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Two recent FINRA enforcement actions highlight the necessity for investors to remain vigilant in their investment decision-making, especially if they have purchased variable annuities.
Cecil E. Nivens was the subject of a Default Decision recently entered by a FINRA hearing officer concerning the sale and marketing of variable annuity products.
Nevins worked for NY Life Securities, LLC in North Carolina from 1991 until his voluntary resignation in 2014. The Default Decision indicates that Nevins induced 15 customers to purchase variable annuities by withdrawing funds from the clients’ existing annuities to pay for the new purchases. However, rather than processing these transactions as “1035 exchanges” (referring to an IRS regulation that allows annuity owners to replace an existing annuity with a new annuity without any tax liability), Nivens made misrepresentations on the annuity applications to hide the fact that he had the customers use their existing annuities to fund the purchase of the new annuities.
Nevins instructed the clients to withdraw funds from their existing annuities, place the funds in their checking accounts and then write checks to the purchase the new annuities. He completed the annuity applications, indicating that the clients did not currently own annuities and that the sources of funds for the purchases were not other annuities. Nivens did this to hide the fact that these were replacement annuity purchases, which receive particular scrutiny from brokerage firms and regulators.
Eight of the fifteen customers incurred surrender charges in purchasing the new annuities, and all incurred federal tax liabilities because the transactions were not processed as 1035 exchanges.
Eight settled customer disputes are listed on Nevins’ BrokerCheck report after his resignation, all involving variable annuities.
Nevins was suspended from the securities industry for two years and ordered to pay FINRA $185,737 in the form of disgorgement of the commissions he earned on these transactions.
Walter Marino of Long Island, NY was also disciplined by FINRA regarding improper annuity replacement transactions. In his case, FINRA found that Marino made the unsuitable recommendations to replace existing annuities to two customers, one of whom was an 80-year-old retired teacher and widow. As in the case with Nevins, Marino put false and misleading information on the annuity applications, hiding the fact that the purchases were being funded from existing annuities.
Marino received $60,000 in commissions. One of the customers incurred an $82,523 surrender charge. Both customers also incurred federal tax liabilities.
Marino has worked in the securities industry for 22 years. In that time, he has worked in 14 firms, four of which have been expelled from the industry. He has 19 disclosures on his BrokerCheck report.
FINRA suspended Marino for one year. Because of his financial situation no fine was imposed.
These cases demonstrate that customers must always pay careful attention to their investments decisions. In these cases, investors were persuaded to purchase additional annuities by presumably smooth-talking salesmen more interested in their own income rather than the financial well being of their clients.
Variable annuities are complex investment products. That is one of the reasons they receive so much scrutiny from FINRA and compliance departments of firms. The replacement of an existing annuity with a new annuity might entail tax liability, surrender charges, new surrender periods and new expenses. Clients should be sure that they fully understand the type of product they are purchasing and what the risks and characteristics of those investments might be.
If you have questions concerning your account, contact Lubiner, Schmidt & Palumbo for a consultation.