FINRA Hits Stockbroker For Mortgage Refinance Proceeds Used To Purchase Variable Universal Life Policy

August 27, 2012


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, Andrew Martin Abern Submitted a Letter Of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In The Matter Of Andrew Martin Abern,Respondent (AWC 2010023535101, August 20, 2012).

Abern has been in the securities industry since 1986, and registered with several FINRA member firms, including from March 2005 to August 2008 with Cambridge Legacy Securities, LLC. The AWC asserts that Abern had no prior relevant disciplinary history.

Around August 2007, Abern recommended that a Cambridge customer purchase a John Hancock Variable Universal Life ("VUL") policy for $332,000. In order to undertake that recommended VUL purchase, the AWC alleges that Abern recommended that the customer refinance his home and use a portion of the proceeds to partially fund the purchase - the ReFi proceeds allocated towards the policy were apparently $100,000. The AWC alleges that the significant potential risks posed by using mortgage proceeds to make securities investments and the high concentration level in the VUL investment, rendered the transaction unsuitable.

Further, the AWC alleges that during the period from May 2008 through July 2008, Abern provided five Cambridge customers with variable annuity expense disclosure forms that contained inaccurate information, in that the forms understated the annual expenses that would be charged.

In accordance with the terms of the AWC, FINRA imposed upon Abern a Censure and a $25,000 fine.

Bill Singers Comment

For a similar case reported previously in "Street Sweeper," READ Former LPL Broker Fined and Suspended For Widow's Variable Annuity and Mortgage Activities.  In the LPL case, I noted that FINRA asserted that the stockbroker was aware that:

[H]is customer "was not financially capable of purchasing the recommended variable annuity without encumbering her primary residence to obtain funds to invest."  Further, Wurz allegedly knew and discussed with his customer that she would need her other investment assets (at the relevant time worth about $260,000) to make the required home mortgage payments.

The Offer of Settlement alleges that Wurz lacked a reasonable basis for recommending the customer's investment in the $300,000 variable annuity (as financed with the mortgage loan proceeds), particularly in light of the facts that the customer had:

  • limited current income,
  • wished to retire within seven years, and
  • would have a limited income in retirement (via her public pension and Social Security benefits).

Accordingly, FINRA alleged that Wurz should have known that should the customer's limited retirement income and liquid assets be insufficient to make her mortgage payments, the customer's home ownership could be at risk. . .