuities are very lucrative for the selling agent and firm, but are often unsuitable for investors because they are subject to surrender charges, which, as a practical matter, make them illiquid, as well as contract provisions that make them inordinately expensive to own, among other reasons. The major benefit of owning a deferred variable annuity, tax deferral, is lost if the annuity is held in an already tax-deferred account like an IRA.

The Doss Firm, LLC has over thirty years of combined experience representing investors in disputes with brokerage and advisory firms and their representatives. If you have any questions about your investments, please call us for a free consultation.