(Jason Doiy / The Recorder)

A recent Financial Industry Regulatory Authority’s enforcement action against Matrix Capital Group related to variable annuity sales practices serves to highlight securities regulators’ renewed commitment to protecting retirees by disciplining inadequate supervision of such sales, Morrison & Foerster partner Daniel Nathan reports.

Prior to May 2010 Matrix conducted virtually no business involving variable annuity products, according to the FINRA disciplinary action. At about that time, a registered representative who specialized in variable annuities joined the firm and stayed until April 2011.

During that period, the broker in questions recommended to17 Matrix customers that they give up their variable annuities and replace them with another kind of annuity. Each customer accepted the recommendation, and paid a surrender charge of at least $1,000. The total surrender charges for all 17 transactions were $70,000, with 16 of the customers also forfeiting significant death and/or living benefits by abandoning their contracts.

Although the customers varied widely in age and net worth, the broker recommended that they all replace their existing variable annuities with the same product, optional living benefit rider and underlying subaccount, according to FINRA. The broker also recommended that each customer purchase a 6 percent bonus option. FINRA also found that the broker had listed the same three reasons for the recommendations on each of the 17 switch forms, and that in several cases the reasons were untrue, Nathan reports.

FINRA found that Matrix failed to adequately supervise the variable annuity exchanges made by this broker and also failed to realize or address the fact that this broker was selling the exact same product to a diverse group of clients. Among other sanctions, FINRA fined Matrix $30,000 and suspended it from executing any non-liquidating variable transactions for a year, according to Nathan.

In discussing the Matrix case, Nathan reminds broker-dealers that FINRA has renewed its commitment to focusing on how firms engage with elderly investors, particularly when it comes to suitability determinations. He recommends that firms ensure they have robust procedures in place for products such as variable annuities, equity-indexed annuities and real estate investment trusts. These procedures, he writes, include ensuring that reasons provided on switch forms for a variable annuity exchange match up with the features of the new product, and ensuring that the customer understands the costs and benefits of any exchange.