Farmers Financial Solutions, LLC Sanctioned by FINRA

The Financial Industry Regulatory Authority (“FINRA”) and Farmers Financial Solutions, LLC (“Farmers Financial”) entered into a Letter of Acceptance, Waiver, and Consent No. 2017052173001 on June 21, 2021, after FINRA alleged supervisory failures related to variable universal life insurance contracts (“VUL”) and mutual fund businesses.  The firm was censured and fined $1,000.

If you have suffered financial harm as a result of investing in variable universal life insurance contracts or mutual funds with Farmers Financial Solutions, LLC, contact FINRA arbitration lawyers Iorio Altamirano LLP for a free and confidential consultation.

Farmers Financial Solutions, LLC

Farmers Financial Solutions, LLC has been a registered brokerage firm since August 200.  Farmers Financial, headquartered in Westlake Village, California, sells variable universal life insurance contracts, mutual funds, 529 Plans, and annuities. The firm has approximately 4,300 registered representatives (brokers) and approximately 3,800 branch officers.

FINRA Letter of Acceptance, Waiver, and Consent No. 2017052173001

On June 21, 2021, Farmers Financial agreed to a censure and $100,000 fine after FINRA alleged that from at least June 2016 through December 2018, Farmers Financial failed to establish and maintain a reasonably designed supervisory system to achieve compliance with applicable securities laws and regulations with respect to its VUL business.

FINRA also alleged that from least June 2016 through December 2018, Farmers Financial failed to establish and maintain a reasonably designed supervisory system to achieve compliance with applicable securities laws and regulations with respect to its VUL business.

Applicable FINRA Rules

FINRA Rule 3110(a) requires that FINRA members “establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” The firm needs to supervise for compliance with FINRA Rule 2111, which requires that a member “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer,” including “a reasonable basis to believe that the customer has the financial ability to meet such commitment.”1A violation of FINRA Rule 3110 constitutes a violation of FINRA Rule 2010, which requires member firms to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of their business.

Farmers Financial Failed to Reasonably Supervise Its VUL Business

A variable universal life insurance contract (VUL) is a permanent life insurance policy that contains both insurance and securities features.  Variable universal life insurance contracts are long-term products that can provide coverage for the life of an insured and offer a death benefit payable on the death of the insured. VULs also have an investment feature called the “cash value,” which refers to the underlying value of the investment portion of the VUL. VUL premium payments, which are paid throughout the life of the VUL, are allocated to investment subaccounts in order to increase the cash value. Monthly charges, including the cost of insurance coverage and administrative fees, are deducted from the product’s cash value. The cash value of the VUL may increase or decrease based on the performance of the investment subaccounts. A VUL lapses if the customer stops paying premiums and the cash value is insufficient to pay the monthly charges. If a VUL lapses, the customer is left with no insurance and no investment payout.

FINRA alleged that from June 2016 through December 2018, Farmers Financial failed to establish and maintain a reasonably designed supervisory system to achieve compliance with applicable securities laws and regulations with respect to its VUL business. Specifically, FINRA alleged:

• From June 2016 through December 2018, Farmers Financial sold approximately $30 million in VULs, constituting approximately 30% of Farmers Financial’s revenues.
• During this period, Farmers Financial failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to its VUL business.
• Specifically, the firm had information indicating that VUL policies were lapsing but failed to take reasonable steps to identify why the lapses occurred and whether the sales of VULs to the particular customers were suitable and to monitor the registered representatives involved.
• If a VUL lapsed within certain time parameters set by the issuer, the VUL issuer would claw back the commission paid to the firm and registered representative.
• The firm’s Finance Department, as well as the registered representative’s direct supervisor, were aware of when these clawbacks occurred. This information, however, was not shared with the firm’s principals, who reviewed proposed VUL transactions.
• In addition, the firm did not have any exception reports or other tools that would enable it to identify representatives with high lapse rates.
• Therefore, the firm could not identify and follow up on registered representatives with high lapse rates or unusual transaction patterns, such as selling new VULs to customers whose previous VULs had lapsed.
• As a result of this unreasonable supervisory system, the firm did not identify a registered representative who had been working at the firm for two years, sold over 200 VULs, and amassed a lapse rate of approximately 40%.
• The same representative also made repeat sales of VULs to customers whose VULs had previously lapsed, which the firm’s system did not identify.

Accordingly, FINRA concluded that Farmers Financial violated FINRA Rules 3110(a) and 2010.

Framers Financial Failed to Reasonably Supervise its Mutual Fund Business

FINRA alleged that from least June 2016 through December 2018, Farmers Financial failed to establish and maintain a reasonably designed supervisory system to achieve compliance with applicable securities laws and regulations with respect to its VUL business. Specifically, FINRA alleged:

• The vast majority of mutual funds sold by Farmers Financial in 2016 and 2017 were Class A shares.
• Class A mutual fund shares typically include substantial upfront sales charges, known as “front-end loads.” They generally are suitable only as long-term investments and not as vehicles for short-term trading because an investor usually must hold A shares for a long period of time to account for the front-end load. Mutual fund “switching” occurs when a customer sells mutual fund shares and reinvests the proceeds in another mutual fund company, often incurring additional charges and commissions.
• In addition, many issuers of front-end load mutual funds offer breakpoint discounts. Generally, an investor can procure a breakpoint discount through a single purchase large enough to reach a breakpoint or, in the alternative, through multiple purchases in either a single mutual fund or mutual fund family. Certain mutual funds also offer breakpoints after “householding” accounts or by aggregating purchases in multiple accounts owned by the customer or persons related to the customer.
• From June 2016 through November 2017, Farmers Financial sold approximately $11.5 million in mutual funds, constituting approximately 20% of the firm’s revenue.
• Although new mutual fund accounts were directly opened with the issuer, the firm required its registered representatives to submit these accounts to firm principals for review and approval.
• Farmers Financial failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to its mutual fund business. Specifically, the firm’s primary tools to supervise its mutual fund business—the switch, breakpoint, and bypass reports—failed to constitute a reasonable supervisory system.
• Farmers Financial had insufficient resources and relied on a manual review of the switch, breakpoint, and bypass reports.
• The switch and breakpoint reports included inaccurate or incomplete information and had other data issues that further delayed their review.
• The bypass report consistently included hundreds of transactions per month. For eight months during the relevant period, there were over 300 transactions on each monthly report. and in some cases, the number significantly exceeded that number. In order to follow up on transactions included in the bypass report, the surveillance team undertook an extensive manual review process. This included, among other things, contacting registered representatives, obtaining customer account documents, and tracking the registered representatives’ responses over time.

Accordingly, FINRA concluded that Farmers Financial violated FINRA Rules 3110(a) and 2010.

How to Recover Losses or Obtain a Free Consultation

If you have lost money with Farmers Financial Solutions, LLC, contact securities arbitration lawyers August Iorio and Jorge Altamirano of Iorio Altamirano LLP at august@ia-law.com,  jorge@ia-law.com, or toll-free at (855) 430-4010 for a free and confidential evaluation of your account or insurance policy.

Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.