On May 8, 2018, FINRA settled an enforcement matter against Fifth Third Securities, Inc. (Fifth Third) relating to the firm’s variable annuities (VA) sales practices. In the letter of acceptance, waiver and consent, FINRA alleged that from 2013 to 2015, “Fifth Third made negligent misstatements and omissions of material fact to customers” regarding the costs and benefits of exchanging one VA with another, “failed to have a reasonable basis to recommend and approve” the sample of exchanges FINRA reviewed, and failed to adequately supervise VA exchanges.

Fifth Third previously settled an enforcement action with FINRA in 2009 regarding its VA sales practices. In that settlement, Fifth Third agreed to a censure and to the payment of a $1.75 million fine plus restitution. At that time, Fifth Third also agreed to retain an independent consultant to review its supervisory procedures relating to VA sales practices and to implement those procedure changes.

Relative to the more recent enforcement action, FINRA reviewed a sample of VA exchanges that Fifth Third approved between 2013 and 2015 and found that Fifth Third had misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77% of the exchanges in the sample. The misstatements or omissions included: (1) overstating the total fees of the existing VA or misstating the fees associated with various optional riders; (2) failing to disclose that an existing VA had an accrued living benefit value, or understating the living benefit value, that the customer would forfeit upon an exchange; and (3) misstating that the new VA would have a living benefit rider in cases in which it did not have such a rider. Fifth Third ultimately approved 92% of VA exchange applications despite not having a reasonable basis to recommend and approve many of those transactions.

FINRA found that: (1) Fifth Third did not ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA exchanges; (2) Fifth Third’s registered representatives and principals were not adequately trained to conduct a comparative analysis of the material features of VAs; and (3) Fifth Third misstated the costs and benefits of VA exchanges, causing the exchanges to appear to be more beneficial to customers than they actually were. Additionally, FINRA found that Fifth Third had failed to implement the independent consultant’s changes to its supervisory procedures for VA sales, as required by the 2009 settlement.

Without admitting or denying the allegations, Fifth Third consented to the entry of FINRA’s findings and agreed to a censure and to the payment of a fine of $4 million to FINRA plus restitution in an aggregate amount of approximately $2 million to customers. Fifth Third also agreed to implement improved policies and procedures relating to the supervision of VA sales.

The letter of acceptance, waiver and consent is available at: http://www.finra.org/sites/default/files FifthThirdSecurities_AWC_102015.pdf