A Florida-based firm is being penalized for violations of Regulation Best Interest involving exchanges of registered index-linked annuities (RILAs), Think Advisor reports.
In a letter of acceptance, waiver and consent, the Financial Industry Regulatory Authority said that it has fined AAG Capital $100,000 and ordered the firm to pay nearly $39,000 in restitution. It was determined that AAG Capital exchanged retail customers’ insurance policies, fixed indexed annuities and variable annuities for more costly registered index-linked annuities without reasonably considering the disadvantages of those exchanges.
FINRA stated that from February 2021 through the present, AAG Capital failed to establish and maintain written policies and procedures and a supervisory system reasonably designed to comply with Securities Exchange Act of 1934 Rule 15l-1 (Reg BI) for recommendations to retail customers regarding the RILAs. A RILA is a specific type of annuity that relies on external market performance as measured by an index to determine return. RILAs can feature both upside limits and downside protection during a specified investment term and can have complex structures.
Regarding recommendations to exchange an existing investment into a RILA, FINRA determined that AAG’s supervisory system failed to ensure that the recommendations considered the disadvantages when customers surrendered their existing investment. 19 of 41 exchanges resulted in a customer giving up death and living benefits, or incurring a surrender charge from the exchange:
• Six customers gave up life insurance policies with a death benefit valued more than the surrender value of the contract, in some cases by over $100,000;
• 15 customers relinquished fixed or variable annuities with optional death benefit riders or living benefit riders, some of which had accrued value exceeding the contract value;
• Eight customers incurred surrender charges as a result of the exchange, which totaled $38,591.
At the time, the firm’s annuity business exclusively involved the recommendation of RILAs from three issuers. Between February 2021 and April 2023, the firm recommended 479 RILA purchases, representing more than $92 million in principal.
“AAG Capital’s Reg BI-related written policies and procedures were not tailored to address recommendations of a complex product that comprised a significant component of its revenue and the entirety of its annuity business,” FINRA said. “For example, the firm’s written policies and procedures failed to reasonably describe the steps that supervisors must take to evaluate whether the registered representatives had a reasonable basis to believe that the RILA recommendations were in the customers’ best interest, such as the identification of potential red flags that the recommendation was not consistent with the customer’s investment profile.”
AAG Capital did not admit or deny the allegations but consented to the monetary penalties and a censure. The firm also agreed to certify that it has remediated the issues and implemented a supervisory system reasonably designed to achieve compliance.
Handling financial services disputes requires counsel with a significant understanding of the industry, the laws, rules and regulations that impact our clients and the forums in which disputes are adjudicated. At Hyman Cotter PC, our attorneys’ unparalleled litigation experience comes from leveraging their industry-specific knowledge developed from working at firms such as Morgan Stanley, UBS Financial Services, serving as outside counsel for some of the world’s largest law firms, and through prior affiliations with the SEC. For more information about our arbitration and litigation services, please contact us 312-291-4600 or through our online contact form.
