Chapin and Birli
In May 1991, Patrick W. Chapin (CRD No. 2149171) entered the securities industry. In January 2001, he became associated with MetLife Securities, Inc. (CRD No. 14251) in Williamsville, New York. In April 2012, MetLife terminated him for "not fully disclos[ing] material information on new business applications." In October 2012, MetLife disclosed to FINRA a customer complaint that Chapin had "provided misleading directions regarding the transfer of retirement savings into variable annuities."
In March 2001, Christopher B. Birli (CRD No. 4366441) entered the securities industry and became associated with MetLife in Williamsville, New York. In April 2012, MetLife terminated him for "not fully disclos[ing] material information on new business applications." Later that month, MetLife disclosed to FINRA that Birli had made an inappropriate "recommendation to transfer funds from an existing variable annuity into a new variable annuity."
From July 2004 to December 2011, Chapin and Birli recommended that 45 employees of the State University of New York (SUNY) replace existing MetLife "Financial Freedom Account" (FFA) variable annuities inside the SUNY retirement plan with new MetLife "Preference Plus Select/MetLife Preference Premier" (PPS/MPP) variable annuities in MetLife individual retirement accounts (IRAs) held outside the SUNY retirement plan. MetLife generally did not allow the direct exchange of the FFA for the PPS/MPP, but Chapin and Birli devised a scheme to circumvent MetLife's rules.
The SUNY plan offered not only MetLife's FFAs but also products offered by Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF). Chapin and Birli recommended that customers replace their FFAs with a product offered by TIAA-CREF, then wait at least 90 days, and then replace the TIAA-CREF product with the PPS/MPP in a MetLife IRA. Chapin and Birli moved about $21 million of funds from FFAs through TIAA-CREF products and into PPS/MPPs.
Chapin and Birli concealed the scheme from MetLife by submitting false and misleading paperwork. The scheme was not only unsuitable for the participants but also harmful to them in several ways. For example, the replacements often caused forfeiture of certain death benefits, forfeiture of certain income benefits, and forfeiture of certain investment options. By understating the value of the existing annuities and overstating the value of the replacement annuities, Chapin and Birli persuaded the participants to make the replacements. The scheme generated substantially increased commissions for Chapin and Birli.
The FINRA Complaint
On March 27, 2014, FINRA's Department of Enforcement filed a complaint against Chapin and Birli. FINRA had received complaints from participants in the SUNY retirement plan. The FINRA complaint included three causes of action: (1) unethical conduct, material misrepresentations, and material omissions; (2) lack of suitability; and (3) failure to cooperate with the FINRA investigation.
On March 27, 2014, FINRA's Department of Enforcement filed a complaint against Chapin and Birli. FINRA had received complaints from participants in the SUNY retirement plan. The FINRA complaint included three causes of action: (1) unethical conduct, material misrepresentations, and material omissions; (2) lack of suitability; and (3) failure to cooperate with the FINRA investigation.
The FINRA Order
On July 1, 2014, FINRA's Department of Enforcement issued an order accepting an offer of settlement that Chapin and Birli had submitted. The order said they were "barred from associating with any member firm in any capacity." They consented to the order without admitting or denying the allegations in the complaint.
On July 1, 2014, FINRA's Department of Enforcement issued an order accepting an offer of settlement that Chapin and Birli had submitted. The order said they were "barred from associating with any member firm in any capacity." They consented to the order without admitting or denying the allegations in the complaint.
The FINRA/MetLife AWC
On April 27, 2016, a MetLife official signed a 13-page Letter of Acceptance, Waiver and Consent (AWC). On May 3, 2016, a FINRA official signed the AWC. MetLife accepted and consented without admitting or denying the findings. MetLife consented to the imposition of censure, a $20 million fine, payments to customers totaling up to $5 million in the aggregate, and a certification concerning the review of supervision procedures and their revision as necessary.
On April 27, 2016, a MetLife official signed a 13-page Letter of Acceptance, Waiver and Consent (AWC). On May 3, 2016, a FINRA official signed the AWC. MetLife accepted and consented without admitting or denying the findings. MetLife consented to the imposition of censure, a $20 million fine, payments to customers totaling up to $5 million in the aggregate, and a certification concerning the review of supervision procedures and their revision as necessary.
The AWC says that, during the relevant period, MetLife sold at least $3 billion in variable annuities through 35,500 variable annuity replacements generating $152 million in gross dealer commissions. MetLife principals approved 99.79 percent of the replacements even though nearly three-fourths of the replacement applications contained at least one misrepresentation or omission of material fact. There were also compliance problems related to the disclosures required in Regulation 60 promulgated by the New York Department of Financial Services.
General Observations
Replacement activities have been a thorny problem ever since the beginning of the life insurance business in the U.S. during the first half of the 19th century. The underlying cause of the replacement problem is the commission-driven nature of life insurance and annuity sales activities. State insurance regulators have tried, with little success, to control the problem by imposing disclosure requirements such as those in New York's Regulation 60. I think investigations of variable annuity sales activities at other major insurance companies would reveal similar problems, although it is difficult to believe that the findings would be more serious than those revealed by the FINRA investigation of MetLife.
Available Material
I am making available a complimentary 15-page PDF containing the press release issued by FINRA about its investigation of MetLife, and the AWC entered into by MetLife and FINRA. Email jmbelth@gmail.com and ask for the May 2016 package on the FINRA investigation of variable annuity replacements at MetLife. I am not including the complaint and order relating to Chapin and Birli, but those documents are available through BrokerCheck on the FINRA website (www.finra.org).