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Sandeep Varma – Encinitas, California

An AWC was issued in which Varma was fined $15,000 and suspended from association with any FINRA member firm in all capacities for 10 business days. Without admitting or denying the findings, Varma consented to the sanctions and to the entry of findings that he used a seminar slide presentation promoting a complex estate planning strategy involving the use of a charitable remainder trust (CRT), which failed to provide a sound basis for evaluating the CRT strategy, failed to provide a balanced discussion of the risks and rewards associated with the strategy, and contained claims that were exaggerated, promissory, and/or misleading. The findings stated that beginning in the early 1990s, Varma started employing a strategy with certain customers designed to avoid paying capital gains taxes on the sale of appreciated assets. Under the strategy, customers would typically sell appreciated real estate through a CRT, without immediately paying capital gains tax on the sale, and the proceeds from the sale could then be invested in various investment instruments held within the CRT. Typically, Varma recommended that the proceeds from the sale be invested in variable annuities held within the CRT.

At the time the CRT was created, Varma’s customers would also typically purchase some form of life insurance policy through an irrevocable children’s trust to replace the value of the appreciated asset for the customers’ heirs. Varma’s customers would then take periodic, required income from the CRT and use the income from the CRT to pay, in whole or in part, premiums associated with the life insurance policy Varma recommended to replace the value of the sold appreciated asset. The findings also stated that Varma conducted seminars promoting a strategy involving the use of CRTs that were attended Disciplinary and Other FINRA Actions 23 March 2018 by approximately 70 prospective customers.

Varma’s presentation repeatedly referenced the elimination of capital gains tax on the sale of appreciated assets by using the CRT strategy. The presentation failed to disclose, however, that the strategy only avoided capital gains tax at the time of the sale of the appreciated asset. Varma’s presentation depicted the purchase of a significant life insurance policy to replace, for the prospective customers’ heirs, the value of the appreciated asset sold to fund the CRT. The presentation, however, failed to disclose that the customers’ ability to pay the life insurance premiums using income from the CRT was dependent on the performance of the investments held by the CRT. The findings also included that the seminar presentation further failed to disclose the potential risk that the life insurance policy could lapse should customers be unable to afford to pay premiums associated with maintaining it, or that the life insurance policy payout was dependent on the claims-paying ability of the insurance provider.

The presentation depicted increased income and improved cash flow from employing the CRT strategy, as well as the increased amounts left to the customers’ heirs due to securing the substantial life insurance policy. In doing so, the presentation projected performance of assets held in the CRT in an exaggerated and promissory manner by projecting only positive performance and not clearly disclosing how negative investment performance could affect the strategy. The suspension was in effect from February 20, 2018, through March 5, 2018. (FINRA Case #2014040164801)

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