Minnesota-based broker-dealer RiverSource Distributors agreed to pay $5 million as part of a settlement with the Securities and Exchange Commission (SEC) announced Wednesday for improper switching of variable annuities carried out by certain of its employees.
The alleged misconduct occurred between January 2017 and May 2018, when RiverSource’s compliance department put an end to the unlawful practices, according to the SEC. The employees involved in the alleged scheme received letters of reprimand/caution and were subjected to a training program in which RiverSource’s chief compliance officer explained how their actions violated Section 11 of the Investment Company Act of 1940.
The case marks the first enforcement proceeding to be brought by the SEC under Section 11. Without admitting or denying the agency’s findings, RiverSource consented to a cease-and-desist order and a censure.
The details: Section 11 “prohibits any principal underwriter from making or causing to be made an offer to exchange the securities of registered unit investment trusts (including variable annuities) unless the terms of the offer have been approved by the SEC or they fall within certain limited exceptions,” the agency noted. RiverSource offered and sold variable annuities to retail investors through Ameriprise Financial Services (AFS), a division of its parent company Ameriprise Financial.
A cohort of the approximately 40 wholesalers employed by RiverSource “developed and implemented a sales practice that involved the creation of lists of variable annuities that were still in effect and owned by AFS customers, and then color-coding those lists to highlight exchange opportunities, including information about commissions from exchanges that could be earned by AFS registered representatives,” according to the SEC’s order. Through these alleged efforts, the wholesalers caused exchange offers to be made to holders of variable annuities, resulting in increased sales commissions for RiverSource employees and higher variable annuity related revenues for the firm.
“Congress enacted Section 11 to prohibit the improper ‘switching’ of investors from one investment product to another for the purpose of generating additional selling charges—precisely the conduct our order finds RiverSource to have engaged in,” said Sanjay Wadhwa, deputy director of the SEC’s Enforcement Division, in a press release. “Protecting retail investors from abusive sales practices is a mainstay of our enforcement program, and we remain committed to holding accountable those who engage in such conduct.”
RiverSource’s compliance department caught wind of the scheme in or around March 2018 and conducted an investigation before initiating reprimand, the SEC stated. The company’s variable annuity exchanges subsequently decreased from more than $1 billion in 2018 to $838 million in 2019, the agency noted.
“RiverSource Distributors is pleased to resolve this matter,” a spokeswoman for Ameriprise Financial said in an emailed statement. “We identified and promptly addressed it several years ago, including through enhanced training and updated policies and procedures.”