Transamerica Financial Advisors, Inc. Sanctioned by FINRA and Ordered to Pay $8.8 Million for Supervisory Violations Related to Variable Annuities, Mutual Funds, and 529 Plans

FINRA has sanctioned Transamerica Financial Advisors, Inc. (“Transamerica Financial”) for its failure to reasonably supervise its financial advisors’ recommendations of three different products – variable annuities, mutual funds, and 529 plans.  These recommendations resulted in significant customer harm and financial loss.  Transamerica Financial was ordered to pay $4.4 million in restitution to approximately 2,400 affected customers and also fined an additional $4.4 million.

Investors who have received partial restitution from Transamerica Financial through FINRA’s order may still be entitled to additional recovery.  A FINRA partial restitution order does not preclude investors from pursuing their own claims to seek restitution or other available remedies.

If you have lost money with Transamerica Financial Advisors, Inc., contact New York securities arbitration attorney August Iorio of Iorio Altamirano LLP.  Iorio Altamirano LLP represents investors with disputes with their financial advisors or brokerage firms, such as Transamerica Financial Advisors, Inc.

August Iorio can be reached at august@ia-law.com or toll-free at (855) 430-4010 for a free and confidential review of your account.

Transamerica Financial Advisors, Inc.’s Letter of Acceptance, Waiver, and Consent

Transamerica Financial Advisors, Inc. and FINRA entered into a Letter of Acceptance, Waiver, and Consent (“AWC”) on December 21, 2020, over allegations that it failed to reasonably supervise its stockbrokers’ recommendations of three different products – variable annuities, mutual funds, and 529 plans.

Failure to Supervise Variable Annuity Recommendations:

FINRA alleged that from May 1, 2010, through May 15, 2016, Transamerica Financial failed to reasonably supervise representatives’ variable annuity recommendations.  Specifically, FINRA alleged that during this period:

• Transamerica Financial sold over 51,000 variable annuity policies.
• Transamerica Financial and its advisors received over $591 million in compensation from new variable annuity sales, trails, and subsequent contributions in the form of gross dealer commissions.
• The firm’s commissions from the sale of variable annuities comprised more than 40% of its total revenue.
• Variable annuities are complex investments that are commonly marketed and sold to retirees or individuals saving for retirement.
• FINRA Rules retire that firms provide more comprehensive and targeted protection to investors who purchase or exchange variable annuities because they are complicated investments.
• When recommending a variable annuity exchange, Transamerica Financial required its financial advisors to complete a six-page disclosure form. The form included important disclosures to the customer related to the fee structure, benefits, and features of both the new and existing variable annuities, as well as the representative’s rationale for recommending the exchange.
• However, Transamerica Financial’s system for supervising variable annuity sales and exchanges was deficient, resulting in various 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.
• Transamerica Financial failed to supervise advisors’ annuity exchange recommendations reasonably:
  • Transamerica Financial relied on the information in the disclosure forms to determine whether to approve variable annuity exchanges.
  • However, Transamerica Financial failed to provide adequate training to its stockbrokers and supervisors. The training did not adequately teach advisors how to complete the disclosure forms.  Correspondingly, the firm did not provide sufficient training to supervisors regarding how they should verify the information on the disclosure forms or use that information to conduct a meaningful comparison of the old and new variable annuities.
  • As a result of these supervisory deficiencies, certain firm principals approved variable annuity exchanges based on disclosure forms that contained inaccurate or missing information.
  • Between January 1, 2014, and May 15, 2016, more than half of the 3,781 exchanges approved by the firm contained at least one misstatement or omission.
  • These inaccuracies and omissions, which pertained to surrender charges, fees, and other features of the existing and proposed variable annuities, each had the effect of making the exchange appear to be more favorable than was the actual case.
  • For example, 984 disclosure forms (or 26%) were either blank or stated that there were no advantages associated with retaining the customer’s existing variable annuity.
  • These misstatements or omissions prevented Transamerica Financial’s reviewing principals from having a reasonable basis for approving these transactions.
• Transamerica Financial also failed to surveil advisors’ rates of variable annuity exchanges reasonably.
  • From May 1, 2010, through May 15, 2016, Transamerica Financial maintained an exception report for analyzing variable annuity exchange patterns, but the report was not reasonably designed.
• Transamerica Financial failed to supervise representatives’ variable annuity share-class recommendations reasonably.
  • From May 1, 2010, through May 15, 2016, Transamerica Financial sold variable annuity contracts with different share class options, including B shares, L shares, and C shares.
  • B-share contracts are the most common share class sold in the industry and typically have a seven-year surrender period. L-share contracts typically provide a shorter surrender period of three to five years and have annual fees between 0.35% and 0.50% higher than most B-share contracts. However, some L-share contracts have a specific provision, commonly called a “persistency credit,” which reduces the annual fees, so it is comparable to a B-share contract after the product is held for a period of time, generally seven to ten years. C-share contracts typically have no surrender period and have annual fees that are 0.05% to 0.10% higher than most L-share contracts.
  • Because C- and L-share contracts generally charge higher fees than comparable B-share contracts, the sale of these contracts may raise suitability concerns when sold to customers with long-term investment horizons.
  • This is especially true when combining such contracts with a long-term living benefit rider, such as a Guaranteed Minimum Income Benefit (GMIB) rider or Guaranteed Minimum Withdrawal Benefit (GMWB) rider. These riders typically cost the customer additional annual fees ranging from 1.0% to 1.5% of the variable annuity contract’s face value. GMIB riders usually require a holding period of ten years before the customer can access the income stream benefit. GMWB riders typically require the customer to hold the variable annuity for more than five years to obtain the full benefit of the guaranteed minimum withdrawal.
  • From May 1, 2010, to May 31, 2015, the firm sold 1,965 C-share contracts and 7,809 L-share contracts. These transactions accounted for 21.9% of all variable annuities sold during that period, for an aggregate principal amount of approximately $1.03 billion.
  • The firm’s representatives paired nearly 41% of C shares and 82.5% of L shares with long-term living benefit riders such as a GMIB or GMWB. Moreover, many of Transamerica Financial’s customers who purchased C or L shares had longer-term investment horizons of over seven years.
  • Transamerica Financial did not reasonably supervise the sale of these multi-share class variable annuities.
  • First, Transamerica Financial failed to provide proper training and guidance to its representatives on the features, fees, and surrender charges of the various share classes. As a result, certain representatives lacked the information necessary to compare share classes in making suitability determinations. Similarly, the firm failed to provide adequate training or guidance to its supervisors regarding variable annuity share classes. Consequently, supervisors did not identify common red flags, including sales of C- and L-share contracts to customers with no short-term liquidity needs or to customers who indicated a long-term investment horizon, and representatives who recommended that customers combine a C-share or L-share purchase with a long-term living benefit rider.
  • Second, Transamerica Financial lacked a reasonably designed system to detect red flags of inappropriate share-class recommendations. Transamerica Financial did not have any system to monitor for patterns or trends pertaining to variable annuity share-class suitability. In fact, the firm’s blotter for variable annuity transactions did not capture share-class data.
  • Even when the firm became aware of red flags regarding representatives’ variable annuity share-class recommendations, it failed to take appropriate action.
  • For example, the firm was aware of representatives who employed a “one-size-fits-all” approach with respect to variable annuity share classes recommended to their customers. At least four Transamerica Financial representatives sold the same shorter-term share class to between 70% and 95% of their variable annuity customers.
  • Although Transamerica Financial’s supervisory and compliance personnel were aware of these representatives’ tendency to sell only one share class, the firm did not reasonably supervise these representatives to ensure that they had a reasonable basis for each share class recommendation to their customers.

If you purchased a variable annuity through Transamerica Financial, contact investment advocate law firm Iorio Altamirano LLP for a free and confidential review of your account.

What is a Variable Annuity?

A variable annuity is a contract between an investor and an insurance company, whereby the insurance company promises to make periodic payments to the investor or a beneficiary designated by the investor.    A variable annuity serves as an investment account that may grow on a tax-deferred basis, includes insurance features, and offers the investor to receive periodic income payments.  Variable annuities allow customers to choose from a complex array of contract features and investment options, including various share classes and optional riders.    Each variable annuity is unique.  The investor pays extra for the features offered by variable annuities.

Variable annuities can help investors meet retirement or other long-term goals.  However, Variable annuities are not suitable for all investors, especially for investors with short-term needs or objectives.   Variable annuities are complex and can be costly due to fees or taxes and surrender charges that may apply if money is withdrawn early.  Variable annuities also involve investment risks and include contract fees.   Accordingly, financial advisors must exercise particular care to ensure that the purchase or exchange of variable annuity is suitable for a customer before recommending the product to a customer.

FINRA Rule 2111 requires that all investment recommendations be in the best interest of the customer. FINRA Rule 2330 provides investors with additional protections related to annuities.  The rule requires that when a financial advisor recommends an exchange of a variable annuity, the financial advisor must consider whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits (such as death, living, or other contractual benefits), or be subject to increased fees or charges (such as mortality and expense fees, investment advisor fees, or charges for riders and similar product enhancements).

Failure to Supervise Mutual Fund Sales

FINRA alleged that from January 1, 2009, through November 15, 2016, Transamerica Financial failed to supervise financial advisors’ sale of certain mutual funds reasonably. Specifically, FINRA alleged that during this period:

• Transamerica Financial sold mutual funds with different share classes, including A shares, B shares, and C shares.
• Class A shares typically include a front-end sales charge and have annual fund expenses, including ongoing distribution and service fees typically around 0.25%.
• Class B and C shares do not generally carry a front-end sales charge but have significantly higher distribution and service fees (typically 1%) and may include a contingent deferred sales charge.
• During this period, many mutual funds waived the front-end sales charges on A shares for certain retirement plans and charitable organization customers.
• Transamerica Financial failed to supervise the application of these sales charge waivers reasonably.
• The firm relied on its representatives to determine the applicability of sales charge waivers but failed to provide adequate guidance or training to assist them in making this determination.
• The firm relied on its financial advisors to determine the applicability of sales charge waivers to customers’ mutual fund purchases, but the firm failed to provide guidance to representatives to assist them in making this determination.
• Furthermore, Transamerica Financial failed to establish a system to verify whether waivers were applied correctly.
• As a result, Transamerica Financial failed to apply approximately $438,239 in available waivers to customers in 433 accounts.

If you purchased a mutual fund through Transamerica Financial, contact securities arbitration law firm Iorio Altamirano LLP for a free and confidential evaluation of your account.

Failure to Supervise 529 Savings Plans Recommendations  

FINRA alleged that from May 1, 2010, through May 31, 2015, Transamerica Financial failed to reasonably supervise brokers’ recommendations to customers to purchase certain share classes of 529 saving plans. Specifically, FINRA alleged that during this period:

• 529 plans are tax-advantaged municipal securities designed to encourage saving for the future educational expenses of a designated beneficiary.
• Shares of 529 plans are sold in different classes with different fee structures. Class A shares typically impose a front-end sales charge but charge lower annual fees compared to other classes.
• Class C shares typically impose no front-end sales charge but impose higher annual fees than Class A shares.
• Because of their higher annual fees, Class C shares may be more expensive over extended holding periods. Consequently, Class A shares are frequently the suitable option for accounts with younger beneficiaries and a longer investment horizon.
• Because 529 plans are municipal securities, the sale of 529 plans is governed by the Municipal Securities Rulemaking Board (MSRB). MSRB Rule G-27(a) requires each broker, dealer, and municipal securities dealer to supervise the conduct of its municipal securities activities to ensure compliance with MSRB rules and federal securities laws. MSRB Rules G-27(b) and (c) require each firm to establish and maintain a system, and to establish, maintain, and enforce written procedures, to supervise its municipal securities activities in a manner that is reasonably designed to achieve compliance with the federal securities laws and MSRB Rules
• Transamerica Financial did not provide adequate guidance to representatives regarding the importance of considering share-class differences when recommending 529 plans and did not provide supervisors with the information necessary to evaluate the suitability of 529 share-class recommendations properly.
• For example, the firm’s policies and procedures relating to 529 plans did not instruct supervisors to consider either (1) the beneficiary’s age or (2) the number of years until expected withdrawals—both critical factors in determining the suitability of the recommended share class.

If a Transamerica financial advisor sold you a 529 Savings Plan, contact investor protection law firm Iorio Altamirano LLP for a free and confidential review of your account.

Transamerica Financial Advisors, Inc.– A Duty to Supervise

Brokerage firms like Transamerica Financial Advisors, Inc. must supervise financial advisors and customer accounts properly.  Brokerage firms must also establish and maintain a reasonably designed system to oversee account activity, such as excessive trading, to ensure compliance with securities laws and industry regulations.   When a brokerage firm fails to supervise their financial advisors or the investment account activity sufficiently, they may be liable for investment losses sustained by customers.

Investment Loss Recovery

A FINRA partial restitution order does not preclude investors from pursuing their own claims to seek restitution or other available remedies.

If you have lost money with Transamerica Financial Advisors, Inc., contact securities arbitration attorney August Iorio of Iorio Altamirano LLP.

August Iorio can be reached at august@ia-law.com or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.

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