In 2016, The Financial Industry Regulatory Authority (FINRA) fined MetLife Securities, Inc. $20 million and also ordered the payment of $5 million in restitution for complaints related variable annuity sales. FINRA found that Metlife had committed negligent misrepresentations and omissions when selling variable annuity replacements for tens of thousands of customers. The misrepresentations and omissions caused the replacements to appear more advantageous to the customer, even though they offered little to no benefit over their existing product and generally had higher fees and other costs. During this period, the sale of variable annuity replacements was a large part of it’s business, earning more than $150,000 in gross dealer commission during the six year period that was examined.
Variable Annuities Are Complex Financial Instruments
In order to make a sound decision about whether to replace one variable annuity with another, a thorough analysis of the features of both securities is required. Unfortunately, unscrupulous brokers looking to churn fees will sell features of their new products, without informing their customers that their existing annuity is just as good. Variable annuities are complicated, and most lay people will not be able to notice these distinctions on their own. That’s why variable replacements are subject to strict regulatory requirements that mandate that firms and their registered brokers compare costs, features and guarantees to determine if the replacement is actually an improvement over the existing annuity. For sales in New York State, firms must also comply with the even stricter disclosure requirements for Regulation 60 under the state’s insurance law. These complex financial instruments are most commonly sold to retired people or people saving for retirement, a class of customer that is often especially unsophisticated and vulnerable, making oversight even more important. FINRA’s Executive Vice President and Chief of Enforcement, Brad Bennett, expressed his position on the subject by stating that, “Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning.” Bennett explained how this meant that firms selling these financial instruments must “ensure that the information on the costs and benefits of these products is accurate,” and that the registered representatives selling these products are properly trained and supervised. The burden on a firm is even higher when selling a firm’s marketing efforts are specifically directed towards “switching customers out of their existing annuities.”
MetLife Reps Made Misrepresentations and Omissions
FINRA found that Metlife misrepresented or omitted one or more material facts regarding costs and guarantees of their customers’ existing variable annuity contracts in 72% of its variable annuity replacement applications from from 2009 through 2014. The finding was based on a random sampling of the 35,500 variable replacement applications that they handled during this period of time. Some examples of their malfeasance include:
- Failing to disclose to customers that the variable annuity replacement they were proposing would reduce or eliminate important features contained in their existing variable annuity such as guaranteed income benefits, accrued death benefits and guaranteed fixed interest account riders;
- Representing to customers the variable annuity they already had was more expensive than the one they were proposing even though the opposite was true, causing customers to pay fees to switch to a more costly product without benefit and
- Understating the value of the death benefits of customers’ existing variable annuity in disclosures that were required under New York State Regulation 60.
Training and Oversight Was Insufficient
FINRA also found fault with Metlife’s failure to ensure that it’s representatives had accurate information about the variable annuities they recommended and that they did not properly train their brokers to comply with regulatory mandates to compare the relative costs and guarantees of the transactions they proposed. FINRA also discovered that principals of Metlife rubber stamped 99.79% of the variable annuity replacement contracts that they reviewed, even though more than 75% of these applications had materially inaccurate information in gross disregard for their obligation to review and scrutinize these sales.
Failure to Supervise GMIB Riders
Guaranteed Minimum Income Benefit (GMIB) riders were Metlife’s best selling variable annuity feature during the time period they were investigated. The rider was marketed to existing customers, some of whom already held Metlife annuities, as an economical and practical way to provide a guaranteed future income stream. GMIB riders are particularly complex and expensive with annual fees that range from 1 to 1.5 percent of the national income base value of the variable annuity. FINRA found that Metlife failed to properly train and supervise sales of GMIB’s because they were consistently recommending adding a GMIB as the reason to replace an annuity even though it would have been much less expensive to simply purchase a rider for their existing annuity. FINRA stopped short of accusing Metlife of doing this intentionally, instead finding that they were negligent in failing to supervise and train their representatives.
Customers Received Misleading Statements
FINRA also found that since 2009, Metlife customers had been issued quarterly accounts that were misleading because they understated the total fees and other charges that were incurred on some contracts for variable annuities. It was common for a quarterly account statement to misrepresent the total fees and charges as $0.00, when the customer had actually paid substantial amounts of money for fees and charges.
MetLife Customers Suffered Financial Losses
If you’ve suffered a financial loss due to the negligence or intentional acts of a financial institution or their representatives, you’re entitled to make a claim for compensation to recover what you’ve lost. Financial institutions have a responsibility to comply with federal, state and local laws and regulations and when they fail to do so they can be held liable for their customer’s losses. If you believe you’ve been a victim, it’s important to speak to an experienced security law attorney about making a claim.