FINRA Sanctions Transamerica $8.8 Million over Variable Annuities and Mutual Funds

In December, 2020, the Financial Industry Regulatory Authority (FINRA) [1]fined Transamerica $8.8 million, including $4.4 million in restitution to be paid to 2,400 customers that lost money due to their malfeasance. FINRA determined that Transamerica’s failure to properly supervise the recommendations of their registered representatives for their variable annuity, mutual fund and 529 plans. The other $4.4 million in sanctions was a fine.

Transamerica Failed to Supervise Annuity Recommendations

The results of the FINRA’s investigation revealed that Transamerica had failed to use reasonable care in supervising their representatives’ variable annuity recommendations from May 1, 2010 through May 15, 2016. FINRA determined that during this period when Transamerica sold over 51,000 variable annuity policies and variable annuity sales constituted forty percent of the firm’s revenue, their representatives made literally thousands of misstatements to customers. This was especially offensive to FINRA because Transamerica received more than $591 million in compensation from the sales of new variable annuity, trails and broker commissions during this time period. Variable annuities are complex investments that are primarily marketed to individuals saving for their retirement. Due to the vulnerable population that’s being targeted and the complicated nature of these financial products, FINRA rules require a very high level of comprehensive protection to protect purchasers.

On its face, Transamerica’s policy was sound, requiring its brokers to complete a six page long disclosure form that included the fee structure, features and benefits of a product and the rationale for recommending an exchange. However, FINRA found that Transamerica was not providing proper training to its supervisors and stockbrokers about how to complete these forms, how to verify the information on the forms and how to use that information to compare old and new variable annuities. For example, the FINRA investigation revealed that close to one thousand disclosure forms were either blank or did not state a single advantage for a customer retaining their existing variable annuity. It came to light that Transamerica’s representatives were routinely understating the benefits of customers’ existing annuities and overstating the benefits of exchanging their annuity for a new financial product.

FINRA came to the conclusion that this happened due to the firm’s failure to properly supervise their representatives and more rigorous oversight would have prevented these acts that harmed customers. This type of behavior was akin to “churning” as transaction fees were charged for exchanging equivalent products, with no benefit to the customer. FINRA also found that Transamerica ignored the many red flags regarding broker variable annuity recommendations, especially selling shorter-term share classes with higher fees to 70% to 95% of their customers regardless of their suitability.

Failure to Apply Sales Charge Waivers For Certain Mutual Funds

FINRA scrutinized the sales of mutual funds from January 1, 2009 through November 15, 2016 and found that customers did not receive the benefit of about $428,239 in sales charge waivers that they were entitled to for 433 accounts. Transamerica sold mutual funds with share classes that included A, B and C shares. Class A shares usually have a front end fee and annual expenses that include service and distribution fees of about 0.25%. Class B and C shares usually don’t have an upfront cost but have much higher annual service and distribution fees of about 1% and sometimes include a deferred sales charge. During the period that was examined, many mutual funds were waiving their front end charges for Class A shares of some retirement plans and for customers that were charitable organizations. FINRA found that Transamerica failed to provide sufficient guidance to their representatives about when the sales charge waiver should be applied for mutual fund purchases and had no system in place to verify whether waivers were properly applied. FINRA determined that Transamerica’s failure to supervise their representatives caused customers to lose benefits they were entitled to in violation of the FINRA rules.

Failure To Supervise 529 Recommendations

529 savings plans are tax advantaged municipal securities intended to encourage savings for educational expenses for a specific beneficiary. The sale of 529 plans is governed by the Municipal Securities Rulemaking Board (MSRB) and Rule G-27(a), which requires firms selling 529 savings plans to carefully supervise their representatives to ensure compliance with MSRB rules and federal securities laws. Rules G-27(b) and (c) require firms to establish and maintain systems and written procedures that are reasonably designed to achieve this goal. For example, Class A shares usually have higher up front end costs, but lower annual fees whereas Class C shares have no front end costs but higher annual fees. Brokers should have been recommending Class A shares for younger beneficiaries because they’d be paying less in fees over the life of the plan whereas investors with older beneficiaries would benefit more from not having to pay front end fees. FINRA found that from May 1, 2010 through May 31, 2015, Transamerica failed to properly supervise it’s brokers recommendations to customers for some share classes of 529, resulting in customers paying higher fees than they should have.

Did You Lose Money With Transamerica?

If you lost money due to Transamerica’s failure to properly supervise its employees, it’s important to know that FINRA’s imposition of fines and restitution for certain customers does not preclude you from pursuing compensation for money you’ve lost. If you suspect you’re a victim of Transamerica’s wrongdoing, it’s important to speak to an experienced investor advocate attorney as soon as possible to find out whether you have an actionable claim.