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.