SEC Settles Charges with Broker-Dealer in Connection with Improper Switching of Variable Annuities

May 27, 2022

On May 25, 2022, the SEC announced that it settled charges against a registered broker-dealer (Broker-Dealer) in connection with improper switching or replacing of variable annuities for which it was a principal underwriter. Without admitting or denying SEC findings, the Broker-Dealer consented to, among other things, a finding that it violated Section 11 of the Investment Company Act (Section 11) and a $5 million penalty.

This is the SEC’s first enforcement proceeding under Section 11, which generally makes it unlawful for any fund or its principal underwriter to make an offer to exchange the fund’s shares for the shares of another fund on any basis other than the relative net asset values of the respective securities to be exchanged.

According to the SEC order, employees of the Broker-Dealer engaged in sales practices that caused offers to be made to holders of variable annuities to switch from one variable annuity to another. These alleged practices included developing lists of in-force annuities for the purpose of identifying exchange opportunities and encouraging representatives of an affiliated broker-dealer/investment adviser to offer replacements to retail customers. The SEC order indicates that variable annuity exchanges increased during the time period in which these sales practices occurred. The SEC asserts that the sales practices constituted “improper switching” and were motivated by a desire to increase sales commissions and the Broker-Dealer’s variable annuity related revenues.

The SEC press release can be found here.

The SEC order can be found here.


Categories

Compliance, Enforcement Actions, Investment Advisers, Investment Companies, Miscellaneous, Mutual Funds, Regulatory