A broker-dealer settled FINRA charges for supervisory violations over the firm's variable universal life insurance contracts ("VULs") and mutual fund business.
In a Letter of Acceptance, Waiver and Consent, FINRA found that the firm was aware of lapsing VULs, "but failed to take reasonable steps to identify why the lapses occurred and whether the sales of VULs to the particular customers were suitable and to monitor the registered representatives involved." FINRA also found that the firm's Finance Department, and a registered representative's direct supervisor, were aware that the VUL issuer would "claw back" the commission paid to the firm and registered representative. This information, however, was not shared with the firm's principals who reviewed proposed VUL transactions.
As to the firm's mutual fund business, FINRA found that the firm relied on a manual review of the switch, breakpoint and bypass reports, which led to inaccurate information on the reports and created a backlog that put the firm several months behind its review. Specifically, FINRA found that:
- the switch report flagged only one-half of a transaction, requiring reviewers to search for the other half;
- the breakpoint reports contained duplicate lines of data, requiring surveillance staff to clear the information; and
- the bypass report included hundreds of transactions per month.
As a result, the firm violated FINRA Rules 3110(a) and 2010 ("Standards of Commercial Honor and Principles of Trade"). To settle the charges, the firm agreed to (i) a censure and (ii) a $100,000 fine.
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