FINRA Enforcement Actions: Month in Review
(May 2014)
APRIL 2014 SELECTED FINRA ENFORCEMENT ACTIONS
FIRMS FINED
The Huntington Investment Company (CRD #16986, Columbus, Ohio)
The Huntington Investment Company consented to a $25,000 fine and censure. The firm consented to an entry of "findings that it failed to provide notice to the MSRB via the Electronic Municipal Market Access System (EMMA) that no preliminary official statements or official statements were to be prepared for bond anticipation note offerings in which the firm participated."...
Structured Product Based Variable Annuites are Riskier Than Advertised
(Feb 2014)
My colleagues and I have a paper in the current (Winter 2014) Journal of Retirement about structured product based variable annuities (spVAs), which are variable annuities with index-linked accounts that have a payoff similar to structured products. We have been following the market for spVAs since they were first introduced in 2010, and distributed our first working paper in 2011. Since then, three issuers have sold more than $3 billion worth of spVAs, according to a recent article in...
SLCG's Own Dr. Tim Dulaney to Join the SEC
(Feb 2014)
I am sad to report that one of SLCG Blog's commentators, Dr. Tim Dulaney, will be leaving us for an exciting opportunity at the Division of Investment Management at the Securities and Exchange Commission. While we will greatly miss his skills and camaraderie, we are glad that he will not be going far.
Dr. Dulaney has made enormous contributions to our research and advocacy work over the past two and a half years. He has co-authored eleven working papers and peer-reviewed publications (!),...
SEC Examiniation Priorities 2014
(Jan 2014)
The Securities and Exchange Commission (SEC) senior staff recently announced their 2014 examination priorities . The national examination program will be focusing on fraud detection and prevention, corporate governance, and registrants that serve as both a broker-dealer and investment adviser.
SEC staff also plans to undertake initiatives that examine the rollover of retirement vehicles during employment transitions or near retirement. In particular, the staff is concerned about misleading...
Brokers Steal from Elderly Widow
(Dec 2013)
In our day-to-day work, we often come across brokers willing to ruin the lives of the undereducated or underprepared in order to make a quick buck. We thought we'd highlight a particularly egregious example of this from a recent Financial Industry Regulatory Authority (FINRA) press release.
According to the release, Fernando L. Arevalo and Jimmy E. Caballero encouraged an "elderly widow with diminished mental capacity" to sell two annuities for approximately $300,000 and then moved the funds...
Monte Carlo Simulation, Explained
(Nov 2013)
Valuing products with exotic derivatives can be difficult since these products typically have complex payoff formulas. One of the most flexible methods for valuing such products is called Monte Carlo simulation. At SLCG, we use Monte Carlo simulation in a lot of our work, so we thought it would be helpful to explain a bit about it and show how it can be used to estimate the future returns of an asset.
The basic idea behind Monte Carlo simulation is to determine the statistical properties...
Variable Annuity Fees Linked to the VIX -- Part II
(Nov 2013)
In our last post, we discussed a whitepaper that proposed linking the fees in a variable annuity to the CBOE Volatility Index (VIX). That paper ran a simple backtest of a variable annuity fee tied to the VIX over the period from 1990-2012, assuming certain parameters, and then compared the result to a fixed fee annuity over the same period. We have replicated their approach between January 1990 and January 2013 and found that not only are the fees and ending account values comparable, but so...
Variable Annuity Fees Linked to the VIX -- Part I
(Nov 2013)
We've discussed the CBOE Volatility Index -- known as the VIX-- many times before. Essentially, the VIX is a very complex calculation of the expected future variance of the S&P 500 (see the full calculation methodology), and is popularly known as the 'investor fear gauge'. The VIX is not a tradeable asset, but there are VIX options and futures contracts, and those contracts serve as the basis for several VIX-related exchange-traded products (TVIX, XIV, VXXto name a few). The VIX is very...
Fidelity to Launch Mutual Fund Based on Hedge Fund Strategy
(Oct 2013)
We see it again and again: complex investment strategies packaged into traditionally conservative investments. We have seen corporate debt linked to exotic derivatives positions (structured products), exchange-traded products linked tocomplex futures positions (commodities and volatility ETPs), variable annuities linked to options strategies (structured product based variable annuities), and even certificates of deposit with complex payoff structures (structured CDs). Now, we are seeing more...
SLCG Research: Structured Product Based Variable Annuities
(Sep 2013)
In 2010, AXA Equitable began issuing a new kind of variable annuity that, in addition to traditional mutual fund-like subaccounts, also included an option for a structured product-like crediting formula linked to an underlying index such as the S&P 500. Our firm had done a lot of work on both structured products and variable annuities, so in late 2011 we started analyzing the structured product embedded in AXA's product, eventually writing a short research paper on the subject which we...
