The Financial Industry Regulatory Authority has fined MetLife Securities Inc. $20 million and ordered the firm to pay $5 million to variable annuity customers for allegedly misleading them on replacement applications.

In agreeing to settle the claim with FINRA, said to be one of the largest on record of its kind, MetLife neither admitted or denied the charges.

According to a release from FINRA, “tens of thousands” of variable annuity replacement applications issued by MetLife included “negligent material misrepresentations and omissions.”

Those misrepresentations and omissions made the replacement variable annuity contracts appear beneficial to customers, “even though the recommended VAs were typically more expensive than customers’ existing VAs,” said FINRA.

MetLife’s variable annuity replacement business generated at least $152 million in commissions over the six-year period from 2009 to the end of 2014.

Under Section 1035 of the Internal Revenue Service code, variable and other annuity products can be exchanged for purportedly better-structured contracts without investors having to pay income or capital gains taxes on the earnings of the original contract, according to an investor alert, Should You Exchange Your Variable Annuity, previously issued by FINRA.

That benefit is one of the selling points to replacing one annuity contract for another. The same investor alert, which is not dated, says there are legitimate reasons to exchange an existing VA contract for a new one, but that generally, “the exchange or replacement of insurance or annuity contracts is not a good idea,” according to FINRA’s investor alert.

From 2009 through 2014, MetLife Securities misrepresented or omitted at least one material fact relating to the costs and guarantees of existing VA contracts in 72 percent of the 35,500 replacement applications the firm approved, said FINRA.

Some customers were told their existing annuity was more expensive than a recommended annuity, when the opposite was true, alleges FINRA.

In other instances, MetLife failed to disclose that the proposed replacement VA would actually reduce or eliminate some features of the existing contract, like death benefits and guaranteed income riders.

In other cases, FINRA says MetLife understated the value of existing death benefits to encourage the sale of a new variable annuity.

“Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning,” said Brad Bennett, FINRA’s chief of enforcement.

“Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate, and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling,” added Bennett.

The company failed to adequately train its registered reps on accurately valuing an annuity replacement, the regulator said.

Nor did MetLife’s principals accurately vet the value and costs of the proposed transactions: 99.79 percent of the replacement applications were approved, even though almost three-quarters contained inaccurate information.

Since 2009, FINRA also alleges MetLife mislead investors in quarterly account statements, by stating fees and charges at $0.00, when the customer had already paid “a substantial amount in fees and charges” on the contracts, according to FINRA’s statement.

The news that MetLife systemically misled annuity customers—allegedly—comes as variable annuity and fixed indexed annuities have been made subject to the Department of Labor’s fiduciary rule

Under the rule’s Best Interest Contract Exemption, brokers who sell VAs and FIAs will have to do so only when serving clients’ best interests. Brokers of VAs and FIAs will also be subject to new fee disclosure requirements.

That provision of the DOL’s rule is expected to have significant ramifications on the VA and FIA market.

The fiduciary rule will also give investors greater access to bring class action claims, though the rule’s grandfather provision says sales prior to the final rule’s implementation will not be subject to the BIC exemption.

Instant Insights /

MetLife to pay for misleading investors on variable annuity replacements

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