Published on Jun 2nd, 2022 |

Brief Introduction

Last week, the SEC’s first-ever enforcement proceeding under Section 11 of the Investment Company Act of 1940 occurred for improper switching or replacement of variable annuities.

Any principal underwriter is prohibited from making or causing to be made an offer to exchange the securities of registered unit investment trusts, which includes variable annuities, under Section 11 of the Investment Company Act. There is an exception, but it was not applicable for the Broker Dealer. This exception is if the terms of the offer fell within certain limited exceptions or were approved by the SEC.

How Did The Issue Occur?

  • Through an affiliated Broker Dealer/Investment Adviser, the Broker Dealer offered and sold variable annuities to retail investors.
  • sales practice was implemented by certain employees from the Broker Dealer that caused exchange offers to be made to holders of variable annuities to switch from one variable annuity to another.
    • This resulted in an increase of variable annuity related revenues and sales commissions for the Broker Dealer’s employees.
  • From 2016 to 2018, there was a large increase in these types of transactions, at which time the Broker Dealer’s compliance department put an end to the abusive sales practice at around March of 2018.
    • The compliance department implemented a training program to explain how the creation and use of these types of in-force annuity lists violated the principles of Section 11.

What Were The Findings And Final Conclusion?

  • The SEC has made it clear that they are going to continue focusing on protecting investors, and they state that protecting retail investors from abusive sales practices is a centerpiece of their enforcement program.
    • Accountability is very important with the SEC and they will continue to hold those that engage in such conduct accountable.
  • They found that the Broker Dealer conducted an improper switch of investors from one investment product to another for the purpose of generating additional selling charges, which is prohibited in Section 11.
  • The Broker Dealer consented to an order finding that it violated Section 11 of the Investment Company Act and imposing a cease-and-desist order, a censure and a $5 million civil penalty without admitting or denying the SEC’s findings.

Vigilant’s Final Conclusion

As we have stated throughout the year, the SEC is fully focused on protecting investors in 2022, and this was clearly communicated throughout this order by the SEC.

While this is the first-ever enforcement proceeding under Section 11 of the Investment Company Act of 1940, the SEC will continue to hold Firms accountable to those who engage in conduct similar to this.

If you need are in need of assistance…click the Contact Us button below.

Contact Us Here Today For Assistance