Failure to Supervise Third Parties: AXA Advisors, LLC Sanctioned by FINRA

In early May, the Financial Industry Regulatory Authority (FINRA) announced fines levied against AXA Advisors, LLC (AXA), a company that sells and services group annuity contracts for employer-sponsored 401(k) retirement plans through an affiliated life insurance company.


According to the FINRA allegations, between September 2010 and November 2015, AXA distributed materials created by its affiliated life insurance company to retirement plan sponsors that claimed certain bond funds offered for 401(k) plans were “investment-grade,” but the portfolios instead contained a substantial number of high-yield or junk bonds. In fact, the fund that was owned by the largest number of plans and participants, held approximately 65% of its assets in high yield or junk bonds as of March 31, 2015.

Misleading Marketing Materials

Through its registered representatives, AXA distributed various misleading marketing materials that contained a list of the available investment options and bond funds, inaccurately categorized by the type of underlying investment (as outlined above).

The inaccurate documents included approximately 14,500 enrollment forms and 2,500 investment options attachments that misclassified the credit quality of five bond funds, negatively affecting approximately 800 retirement plans and 6,200 plan participants during that 5-year period.

Click to read the full news release.

Due to its reliance on its third-party affiliated life insurance company to classify the bond funds in the group annuity contracts, AXA failed in its responsibilities to implement supervisory systems or written supervisory procedures reasonably designed to achieve compliance with FINRA rules.

AXA has agreed to pay approximately $172,000 in restitution and was required to send corrective disclosures to all affected plan participants who had invested in any of the five relevant bond funds and may have been negatively affected by the misclassification.

Utilizing Third Parties: The Importance of Due Diligence and Disclosure

The penalties leveled by FINRA make clear the seriousness of failing to accurately disclose to investors the exact nature of investments made on their behalf, whether the failure occurs on the part of the firm or third-party affiliates.

First, it is important for your firm to understand that, if it makes use of third-parties, including advisers or sub-advisers, it is incumbent upon the firm to perform due diligence and oversight, utilizing adequate controls to ensure the information utilized by the firm and distributed to investors is accurate and not misleading.

Second, it is crucial to make sure all disclosures accurately reflect the contents of an investment vehicle, that the contents are in line with investment objectives, and that investors are made fully aware of any potential risks, including if there are high-risk investments that are included.

Failure to meet these obligations could put your firm on the wrong side of an enforcement action.

Meeting Disclosure Requirements: Assistance Available

Navigating the oversight of third parties and constructing disclosure documents that meet regulatory requirements can pose difficulties for many firms. The consultants at Core Compliance & Legal Services, Inc., have extensive experience in the financial services industry and can help you to understand the complexities of disclosure at all levels.

For assistance with any and all of your compliance and legal needs, contact us here.

Leave a Reply

Your email address will not be published. Required fields are marked *