According to FINRA, Christine Anne Warner was fined $5,000 and suspended from association with any FINRA member in any principal capacity for 40 business days for failing to reasonably supervise the sales practices of two registered representatives.
Contrary to the firm's Written Supervisory Procedures, Warner failed to compare the information on a representative's exchange applications with disclosed surrender charges with other sources of information such as the original applications, the surrender fee schedules, or the customers' most recent account statements. As a result, Warner failed to detect that the representative had understated the customers' actual surrender charges on nearly all of the exchange applications that she reviewed and approved. In total, these transactions caused customers to incur surrender charges totaling $227,584.13. Moreover, Warner failed to conduct an analysis to determine whether the cost savings of the new share class exceeded the amount of the surrender charges and thereby failed to reasonably determine whether the recommended exchanges were suitable.
Additionally, Warner failed to reasonably investigate red flags of excessive variable annuity switching by one of the representatives. Warner was notified that a variable annuity issuer terminated their agency relationship with the representative because he had recommended the early liquidation of 23 variable annuity contracts, which resulted in the imposition of substantial surrender fees. Nonetheless, over the course of one year after receiving this notification, Warner approved new variable exchanges that the representative recommended to 11 of the same customers. These new exchanges also caused the customers to incur additional surrender fees.
Warner also failed to reasonably investigate red flags that another representative was conducting securities business through an unapproved email account. Warner was assigned supervisory responsibilities for the representative when he was placed on heightened supervision. Notwithstanding Warner's knowledge of the representative's use of an outside email account, she did not take reasonable steps to review and ensure the retention of these business-related emails. Even after being advised by FINRA that the representative and office staff were continuing to use the outside email account to conduct securities business with firm customers, Warner made no reasonable effort to review or ensure the retention of these emails.
The suspension is in effect from January 3, 2023, through March 1, 2023.
As a principal, Warner had heightened responsibilities to supervise the registered representatives under her authority. Principals serve as gatekeepers who must review transactions and activities to detect potential violations before they harm customers. Warner's failures represent a breakdown in this critical supervisory function.
The variable annuity exchange supervision failures are particularly serious because they were repeated across multiple representatives and customers, resulting in over $227,000 in unnecessary surrender charges. Warner's failure to follow the firm's own WSPs by not comparing exchange applications with surrender fee schedules is a fundamental supervisory lapse. These comparisons are basic steps that should be automatic in any review of annuity exchanges.
The red flags Warner ignored were numerous and obvious. When a variable annuity issuer terminates its relationship with a representative due to excessive early liquidations, this is an extremely serious warning sign that the representative is engaging in unsuitable switching to generate commissions. For Warner to continue approving exchanges recommended by this representative to the same customers who had previously been subjected to unsuitable switches demonstrates a complete failure to respond to red flags.
The email supervision failures compound the picture of inadequate supervision. When a representative is placed on heightened supervision due to concerns about their conduct, the supervising principal must be especially vigilant. Warner's failure to review or ensure retention of emails sent through an unapproved account, even after FINRA specifically alerted her to the continued use of the outside account, shows a lack of diligence and follow-through.
For investors, this case demonstrates that not all firm supervisors adequately fulfill their responsibilities. The supervisory failures allowed representatives to engage in unsuitable exchanges that cost customers over $227,000. When selecting a broker, consider not just the individual representative but also the quality of supervision at the firm.
