FINRA Sanctions Lincoln Financial Over Unsuitable Variable Annuity Investments
The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2012032975301) brokerage firm Lincoln Financial Advisors Corporation (Lincoln Financial) concerning allegations between October 2008 and April 2009, brokers in two of the firm's branch offices recommended that customers invest in a hedge fund offered as a sub-account to a private placement variable annuity. According to FINRA, the hedge fund engaged in a complex options trading strategy, including trading uncovered options, exposing customers significant risks under certain circumstances. Lincoln Financial was found to have approved the investment. Based on recommendations of the firm's brokers FINRA found that 25 customers invested a total of $11.7 million in the hedge fund. Thereafter, in 2010, the hedge fund was shut down.
Lincoln Financial has been a registered broker-dealer with FINRA since 1969. The firm conducts a general securities business which includes the sales of variable annuities. The firm has 2,461 brokers operating out of 567 branch offices and is headquartered in Fort Wayne, Indiana.
According to FINRA, beginning in January 2007 brokers in the firm's Salt Lake City, Utah and Denver, Colorado branch offices recommended that customers invest in the hedge funds through the variable annuities. Customers could allocate funds to sub-accounts consisting of private placement investments. The private placement investments included the fees associated with the private placement. Through the annuity customers could obtain tax deferral on investment gains although some of the firm’s customers who invested held the investment in accounts through which they already obtained tax deferral.
The hedge fund employed a complicated options trading strategy earning revenue exclusively by writing a combination of uncovered options exposing customers to a high degree of financial risk.
FINRA found that Lincoln Financial failed to establish and maintain adequate supervisory systems and procedures to ensure that its brokers complied with their suitability obligations in recommending investments in the hedge fund to the 25 customers. FINRA found that the hedge fund engaged in a complicated options trading strategy that differed significantly from traditional investments in annuities and that the firm failed to provide adequate training or guidance to its brokers on the trading strategy or risks of the hedge fund before they solicited and sold the investments. For example, FINRA alleged that the firm did not provide product-specific training regarding hedge fund to its brokers. In addition, FINRA found that Lincoln Financial failed to adequately supervise its brokers customer specific suitability determinations because the firm conducted suitability reviews concerning a customer's initial sub-account allocation but not when customers re-allocated their investments in the hedge fund. Finally, the firm did not provide sufficient guidance to its brokers regarding concentration of customer assets in the hedge fund. In this regard FINRA found that the firm's written supervisory procedures limited customer investments to no more than 10% of their net worth in investments such as the hedge fund the firm did not review investments in the hedge fund for compliance with this limit.
Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana Weinstein LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.