All Voya FINRA AWCs are Not Relevant Except When They Are

April 24, 2019

As best I remember, a "syllogism" consists of a major premise and a minor premise. Somehow you apply deductive reasoning to the premises and it leads you to a conclusion. All these years later, I still remember the example of All men are mortal. Socrates is a man. Socrates is mortal. I also remember the line about Socrates was a guy who went around giving everyone free advice, so the killed him. Not sure that the latter is an example of a syllogism but I may have cut that class. In today's blog, we have a Wall Street regulatory syllogism in search of a premise. We know that a 2015 FINRA AWC involving Voya Financial was deemed a "relevant disciplinary history" in a 2016 FINRA AWC involving Voya. We know that the same 2015 FINRA AWC was deemed a "relevant disciplinary history" in a 2019 FINRA AWC involving Voya. What we struggle with via deduction is why the 2016 FINRA AWC wasn't disclosed as a "relevant disciplinary history" in the 2019 FINRA AWC involving Voya. 

2015 FINRA AWC

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Voya Financial Advisors, lnc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Voya Financial Advisors, lnc., Respondent (FINRA AWC 2014042939401, July 20, 2015) (the "2015 Voya AWC") 
http://www.finra.org/sites/default/files/fda_documents/2016050231901
%20Voya%20Financial%20Advisors%2C%20Inc.%20CRD%202882%20AWC%20va.pdf 

The 2015 Voya AWC asserts that Voya Financial Advisors, lnc. is an introducing broker and with 1,516 branches and 2,836 registered representative. As to "Relevant Disciplinary History," the 2015 Voya AWC asserts that the "firm has no relevant disciplinary history."

Volume and Sales Charge Discounts

As set forth in part in the "Overview" section of the 2015 Voya AWC:

From April 1, 2009 to April 30, 2014, VFA failed to apply volume discounts to certain customers' eligible purchases of non-traded real estate investment trusts (REITs) and business development companies (BDCs) in violation of FINRA Rule 2010. In addition, VFA failed to have in place an effective supervisory system and written supervisory procedures reasonably designed to ensure that its customers received appropriate volume discounts on eligible purchases of non-traded REITs and BDCs in violation of NASD Rule 3010(a) and (b) and FINRA Rule 2010.

From May 1, 2009 to April 30, 2014, VFA failed to apply sales charge discounts to certain customers' eligible purchases of unit investment trusts ("UITs") in violation of FINRA Rule 2010. in addition, VFA failed to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that customers received sales charge discounts on all eligible UIT purchases in violation of NASD Rule 3010(a) and (b) and FINRA Rule 2010. 

Censure and Restitution

FINRA found that Voya Financial Advisors, Inc. violated  NASD Rule 3010(a) and (b) and FINRA Rule 2010; and, accordingly, FINRA imposed on Voya Financial Advisors, lnc. a Censure, $325,000 fine, and required the firm to pay $41,853.20 in restitution plus interest. 

Now, let's get into our Wall Street regulatory time machine and jump about four years into the future -- where we come upon April 23, 2019.

2019 FINRA AWC

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Voya Financial Advisors, lnc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Voya Financial Advisors, lnc., Respondent (FINRA AWC 2016050231901, April 23, 2019) (the "2019 Voya AWC")
http://www.finra.org/sites/default/files/fda_documents/2016050231901
%20Voya%20Financial%20Advisors%2C%20Inc.%20CRD%202882%20AWC%20va.pdf 

The 2019 Voya AWC asserts that Voya Financial Advisors, lnc. has been a FINRA member firm since 1968 and has about 1,210 branch offices with 2,312 registered representatives. As to "Relevant Disciplinary History," the 2019 Voya AWC sets forth the following about the previously referenced 2015 Voya AWC:

In 2015, Voya executed an AWC (No. 2014042939401), in which FINRA imposed a censure, fine of $325,000, and restitution of $41,853.20. In that matter, Voya failed to apply available sales-charge discounts to transactions in non-traded REITs, business-development companies, and UlTs, and failed to establish and maintain adequate supervisory systems and procedures regarding the same. 

Mutual Fund Sales Charges

As set forth in part in the "Overview" section of the 2019 Voya AWC:

Between January 1, 2009, and May 26, 2016 (the "Relevant Period"), Voya disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge ("Eligible Customers"). These Eligible Customers were instead sold Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. During this period, Voya failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that Eligible Customers who purchased mutual fund shares received the benefit of applicable sales charge waivers . . .

Censure and Remediation

FINRA found that Voya Financial Advisors, Inc. violated  NASD Conduct Rule 3010 (for misconduct before December 1, 2014), FINRA Rule 3110 (for misconduct on or after December 1, 2014), and FINRA Rule 2010; and, accordingly, FINRA imposed on Voya Financial Advisors, lnc. a Censure. Further, the firm will provide remediation to eligible customers who had qualified for but did not receive applicable mutual fund sales charge waivers. 

Under the 2019 Voya AWC heading "Other Factors" we are informed that:

In resolving this matter, FINRA has recognized the extraordinary cooperation of Voya for having: (1) initiated, prior to detection or intervention by a regulator, an investigation to identify whether Eligible Customers received sales charge waivers during the relevant period; (2) voluntarily expanded the look back period requested by FINRA to January 1, 2009, or an additional two years, resulting in additional restitution to customers of approximately $125,982; (3) promptly established a plan of remediation for Eligible Customers who did not receive appropriate sales charge waivers; (4) promptly self-reported to FINRA; (5) promptly taken action and remedial steps to correct the violative conduct; and (6) employed subsequent corrective measures, prior to detection or intervention by a regulator, to revise its procedures to avoid recurrence of the misconduct.

Yeah, wonderful -- absolutely wonderful. Wall Street's self-regulatory-organization has "recognized the extraordinary cooperation of Voya." And, that recognition from FINRA comes despite of -- nay, I say -- it comes with the full knowledge of Voya's prior, relevant disciplinary history pertaining to the 2015 Voya AWC involving failures to pay sales-charge discounts and resulting in a Censure, $325,000 fine, and an obligation to pay $41,853.20 in restitution arising from the member firm's failure to pay sales-charge discounts and for failure to establish and maintain adequate supervision. We know that FINRA was aware of its 2015 Voya AWC because it's set forth as a "Relevant Disciplinary History" in the 2019 Voya AWC

The Vacuum of 2015 to 2019

What exactly transpired since the 2015 Voya AWC and the 2019 Voya AWC that would remotely offer a compelling explanation as to just what the hell Voya and FINRA were doing during the ensuing four years? If you look at the heading "Voya's Investigation and Self-Reporting to FINRA" heading in the 2019 Voya AWC, we learn in part that:

In November 2015, Voya began a review to determine whether the Firm provided available sales charge waivers to Eligible Customers. Based on this review, on May 26, 2016, Voya self-reported to FINRA that Eligible Customers had not received available sales charge waivers. FINRA staff requested Voya review the applicable sales in a five-year look back to January 1, 2011. Voya voluntarily expanded the five-year look back an additional two years and reviewed all applicable transactions since January 1, 2009. Voya estimates that, since January 1, 2009, approximately 143 customer accounts purchased mutual fund shares for which an available sales charge waiver was not applied . . .

That all sounds impressive until you begin to think it through. The relevant period for the 2015 Voya AWC was from "May 1, 2009 to April 30, 2014, VFA failed to apply sales charge discounts. . ." The 2015 Voya AWC was accepted on July 20, 2015. So . . . four months after Voya enters into the 2015 Voya AWC, the member firm only first "began a review to determine whether the Firm provided available sales charges. . . " ? And then it took until May 26, 2016, for Voya to self report its issues to FINRA? You notice that the relevant period for the 2019 Voya AWC was between January 1, 2009, and May 26, 2016? That means there was about a five-year overlap from January 2009 to April 2014 for the violations involving charges in the two AWCs. Notwithstanding that overlap, it only first dawns on Voya in November 2015 that, gee, maybe we should see if we have other sales charge issues and other sales-charge supervisory issues.

How the hell does Voya's belated review rise to the level of extraordinary cooperation? How does FINRA have the audacity to bless this conduct by characterizing Voya has having 

(1) initiated, prior to detection or intervention by a regulator, an investigation to identify whether Eligible Customers received sales charge waivers during the relevant period; (2) voluntarily expanded the look back period requested by FINRA to January I, 2009, or an additional two years. . .

Frankly, and excuse my bluntness here, but that's bull-shit and FINRA should know better -- and, worse, I'm wondering whether FINRA actually does know better. 

Now, let's get into our Wall Street regulatory time machine and jump back about two and a half years into the past -- where we come upon November 2, 2016.

2016 FINRA AWC

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Voya Financial Advisors, lnc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Voya Financial Advisors, lnc., Respondent (FINRA AWC 2014039172901, November 2, 2016) (the "2016 Voya AWC") 
http://www.finra.org/sites/default/files/fda_documents/
2014039172901_FDA_DM932525.pdf

The 2016 Voya AWC asserts that Voya Financial Advisors, lnc. has been a FINRA member firm since 1968 and has about 1,485 branch offices with 2,779 registered representatives. As to "Relevant Disciplinary History," the 2016 Voya AWC sets forth the following about the previously referenced 2015 Voya AWC:

ln 2015, VOYA executed an AWC (No. 2014042939401), in which FINRA imposed a censure, fine of $325,000, and restitution of$41,853.20. FINRA found that the VFA failed to apply volume and sales-charge discounts 10 transactions in nontraded REITs, business-development companies, and UITs, and failed to establish and maintain adequate supervisory systems and procedures regarding the same

VA Supervisory Failures

As set forth in part in the "Overview" section of the 2016 Voya AWC [Ed: footnotes omitted]:

This case concerns VFA's failure to establish, maintain, and enforce a supervisory
system reasonably designed to identify red flags in the sale of multi-share class
variable annuities ("VAs"). Between July 2012 and August 2014 (the "Relevant
Period"), VFA earned over $198 million, or approximately 25%, of its revenue
from the sale of VAs. Approximately $72 million, or 36%, of VFA's VA revenue
was earned from the sale of L-share VAs ("L-share contracts"). L-share contracts
typically provide a shorter surrender period, of three to four years, than B-share
contracts, which typically have a surrender period of 7 years. Insurance
companies design L-share contracts so that customers pay a higher fee for the
benefit of a shorter surrender period. L-share contracts are designed for investors
with short-term time horizons or who want the optionality of being able to
surrender the L-share contract sooner than a B-share contract. Pursuant to the
terms established by the insurance company manufacturers, if a purchaser chooses
not to surrender an L-share contract during the surrender period, the purchaser
continues to pay a higher annual fee for the life of the contract, unless the contract
provides for a "persistency credit."

During the Relevant Period, current VFA customers purchased 1,315 L-share
contracts together with one of two Long-Term Income Riders. The first of these riders. frequently known as the Guaranteed Minimum Income Benefit Rider
(GMIB), provides for the added benefit of guaranteed income for life. The
second, frequently known as the Guaranteed Minimum Withdrawal Benefit Rider
(GMWB), provides for the added benefit of guaranteeing a minimum amount the
customer will be able to withdraw from the contract over time (the riders are
collectively referred to as the "Long-Term Income Riders"). Long-term income
riders are designed for investors with long-term time horizons and cost purchasers
additional annual fees in exchange fur the added benefits. Moreover, because of
the potentially incompatible time horizons, L-shares with Long-Term Income
Riders may present a red flag that the purchase may not be suitable for a
customer's investment objectives and time horizon.

Of the 1,315 L-share contracts with Long-Term Riders VFA sold during the
Relevant Period to current customers, approximately 70% of the customers had a
long-term investment horizon, which should have been a red flag given the short-term nature of L-shares. VFA, however, had no system to review for VA share
classes and no system for identifying potential patterns of unsuitable sales. VFA
also failed to provide its registered representatives and principals with adequate
training and guidance on suitability considerations for multi-share class VAs.
Even though VAs accounted for more than a quarter of the Firm's revenue during
the Relevant Period, the Firm failed to establish and maintain an adequate
supervisory system and procedures to ensure suitability of its VA sales and VA
share class recommendations.

In addition, during the Relevant Period, VFA failed to reasonably supervise VA
exchanges. VFA generated a monthly surveillance report, the "2330 Surveillance
Report," that was intended to monitor for inappropriate rates ofVA exchanges by
its registered representatives. VFA, however, failed to establish reasonable
parameters for the generation of these reports. As a result, the 2330 Surveillance
Report failed to capture the activity of over 90% ofthe Firm's registered
representatives who recommended multiple exchanges per year. Moreover,
during 21 months out of the 22 months ofthe Relevant Period, VFA's principals
failed to review the 2330 Surveillance Report. . . .

Censure and Remediation

FINRA found that Voya Financial Advisors, Inc. violated  NASD Rule 3010, FINRA Rules 2330(c), (d) and (e), and FINRA Rule 2010; and, accordingly, FINRA imposed on Voya Financial Advisors, lnc. a Censure, $2,750,000 fine, and required the firm to pay no less than $1.8 million restitution.

Missing Link

Try as I might, I can't find any reference whatsoever in the 2019 Voya AWC to the 2016 Voya AWC. The odd thing is that both the 2016 Voya AWC and the 2019 Voya AWC reference the prior, relevant disciplinary history of the 2015 Voya AWC -- which would sort of imply that if the 2015 matter was "relevant" to both the 2016 and the 2019 matters, that the 2016 Voya AWC should have been deemed a prior, relevant disciplinary matter in the 2019 Voya AWC. There's plenty of self-regulatory gushing in the 2019 Voya AWC about  how "FINRA has recognized the extraordinary cooperation of Voya" and the firm's self reporting but, hmmmm, how come FINRA didn't think the 2016 Voya AWC was a prior, relevant disciplinary matter that should have been disclosed with the prior, relevant 2015 Voya AWC?  Maybe, just maybe, FINRA had forgotten all about the 2016 Voya AWC? Yeah, that's it, an oversight! Except, how would I explain "FINRA Fines Eight Firms a Total of $6.2 Million for Supervisory Failures Related to Variable Annuity L-Shares/ Five Firms Ordered to Pay More than $6 Million to Customers" (FINRA Press Release / November 2, 2016)
http://www.finra.org/newsroom/2016/finra-fines-eight-firms-total-62-million-supervisory-failures-related-variable-annuity As set forth in part in this 2016 FINRA Press Release

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined eight firms, including VOYA Financial Advisors, five broker-dealer subsidiaries of Cetera Financial Group, Kestra Investment Services, LLC, and FTB Advisors, Inc., a total of $6.2 million for failing to supervise sales of variable annuities (VAs). FINRA also ordered five of the firms to pay more than $6 million to customers who purchased L-share variable annuities with potentially incompatible, complex and expensive long-term minimum-income and withdrawal riders. 

FINRA imposed sanctions against the following firms.

VOYA Financial Advisors Inc., of Des Moines, IA, was fined $2.75 million. . . .

. . .

FINRA ordered the firms to pay the following to investors.

Voya was ordered to pay at least $1.8 million to customers in this category. . . .

. . .

FINRA found that VOYA and four of the Cetera Group firms failed to identify "red flags" of broad patterns of potentially unsuitable sales of this product combination.  . . .

Maybe the good folks at FINRA and Voya need a better understanding of the continuum of time. Maybe they don't quite grasp the difference between "then" and "now," and how the past influences the present and the future. Maybe the regulator and the regulated could have a kumbaya moment and sit down and watch this commercial: