FINRA Lawyer Blog
VALIC Financial Advisors Inc. has agreed to pay $1.75 million to resolve Financial Industry Regulatory Authority (FINRA) allegations that the firm failed to implement reasonable systems to address and review conflicts of interest created by its compensation policy, FINRA reported Monday.
The Houston-based subsidiary of American International Group Inc. allegedly paid its representatives financial incentives to encourage clients to transfer their assets into VALIC’s in-house products and denied compensation to representatives who urged customers toward non-VALIC products.
VALIC Compensation Policy Yields 610% Sales Growth
FINRA spotted a red flag when it found that, between 2012 and 2013, there was a “significant volume of assets moving from VALIC variable annuities to the advisory platform,” the report stated. “Also, in a seven-month period after the compensation policy was amended to include the proprietary fixed index annuity, sales of that product grew more than 610%.”
Upon investigation, FINRA discovered that, between October 2011 and October 2014, VALIC paid its financial advisors to transfer client retirement funds into various VALIC-owned accounts, some of which triggered ongoing management fees that would generate money for the firm and registered advisor representatives.
VALIC also chose not to compensate advisors who suggested clients invest in non-VALIC owned financial products. According to FINRA, these financial incentive practices potentially put firm or advisor profits over the best interest of the client.
FINRA Ramps up Focus on Compensation and Oversight-Related Conflicts of Interest
FINRA continues to seek out firms whose compensation practices create an inherent risk for conflicts of interest. In October 2013, FINRA issued its Report on Conflicts of Interest and stated that it continues to “monitor the efforts employed by firms to identify, mitigate and manage conflicts of interest, including conflicts related to compensation practices.” In August 2015, FINRA issued a statement on rules and guidance for industry professionals around compensation and oversight in creating conflicts of interest.
Compensation Policy Monitoring and Supervision Failures Equal $1.75M FINRA Fine
In this case, the crux of the problem lies within VALIC’s lack of monitoring and supervision of its compensation policy. FINRA requires that broker-dealer firms implement monitoring and supervision of compensation policies to ensure representatives are putting the client’s best interests over their own financial interests. The regulators claim that VALIC:
- Failed to maintain systems and procedures to supervise the sales of individual variable annuities
- Failed to provide its principle variable annuity transaction reviewers with sufficient information to consider customers’ other assets
- Failed to enforce procedures regarding the review of required variable annuity disclosure forms
- Allowed principals to review and approve transactions without all required documentation
- Failed to enforce its procedures regarding the review of transactions that exceeded customer concentration levels
- Failed to implement adequate procedures around the supervision of multi-share class variable annuities
“The conflict of interest inherent in VALIC’s compensation policy was not identified or monitored,” Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said. “Compensation policies that reward representatives for moving customers from one complex proprietary product to other potentially higher cost products must include monitoring and supervision that ensure that the representatives are not putting their own financial interests ahead of their obligation to their customer.”
According to FINRA sources, VALIC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
No Suitability Violations or Fraud Charges Required for COI Penalty
It is important to note that FINRA imposed its $1.75 million fine against VALIC without claiming any suitability violations or charges of fraud. The regulator was able to impose the fine simply because (1) VALIC’s compensation policy created a conflict of interest between registered representatives and clients and (2) the firm failed to identify and reasonably address the conflict of interest.
The fact that the incentive plan led to tremendous growth in sales of proprietary products alerted FINRA of a potential problem and supported the notion that a conflict of interest was occurring without proper supervision or monitoring.
This recent case suggests that investment firms should take a second look at their compensation policies and weed out any financial incentives that contain an inherent risk for basing financial advice on profit over the best interest of the customer. Sudden peaks in sales or profits should be examined for alignment with recent policy changes. If potential conflicts in interest exist, be sure to disclose and correct the issue.
Any compensation plan that has the potential to put firm or advisor profits over the best interest of the client is at risk for fine by FINRA regulators, regardless of the presence of suitability violations or fraud.
If you believe your comp policies might be misconstrued by FINRA you should connect with a Herskovits PLLC securities lawyer to avoid FINRA enforcement problems later on. 212.897.5410