FINRA announced today that it entered into a settlement with MetLife Securities, Inc. in which MetLife agreed to pay FINRA a $20 million fine and its customers up to $5 million in compensation for, basically, making misrepresentations over a five-year period to customers who replaced one variable annuity with another regarding the costs of making the switch and the supposed guarantees offered by the replacement product.  Even for someone as jaded as me when it comes to FINRA Enforcement actions, this one took my breath away, for its sheer magnitude.  Twenty-million dollars!  Yikes, there goes FINRA’s operating budget deficit in one fell swoop!

As I read the AWC, however, there were a couple of other things besides the ridiculous size of the monetary sanction that stood out, and are worthy of mention.

First, note that no individual was named as a respondent. FINRA has taken considerable heat over the years for its seeming disparate treatment between officers and principals of small broker-dealers, on the one hand, versus officers and principals of large firms, on the other.  Anecdotally, at least, it sure seems that FINRA is much, much more apt to name individuals for supervisory failures when the respondent is a small broker-dealer.  And, given that most FINRA member firms are “small,” this happens a lot.

Here, however, despite the magnitude of the underlying supervisory problems that led to this whopping settlement, not a single person was named by FINRA. Yet, the supervisory failures identified in the AWC are undeniably serious, pervasive, and systemic, “affecting almost three quarters of the tens of thousands of [variable annuity] replacements” MetLife recommended, and for which the firm earned $152 million in gross dealer commissions.  For instance,

  • MetLife “failed to implement an adequate supervisory structure to ensure that its registered representatives obtained an assessed accurate information concerning the recommended VA Replacements”;
  • The firm “did not provide sufficient training or guidance to its registered representatives on how to complete” the form by which the costs of the replacement were disclosed;
  • The firm “did not identify or describe a process by which registered representatives could obtain” the comparative cost and benefit information to be able to fill out that form accurately;
  • The firm “did not implement an adequate review of the replacement applications to ensure the information included was accurate.” As a result, 72% of its customers got inaccurate information;
  • The firm “did not implement reasonable supervisory systems, procedures, or training regarding its principal review of the suitability of the proposed replacement”; while registered reps had to provide a written justification for the replacement, firm principals were not required actually to review that answer. Not surprisingly, 99.79% of all proposed replacements were approved; and
  • The firm failed to properly supervise the sale of a rider that provided a guaranteed minimum income benefit. FINRA found, and MetLife agreed, that it failed provide either its reps or principals with “reasonable guidance or training on the costs and benefits of the” rider.

This is an astounding list of dramatic supervisory lapses that ensued over a five-year period, resulting in massive customer losses. And, yet, no one was responsible.  I simply do not believe that a small firm would have received similar treatment.

Second, as the title of this post suggests, it is remarkable to me that FINRA was willing to characterize these seemingly endless failures as the result of “negligence.” Having been on the other side of countless negotiations with FINRA, I would bet my mortgage that when settlement discussions first began, FINRA was looking at charging these as intentional misrepresentations and omissions.  A tip of the hat to MetLife’s counsel, then, for convincing FINRA that a finding of negligence would still achieve its goal of arriving at an appropriate “remedial measure.”  Of course, that would help explain the size of the fine imposed.  I am not saying that MetLife was able to get FINRA to agree to call its misconduct “negligent” simply by paying $20 million, as opposed to, say, $5 million; but, as they say about chicken soup, “it couldn’t hurt.”  In FINRA’s world, as elsewhere, money talks.