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FINRA Investigates Broker-Dealers for Selling Variable Annuities Invested in Hedge Funds

The Financial Industry Regulatory Authority (FINRA) is investigating six independent broker-dealers for selling variable annuities with subaccounts invested in hedge funds, which resulted in $18 million in client losses during the credit crisis. The variable annuity product at the heart of the investigation was issued by Sun Life Financial, and the two hedge funds were Foresee Strategies Insurance Fund and the Foresee Strategies 3(c)(1) Insurance Fund LP, which were related to a group called the SALI Multi-Series Fund LP. The broker-dealers that have already faced FINRA arbitration complaints from investors include: Geneos Wealth Management Inc., Lincoln Financial Network, National Planning Corp., SagePoint Financial Inc., and FSC Securities Corp. Lincoln Financial had the most clients in the Sun Life annuity, and the average investment was about $500,000.00. One broker-dealer that sold the product has completely shut down, and Sun Life has dropped out of the variable annuity business altogether.

An annuity is a form of insurance that offers a series of payments for a period of time. Variable annuities are typically higher in risk when compared with other types of annuities and depend on how the stock market is performing. Buyers have the option to allocate the cash invested into different types of assets such as mutual funds, indices, fixed income investments or bonds, and cash. Variable annuities do not guarantee principal protection, so investors can lose money if markets deteriorate.

Hedge funds are similar to mutual funds in structure. Investor money is pooled together and invested in an effort to make a positive return. However, hedge funds have more flexible investment strategies than mutual funds. Hedge funds seek to profit in all kinds of markets by utilizing strategies involving leverage, short-selling, and other speculative investment practices that are not typically used by mutual funds. Another factor that distinguishes hedge funds from mutual funds is that hedge funds are not subject to the same regulations designed to protect investors. Depending on the amount of assets in the hedge funds advised by a manager, some hedge funds may not be required to file reports with the SEC. Fortunately, hedge funds are subject to the same prohibitions against fraud as are other market participants. In addition, managers owe a fiduciary duty to the funds under management.

The funds' strategy was put together between 2004 and 2007, which was considered a period of low volatility - the strategy was to invest in options in the Standard and Poor's 500 Stock Index, and to use both put and call options, known as a strangle. The strategy collapsed when the market crash began in September 2008, which caused one fund to lose 90 percent of its value, and the other to lose 75 percent. A FINRA arbitration panel has recently issued a $284,000.00 award to a SagePoint client, who alleged unsuitability, common law fraud, breach of fiduciary duty, and negligence. Three of the other broker-dealers have already resolved litigation.

Have you suffered losses in your variable annuity due to investments in hedge funds? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

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