According to FINRA’s Disciplinary and Other Actions publication, FINRA censured and fined Principal Securities, Inc. fka Princor Financial Services Corporation (CRD # 1137) $250,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that for at least three years, its system for supervising additions to existing variable annuities was not reasonably designed to ensure that they complied with applicable securities laws and rules, including those governing suitability (See FINRA Case #2015047322502).
FINRA alleged that from October 2013 to September 2016, Principal Securities customers added money to existing variable annuities on more than 6,000 occasions. Those additions accounted for approximately one-sixth of Principal Securities’ revenue from variable products during that period.
While Principal Securities reviewed some of those additions the scope of that supervision was unreasonably limited. First, the exception reports covered only transactions involving one of Principal Securities’ affiliates, not all or the existing variable annuities that Principal Securities’ customers held. Second, the exception reports covered only additions to existing variable annuities that were funded by surrendering insurance products, not all sources. For example, the exception reports did not cover additions that were funded by rolling over a retirement plan. Third, Principal Securities’ supervisors used the exception reports to identify trading trends and patterns, rather than to evaluate the propriety of individual additions. Fourth, Principal Securities’ periodic audits covered only selected customers, not additions to existing variable annuities generally or patterns of recommendations to make such additions.
As a result of those and other limitations, Principal Securities’ system for supervising additions to existing variable annuities was not reasonably designed to comply with applicable securities laws and rules, including those governing suitability. Principal Securities’ system did not capture, so the firm did not review, more than two-thirds of those additions. Principal Securities’ system was not reasonably designed to focus on the additions that posed the greatest risk to the firm’s customers such as additions resulting in high concentrations of customers’ net worth in variable contracts, or additions by customers whose financial needs and goals had changed since they initially purchased their contracts. As a result, Principal Securities’ system was not likely to detect and flag relatively risky transactions, such us a large addition to a contract long after it was purchased, prompted by a recommendation front an associated person, so that the firm could determine whether such recommendations violated any securities laws or rules.
Those gaps in Principal Securities’ system resulted in improper transactions escaping detection by the firm, causing harm to contract holders. For example, Principal Securities did not detect recommended in-and-out trading between a customer’s variable annuities, which resulted in frequent and unnecessary surrender charges, nor did the firm detect another customer’s excessive concentration in a variable annuity resulting from a $300,000 addition to that contract which was more than doubled the customer’s initial investment.
HANLEY LAW
Hanley law represents individual investors nationwide with significant losses in their portfolios, retirement plans or investment accounts. The firm is dedicated to assisting investors to recover losses suffered by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. The firm handles cases against the major Wall Street broker dealers, including Principal Securities, Inc. fka Princor Financial Services Corporation.
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