← Broker database 2022-05-31
Camille Cordova Suspended for Unsuitable Annuity Recommendations
According to FINRA, Camille Cordova was assessed a deferred fine of $5,000 and suspended for three months for making unsuitable recommendations for a family trust formed by a senior married couple. Restitution was not ordered because Cordova's member firm compensated the trust in connection with settlement of an arbitration claim.
Cordova and another registered representative at the firm recommended that the trust purchase a deferred variable annuity for approximately $540,000 and fund that purchase through two withdrawals from an indexed annuity owned by the trust. Cordova completed and signed the application for the variable annuity as the primary financial professional.
Cordova and the other representative were aware that funding the purchase of the variable annuity with withdrawals from the trust's existing annuity could result in negative tax consequences for the trust. They were also aware that their recommendation to purchase the variable annuity would not be suitable if it caused negative tax consequences. However, neither Cordova nor the other representative researched how the trust might purchase the variable annuity without negative tax consequences.
Instead, the other representative recommended that the trust withdraw funds from the indexed annuity via two checks payable to the trust and immediately endorse the checks as payable to the firm to fund the purchase of the variable annuity. The other representative mistakenly believed that having the trust immediately endorse the checks as payable to the firm would avoid adverse tax consequences, but did not confirm that belief. Cordova knew of and acquiesced to this funding recommendation without doing any of her own additional research.
The withdrawal of funds from the indexed annuity were, in fact, taxable events that resulted in negative tax consequences to the trust. These adverse tax consequences could have been avoided if Cordova or the other representative had recommended the new variable annuity be purchased as a tax-free 1035 exchange, but they failed to research that option.
A 1035 exchange is a provision of the tax code that allows tax-free exchanges of certain insurance products, including annuities. By failing to research and recommend a 1035 exchange, the representatives caused the trust to incur unnecessary taxes on the annuity withdrawal, making the overall recommendation unsuitable.
For investors, particularly those with trusts or complex financial situations, this case illustrates the importance of working with representatives who thoroughly research tax implications before making recommendations. Annuity exchanges and transfers can have significant tax consequences, and representatives must understand these consequences and structure transactions to minimize unnecessary taxes. The suspension is in effect from June 6, 2022, through September 5, 2022.