On May 3, 2016, the Financial Industry Regulatory Authority announced that MetLife Securities, Inc. agreed to pay $25 million to settle allegations that the company misled its customers in tens of thousands of variable annuity replacement applications. The sanction represents FINRA’s largest fine related to variable annuities.
Variable annuities (“VAs”) are highly complex and highly regulated insurance contracts that guarantee their holders—typically retirees—a minimum payment at the end of an accumulation stage. When a consumer seeks to replace one VA for another, her broker must complete an Annuity Replacement and Transfer Disclosure (ARTD) setting forth the comparative cost and guarantee information about existing and proposed annuity contracts. In New York, brokers must also complete a “Regulation 60 Disclosure,” which contains a hypothetical illustration of death benefits and surrender values for existing and proposed contracts under various hypothetical market growth rates.
FINRA concluded that between 2009 and 2014, MetLife – through its brokers – negligently made material misrepresentations in over 25,000 ARTDs and in quarterly account statements, including misrepresentations concerning the benefits of VA replacement contracts over the original VAs. FINRA also concluded that MetLife misrepresented guaranteed death benefit values on the Regulation 60 Disclosures for many of its New York customers. FINRA noted that during this period, MetLife approved 99.79 percent of VA replacements applications.
The regulator determined that these misrepresentations resulted from MetLife’s failure to implement reasonable supervisory systems, written procedures, or employee training. It further concluded that the company failed to implement reasonable controls, procedures or training regarding its review of the sustainability of proposed VA replacement contracts, or whether its brokers correctly performed comparative analyses. Finally, FINRA found that MetLife failed to supervise sales of its “GMIB Rider” – the company’s bestselling optional feature for VA contracts – and failed to provide its brokers reasonable guidelines or training regarding the Rider.
As a result of these allegations, MetLife consented to a $20 million fine and compensation to VA contract customers up to $5 million dollars in aggregate. It also undertook to review and revise its corporate systems, policies, procedures, and training programs. MetLife did not admit or deny FINRA’s charges in settling the matter.
FINRA’s decision against MetLife evidences the regulator’s willingness to scrutinize and loft hefty fines against financial firms who it concludes do not adequately monitor their employees’ sale and issuance of complex securities. It also acts as a cautionary tale to similarly situated investment firms to implement sound corporate controls, policies and procedures as they relate to VA annuity contracts.