If Only You Believe in 1035 Exchange Miracles

December 5, 2014

As a recent FINRA regulatory settlement shows, the magic of the holiday season is in the air. We have the tale of an intrepid registered rep who tries to obtain approval for a proposed 1035 variable annuity exchange. He asks his firm to believe. They do not. Thereafter, we have the mystical appearance of FINRA in the role of a somewhat forgiving regulatory angel -- some might say in the shape of a Jefferson Starship.

Case In Point

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, Rick Dean Bianchi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Rick Dean Bianchi, Respondent (AWC  #2014040307401, November 20, 2014)

In 1995, Bianchi first became registered and by May 2013 he was registered with FINRA member firm Questar Capital Corporation. The AWC asserts that he had no prior relevant disciplinary history. 

1035 Exchange

The AWC asserts that in furtherance of a proposed variable annuity exchange in purported compliance with  Section 1035 of the Internal Revenue Code for one of his customers, on October 16, 2013, Bianchi submitted an initial application to Questar for the 1035 Exchange. The firm, however, declined to approve the exchange citing the unsuitably high 5.75% surrender charge.

SIDE BAR: For an excellent presentation about variable annuities, read: "SEC Publishes Superb Consumer Guide: Variable Annuities: What You Should Know"

Would You Believe 4%?

For fans of the old "Get Smart" television show, we now enter the realm of "Would you believe?"  The AWC alleges that in response to his firm's denial fo the proposed 1035 Exchange, Bianchi responded that the actual surrender charge would "be closer to 4% due to a miscalculation by the insurance 
company."  Okay . . . but for the fact that on November 18, 2013, when Bianchi resubmitted the application to Questar, lo and behold, the surrender charge was still indicated as coming in at a hefty 5.75%.

Would You Believe A Calculation Error?

About a month after the resubmission and an apparent back-and-forth with Questar, on December 17, 2013, after further inquiry from the Firm, Bianchi submitted what the AWC characterizes as "a falsified letter purportedly from the insurance company addressed to Bianchi's customer." As more fully set forth in the AWC, this letter was prepared on old letterhead that Bianchi had obtained through his previous employment. As asserted in the AWC, that fabricated correspondence apparently falsely asserted that:

(i) the original surrender charge calculated was in error because part of the contract was beyond the surrender period; 
(ii) that a separate fee relating to the exchange should be waived; and, 
(iii) that the fees and surrender charges were being evaluated further.

In accordance with the terms of the AWC, FINRA imposed upon Bianchi a $5,000 fine and a three-month suspension from association with any FINRA registered broker-dealer in any capacity.

Bill Singer's Comment

WTF?  I mean, seriously? All of that subterfuge and falsification and it only amounts to a modest fine and a paltry three-month suspension?  

After reading this case, all that I could think of was that line from the old Jefferson Starship song "Miracles": 

Oh, if only you believe like I believe, baby (If only you believe like I believe)
We'd get by 
If only you believe in miracles, baby (If only you believe in miracles)
So would I 

The allegations and the sanctions simply do not add to my understanding of this case.  Either FINRA over-stated the underlying facts or someone was in an early and charitable holiday mood.  Bianchi should be thankful for the relatively light suspension. He should truly believe in miracles.