On November 18, 2018, the Financial Industry Regulatory Authority (FINRA) entered into a settlement with H. Beck, Inc., a brokerage firm headquartered in Rockville, MD, with 406 branch offices nationwide, fining the firm $400,000 and requiring the review and revision of its policies and procedures relating to the sale of multi-share class variable annuities. (FINRA Case #2017052326501 [PDF]) The settlement highlights the complexity of variable annuities in general and the traps lying in wait for the unsuspecting investor.
From 2013 to 2018, H. Beck sold variable annuities with the option of different share classes, including B-share contracts (which are the most common share class and carry a seven-year surrender period) and L-share contracts (which have a three- to four-year surrender period). The L-share contracts are designed for customers who want to pay a higher fee in exchange for the increased liquidity provided by the shorter surrender period. However, H. Beck sales agents often combined the sale of the L-share contracts with a long-term rider, such as a Guaranteed Minimum Income Benefit Rider (GMIB) or Guaranteed Minimum Withdrawal Benefit Rider (GMWB), which require customers to hold the variable annuity for five years or longer in order to obtain the full benefit. In short, customers were paying extra for the L-share that, when combined with the rider, provided very little benefit.
Importantly, H. Beck’s sales practices were not isolated events. For example, during a two-year period alone, the firm sold 7,001 variable annuity contracts with revenues of approximately $34.9 million, including approximately 2,835 L-share contracts, many of which were sold with long-term riders.
FINRA has specific suitability rules relating to the sale of variable annuities given their complexity and the opportunity for fraud. For example, FINRA rules require that brokers recommending variable annuities have a reasonable basis to believe that the customer has been informed of various features of the variable annuity, including the potential surrender period and potential charges for and features of riders, and that the features and riders are suitable for the particular customer. FINRA rules also require brokerage firms to establish and maintain a supervisory system designed to achieve compliance with securities laws and regulations.
H. Beck’s sales of the L-shares combined with the GMIB or GMWB riders violated these FINRA rules and should serve as a warning to all potential variable annuity purchasers to be vigilant of the complexities of annuities and to always “investigate before you invest.” This includes researching your broker on FINRA’s BrokerCheck and reviewing various publications relating to annuities, including FINRA’s “Variable Annuities: Beyond the Hard Sell” (PDF).
If you have any concerns about your variable annuity, please contact the Law Office of Scott Lane for a no-cost, no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an arbitration claim with FINRA.