The Financial Industry Regulatory Authority has finedMetLife Securities Inc. $20 millionand ordered the firm to pay $5 million to variable annuity customers forallegedly misleading them on replacement applications.

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

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

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Those misrepresentations and omissions made the replacementvariable annuity contracts appear beneficial to customers, “eventhough the recommended VAs were typically more expensive thancustomers’ existing VAs,” said FINRA.

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MetLife’s variable annuity replacement business generated atleast $152 million in commissions over the six-year period from2009 to the end of 2014.

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

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That benefit is one of the selling points to replacing oneannuity contract for another. The sameinvestor alert, which is not dated, says there are legitimatereasons to exchange an existing VA contract for a new one, but thatgenerally, “the exchange or replacement of insurance or annuitycontracts is not a good idea,” according to FINRA’s investoralert.

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

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

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In other instances, MetLife failed to disclose that the proposedreplacement VA would actually reduce or eliminate some features ofthe existing contract, like death benefits and guaranteed incomeriders.

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In other cases, FINRA says MetLife understated the value ofexisting death benefits to encourage the sale of a new variableannuity.

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

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

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

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Nor did MetLife’s principals accurately vet the value and costsof the proposed transactions: 99.79 percent of the replacementapplications were approved, even though almost three-quarterscontained inaccurate information.

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

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The news that MetLife systemically misled annuitycustomers—allegedly—comes as variable annuity and fixed indexedannuities have been made subject to the Department of Labor’sfiduciary rule

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

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

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The fiduciary rule will also give investors greater access tobring class action claims, though the rule’s grandfather provisionsays sales prior to the final rule’s implementation will not besubject to the BIC exemption.

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