Changing the Game: SEC Brings Enforcement Action for Exchanging Annuities

On Monday, Could 25, 2022, the U.S. Securities and Change Fee issued an Order Instituting Administrative and Stop-And-Desist Proceedings (“Order”) towards RiverSource Distributors, Inc. (“RDI”) with respect to exchanges it made with current prospects between January 2017 and Could 2018 of variable annuities. The exchanges have been marketed and offered by means of RDI’s affiliate, Ameriprise Monetary Companies, LLC (“Ameriprise”), and the annuities concerned have been issued by RiverSource Life Insurance coverage Firm, a wholly-owned subsidiary of Ameriprise. As the SEC asserts in the Order: Variable annuities are advanced securities pursuant to which prospects enter into long-term contracts with an issuing firm like RiverSource Life. Variable annuities entitle prospects to sure funds relying on the phrases of the contract and efficiency of an underlying portfolio of securities. Variable annuities typically have give up intervals, earlier than the finish of which prospects should pay a price for promoting or exchanging their annuity contract.

As a result of the complexity of variable annuities and the potential for fee-generation by gross sales representatives, Part 11 of the Funding Firm Act of 1940 (the “1940 ACT”) prohibits any principal underwriter of a registered funding belief, together with variable annuities, from exchanging any of these securities except the phrases of the change supply have been permitted by the Fee (there are restricted exceptions, none of which utilized right here). Evidently, neither RDI nor Ameriprise sought SEC blessing for the exchanges that have been the topic of the Order. The violations have been initially recognized by RDI’s Compliance Division in Spring 2018, maybe attributable to charges generated by the change program exceeding $1 billion in every of 2017 and 2018. Sooner or later thereafter, RDI approached the Fee and supplied a settlement. The SEC accepted the supply, and in the ensuing Order censured RDI and imposed a civil penalty of $5 million. As well as, as is common in such settlements, RDI agreed to not argue, in any buyer civil motion towards RDI, that the civil penalty must be taken under consideration to cut back its internet legal responsibility to a buyer.

This motion is exclusive in that by no means earlier than has the SEC sought enforcement for violations of Part 11 of the 1940 Act, even after 82 years on the books.  That is uncommon, as there have been different regulatory and civil lawsuits involving variable annuities over the years, significantly since 1959, and the U.S. Supreme Court docket held in SEC v. Variable Annuity Life Ins. Co. that variable annuities ARE securities and have to be registered with the Fee. Additionally, there have been prior events when insurance coverage corporations  sought to boost earnings by convincing policyholders to change current insurance coverage insurance policies for dearer ones. See, for instance, the litigation introduced on behalf of eight million coverage holders of Prudential Life Insurance coverage Co. in 1997 (U.S. District Court docket victory affirmed in 1998 in the 3rd Circuit Court docket of Appeals), leading to a settlement of about $2 billion; and comparable litigation introduced by three million coverage holders of Metropolitan Life Insurance coverage Firm in the Federal Court docket for the Western District of Pennsylvania in 1999.  Therefore, it’s unusual that this motion towards RDI must be the first ever introduced underneath Part 11 of the 1940 Act.

One other matter of notice is the place the identify “Ameriprise” originates. An funding and monetary providers advanced started in Minneapolis in the latter half of the 19th century, after the Civil Struggle and the financial development of agriculture in the higher Midwest. That advanced finally advanced into Investor Diversified Companies (“IDS”) and included a big household of mutual funds. Minneapolis grew to become an necessary cease on so-called “Road Shows” for public choices (as your creator was conscious from his work as a securities lawyer on Wall Avenue in the late ‘60’s and early ‘70’s).  By the 1980’s, the notion of economic conglomerates grew to become modern. For instance, in 1981 Sears, Roebuck and Firm (itself originating in Minneapolis, however by then headquartered in Chicago) purchased the funding financial institution and dealer/supplier Dean Witter and Firm and the actual property dealer Coldwell Banker, resulting in the famed sobriquet for Sears of “Socks and Stocks.”  To not be outdone, in 1984 American Specific, Inc. (“AmEx”) purchased IDS.  AmEx modified the identify of the funding advanced to Ameriprise Monetary, and after recurring administration and profitability points, spun it off as a separate publicly owned firm in September 2005.  Over the years Ameriprise has had its personal recurring sequence of lawsuits and regulatory sanctions, significantly associated to pension funding administration. And one might safely say that monetary conglomerates have usually light from the market. However one thing involving “Ameriprise” does deliver one again.

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