According to FINRA, Michael Girard DeLuca was fined $5,000 and suspended from association with any FINRA member in any principal capacity for 15 business days for failing to reasonably supervise variable annuity exchanges and surrenders recommended by a registered representative.
DeLuca failed to reasonably respond to red flags that many of the representative's exchange applications contained material misrepresentations. The applications contained information about the purchase date, surrender period, and amount of the exchange that contradicted the representative's claims that there would be no surrender charge. DeLuca was aware that during the surrender period, investors were permitted to withdraw only a specified percentage of the contract amount. However, in one case, the exchange application revealed that a customer was seeking to exchange 64 percent of the contract value during the surrender period when the free withdrawal percentage was capped at 10 percent of the contract value. DeLuca failed to question or investigate the representative's representation on the application that the customer would not incur a surrender charge.
DeLuca also failed to compare the information on the exchange documents with other available external information sources such as the original applications, the surrender fee schedules, or the customers' most recent account statements, and thereby failed to detect that the representative misrepresented that the customer would not have to pay a surrender charge. In total, these transactions caused customers to incur surrender charges totaling $71,386.94.
The suspension was in effect from January 3, 2023, through January 24, 2023.
Variable annuities are complex insurance products that often have substantial surrender charges during the early years of ownership. These surrender charges compensate the insurance company for upfront commissions paid to the representative and other costs. When customers exchange one variable annuity for another (a 1035 exchange), they may incur surrender charges on the old annuity if it is still within the surrender period.
Exchanges of variable annuities during the surrender period are often unsuitable because the customer incurs substantial surrender charges on the old annuity and typically starts a new surrender period on the new annuity. Such exchanges may primarily benefit the representative, who earns a new commission, rather than the customer. For this reason, firms must carefully review annuity exchanges to ensure they are suitable and that customers are fully informed about all costs, including surrender charges.
The red flags in this case were numerous and obvious. When an exchange application shows that a customer wants to exchange a percentage of the annuity value that exceeds the free withdrawal amount, and the representative has indicated there will be no surrender charge, these facts are contradictory. DeLuca, as the supervising principal, should have immediately recognized this contradiction and investigated.
His failure to compare the information on the exchange applications with the surrender fee schedules or original applications represents a fundamental supervisory failure. These comparisons are basic steps that should be part of any reasonable review of annuity exchanges. Had DeLuca taken these simple steps, he would have discovered the misrepresentations and prevented customers from incurring over $71,000 in unnecessary surrender charges.
For investors, this case underscores the importance of understanding surrender charges before purchasing or exchanging variable annuities. Always ask: What is the surrender period? What are the surrender charges if I need to access my money during that period? What is the free withdrawal amount? If exchanging an annuity, will I incur surrender charges on the old annuity? Never rely solely on the representative's verbal assurances—review the written contract and fee schedule yourself.
