For years, Transamerica Financial Advisors (TFA) fell short on adequately supervising registered representatives’ recommendations to clients about variable annuities, mutual funds and 529 plans, according to claims by the Financial Industry Regulatory Authority. The regulatory agency said Monday it was sanctioning the large broker/dealer and RIA $8.8 million in restitutions and fines for their alleged paltry oversight that affected about 2,400 clients.
“It is imperative that FINRA member firms selling variable annuities, mutual funds, and 529 plans exercise particular care and diligence in training and supervising those representatives who recommend them to customers,” Executive Vice President and FINRA Enforcement Department Head Jessica Hopper said.
FINRA said the misconduct occurred between early 2009 and late 2016, according to FINRA’s letter of acknowledgement, waiver and consent. According to its site, TFA boasted more than 3,330 registered representatives at the start of 2019, with more than $10 billion in total assets under management and 300,000 customer accounts. Based in St. Petersburg, Fla., the company is part of Baltimore-based Transamerica, which is itself owned by Aegon Asset Management.
FINRA noted the alleged supervisory lapses were uncovered during a cycle examination by the agency. In the letter, it argued Transamerica failed to supervise variable annuity recommendations between 2010 and 2016, despite the fact that gross commissions from sales of these products were more than $591 million, or 40% of its total revenue. The regulatory agency claimed that the “deficient” oversight led to numerous sales practice violations.
“Most significantly, the firm failed to detect that certain of its representatives made thousands of misstatements to customers in recommending variable annuity exchanges, understating the benefits of the existing variable annuity and overstating the benefits of the new variable annuity,” the agency’s letter read.
According to FINRA, when representatives at TFA recommend a variable annuity exchange, they had to complete a disclosure form detailing fee structures, benefits and features for the existing and new variable annuities in question. But the firm allegedly didn’t provide adequate training on how representatives should complete the forms, didn’t relay to supervisors how to verify information included in the forms, and did not detail how the information should be used.
The agency also argued that between January 2014 and May 2016, more than half of the exchanges approved by the firm contained “at least one misstatement or omission,” often resulting in a rosier assessment of the proposed variable annuity than was warranted. Though Transamerica ran “exception reports” to oversee variable annuity exchange patterns, those reports only identified reps with a certain volume of exchanges per quarter, and they’d only be flagged for review if the total value of the exchanges was more than half of their overall business.
“This report was insufficient to detect inappropriate rates of exchange because representatives who effected a large number of exchanges but had a high overall level of production could be excluded from additional scrutiny because of the 50% threshold,” the FINRA letter read.
The firm also failed to supervise how reps were recommending different share classes for variable annuities, mutual funds and 529 plans, according to FINRA. In many cases, TFA didn’t have practices in place to inform representatives about the suitability of particular share class recommendations and didn’t have systems ready to flag inappropriate recommendations, the agency argued in the letter.
"Since this investigation began in 2015, TFA has enhanced its training, guidance, policies and procedures, and oversight of its registered representatives and has enhanced its disclosures to customers," a spokesperson for Transamerica Financial Advisors wrote in a statement. "The settlement impacts a very small number of the total number of customer accounts held by TFA between 2009 and 2016."
According to the spokesperson, the restitution FINRA ordered affected 2,405 customer accounts, and the restitution the firm was to pay included $438,239 that was already paid to 433 customers during FINRA's examination concerning allowable fee waivers for mutual fund share class purchases. The spokesperson noted that affected investors would receive amounts from a fund that would be administered by a "third-party settlement administration firm."
“TFA cooperated fully with FINRA throughout the proceeding, and the settlement announcement concludes FINRA’s proceeding," the spokesperson wrote. "TFA is confident in its investment recommendations and remains committed to continuously improving its business practices."
In agreeing to FINRA’s sanctions, Transamerica Financial Advisors neither admitted nor denied the letter’s contents, but agreed to pay a $4.4 million fine, as well as nearly $4.4 million in restitution to customers, including nearly $3.6 million related to 1,141 clients who reportedly were harmed by “inaccurate exchange disclosure” of variable annuity products. The company also received a censure and agreed to certify it had undertaken FINRA’s mandates within 120 days of noting they’d accepted the letter.