On December 4, 2019, Rochester broker and investment adviser Jerry Michael Wells (CRD# 1015358) consented to a two-month industry suspension and a $5,000 fine from the Financial Industry Regulatory Authority (FINRA). As disclosed in a Letter of Acceptance, Waiver and Consent (AWC)—under which Mr. Wells neither admitted nor denied FINRA’s findings—Mr. Wells purportedly recommended that some of his customers invest in variable annuities without adequately informing his customers that these investments consisted of replacements of then-existing variable annuities.

Mr. Wells was most recently affiliated with SagePoint Financial, Inc. from May 2016 until May 2020 in their Rochester, New York office. Previous to that, he was affiliated with MetLife Securities from 1991 to May 2016 in that firm’s Rochester, New York office. As disclosed through FINRA’s AWC and in the FINRA BrokerCheck report for Mr. Wells, from 2012 to 2015 he allegedly “falsely represented” that certain recommended variable annuities would not “replace or change one or more existing” variable annuities. Furthermore, Mr. Wells purportedly knew that each of the recommended variable annuity purchases “was funded, in whole or in part, by proceeds from the sale of, or distribution from, another variable annuity.” As a result of his alleged misconduct, Mr. Wells was suspended by FINRA from January 6, 2020 to March 5, 2020 and additionally fined $5,000.

In recent years, FINRA Enforcement has prioritized addressing possible sales practice abuse involving variable annuities. Because of these products’ characteristic high up-front commissions, some unscrupulous financial advisors may unsuitably recommend that an investor replace one variable annuity for another, as a means of generating commissions. This practice is sometimes referred to as “switching” and is akin to churning an investor’s account or trading excessively to generate commissions, at the expense of the investor.

While replacing one variable annuity for another is not necessarily indicative of any wrongdoing, financial advisors making such recommendations must ensure that they adhere to all applicable industry rules when recommending investments, including FINRA Rule 2111 (Suitability). In addition, Rule 2330 specifically relates to the suitability of deferred variable annuities. With respect to a variable annuity replacement or switch, Rule 2330 mandates that before recommending a variable annuity switch, a financial advisor must consider, “among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges [or whether he or she] has had another exchange within the preceding 36 months.”

The fact that variable annuities offer brokers and their firms higher fees and compensation than, for example, exchange-traded funds (EFTs) or mutual funds, presents a significant potential conflict of interest. Applicable FINRA rules mandate that, at the time of the investment recommendation, a brokerage firm and its financial advisor must ensure that any investment recommendation is suitable for an investor in light of the investor’s stated objectives and profile. In instances where an investor is unsuitably steered into an inappropriate investment, then the financial advisor and, by extension, the brokerage firm, may be held liable for losses suffered.

The attorneys at Giarrusso Law Group LLC have significant experience in working closely with investors to resolve all manner of disputes concerning investment losses, including losses suffered due to impermissible switching of variable annuities. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost and confidential consultation.