On September 29, 2014, the Financial Industry Regulatory Authority Inc.’s (“FINRA”) Department of Enforcement filed a formal complaint against SWS Financial Services Inc. (“SWS”) alleging that it approved numerous variable annuity application with no principal review for suitability (Disciplinary Proceeding No. 2011025622001).

Specifically, FINRA alleges that SWS had inadequate supervisory systems and written supervisory procedures to supervise its variable annuity business during the period from September 2009 through May 2011. As such, FINRA contends that SWS violated NASD Rule 3010, FINRA Rule 2010, and numerous provisions of FINRA 2821 and FINRA 2330. Based on these alleged violations, FINRA has brought five charges against SWS for: (i) having inadequate supervisory systems and written supervisory procedures to supervise its variable annuity business; (ii) having inadequate supervisory reviews of its variable annuity deals; (iii) failing to have a registered principal review of its variable annuities before submitting the applications to the insurer; (iv) failing to have surveillance procedures to detect inappropriate variable annuity exchanges; and (v) failing to develop and document a specific training plan for supervisory review of its variable annuity deals.

During the period from September 2009 through May 2011, SWS derived 16% to 20% of its total revenues from the sale of variable annuities to its customers. According to FINRA, SWS’s failure to establish and maintain written supervisory procedures specifically tailored to its variable annuity securities business caused SWS to submit over 70% of the variable annuity applications it generated in offices that did not have an onsite supervisor to the issuing insurance company without ever having been reviewed by an SWS securities principal. Furthermore, when the variable annuity applications were eventually reviewed by SWS securities principals, the supervisory reviews were deficient in numerous respects.

NASD Rule 2821(c) and FINRA Rule 2330(c) require that a registered principal “approve the recommended [VA] transaction only if he or she has determined that there is a reasonable basis to believe that the transaction would be suitable . . . .” Notwithstanding these clear rules, FINRA alleges that in many instances, SWS’s managers did not have a reasonable basis to believe that the variable annuity transactions that they approved were in fact suitable for SWS’s customers.

FINRA further alleges that in one instance an SWS advisor recommended that 29 of his clients swap variable annuities issued by MassMutual Life Insurance Co. for those issued by Jackson National Life Insurance Co. because the former would no longer issue certain guaranteed living benefits. According to FINRA, at least three of those exchanges may have been inappropriate because the clients had not reached the appropriate age of 45 to add the benefits offered by Jackson National.

Finally, FINRA alleges that, during the relevant time period, SWS: (1) effectively had no system in place to monitor the more than 1,500 variable annuity transactions executed by 128 advisors for inappropriate exchanges and (2) had no specific training policies or programs in place for the securities principals who had responsibility for reviewing and approving variable transactions.

If you bought or sold a variable annuity through SWS any time during the period from September 2009 through May 2011, contact Jacobson Law P.A. for a free consultation to discuss the specific facts of your case. You may have a claim and could be entitled to recover damages.