Farmers Financial Solutions, the broker/dealer arm of national insurance company Farmers Insurance, moved to settle with the Financial Industry Regulatory Authority after allegedly failing to supervise registered representatives’ sales of certain products.
The firm, which has been a FINRA member since 2000, is based in Westlake Village, Calif., and specializes in selling numerous products, including variable universal life insurance contracts (VULs), mutual funds, 529 plans and annuities. The regulatory agency said that for multi-year periods the b/d “failed to establish and maintain a reasonably designed supervisory system” to stay in compliance with securities regulations as it oversaw the sales of VULs and mutual funds, according to the letter of acceptance, waiver and consent.
According to FINRA, a VUL is a long-term product “containing both insurance and securities features,” including a feature called a “cash value” that is tied to the underlying value of the investment portion of the product. But a VUL can lapse if a customer stops paying their premium and if the cash value is not enough to make the monthly charges. In the event of a VUL lapsing, the customer gets no payout from either the insurance or investment parts of the product.
From June 2016 through December 2018, Farmers Financial sold about $30 million in VULs, which FINRA determined was about 30% of the b/d’s total revenue for that time. But the regulatory agency said the firm was falling short in supervising its VUL business.
“Specifically, the firm had information indicating that VUL policies were lapsing but failed to take reasonable steps to identify why the lapses occurred and whether the sales of VULs to the particular customers were suitable and to monitor the registered representatives involved,” the letter read.
FINRA claimed the firm didn’t have tools in place to track if particular representatives had a suspiciously high lapse rate; this led to one situation where a registered rep had sold more than 200 VULs with a lapse rate of about 40%, and had also made numerous sales to customers who previously lapsed on other VULs they purchased, according to FINRA (a request for comment to Farmers Financial was not returned as of press time).
Between June 2016 and November 2017, the b/d also sold about $11.5 million in mutual funds, which was about 20% of the firm’s revenue, which were typically “Class A shares” that typically included high upfront sales charges. But while reps opened new mutual fund accounts directly with the issuer of the fund, reps were also supposed to submit accounts to “firm principals” to review them. But the agency suffered backlogs in a number of reports it used to supervise these transactions, and thus did not review hundreds of the mutual fund sales “in a timely fashion,” according to FINRA.
The b/d agreed to a censure and a $100,000 fine, while not admitting or denying the allegations included in FINRA’s letter.
