NASD Regulation Files Six
Enforcement Actions Involving Marketing and Sales
of Variable Annuities
APRIL 2001
NASD Regulation announced the filing of six separate
enforcement actions
against firms for the improper marketing and sale of variable
annuities. One
individual was also named. These disciplinary actions represent the
first cases
resulting from a series of special examinations focusing on the sale
of variable
contracts conducted by NASD Regulation during 1999 and 2000.
Monetary
sanctions, including restitution, in the five settled actions total
more than
$112,000.
The six cases include allegations and findings of
violations in the following areas:
* Misleading and unbalanced advertising and sales
literature that failed to
adequately disclose that variable contracts purchased in
tax-deferred plans provide
no additional benefit to the customer;
* Use of a Web site that implied that tax benefits
in tax-deferred plans are only
available if they are funded with an annuity contract;
* Unsuitable sales of variable annuities;
* Failure to collect customer financial and other
information for use in making
suitability determinations;
and
* Deficient supervisory procedures with respect to
suitability reviews.
The sanctions in this group of settled cases include
censures and fines ranging
from $10,000 to $32,500 and restitution to an affected public
customer. These
actions were investigated and filed by NASD Regulation offices in
New Orleans
and Dallas, and represent the continuing effort of NASD Regulation
to address
problem areas in the sale, distribution and marketing of variable
products.
Sales of variable products have grown enormously
over the past several years, and
with the rise in new annuity products, investors may be inclined to
replace their
current annuity with a new one in a tax-free exchange. To help
investors consider
a replacement, NASD Regulation today issued an Investor Alert,
offering
investors key points to review before replacing a variable product.
Over the past
few years, NASD Regulation has also offered guidance to its members
on the
proper sale of variable products through the issuance of Notices to
Members 99-
35 and 00-44 and an article in the Summer 2000 issue of the
Regulatory and
Compliance Alert. These information pieces have given firms and
their brokers
sound guidance on how to sell variable annuity and life contracts,
and also offer
key points to consider when evaluating the suitability of these
products for
investors.
Mary L. Schapiro, President of NASD Regulation,
said, "These enforcement
actions demonstrate that variable annuities, like other securities
products, must be
properly sold and must be suitable investments for those who
purchase them.
Because these are complex products both for the broker who sells
them, as well as
the investor who buys them, it is extremely important that firms
selling variable
annuities have supervisory systems in place that will be able to
detect if unsuitable
sales are taking place."
The issuance of a disciplinary complaint represents
the initiation of a formal
proceeding by NASD Regulation in which findings as to the
allegations in the
complaint have not been made and does not represent a decision as to
any of the
allegations contained in the complaint. Because the complaints are
unadjudicated,
the respondents should be contacted before drawing any conclusion
regarding the
allegations in the complaints.
Under NASD rules, individuals and firms named in
complaints can file a response
and request a hearing before an NASD Regulation disciplinary panel.
Possible
sanctions include a fine, suspension, bar, or expulsion from the
NASD.
VARIABLE ANNUITY ENFORCEMENT ACTIONS INCLUDE:
1. American United Life Insurance Company - Case No.
C05010011
American United Life Insurance Company is named in
this complaint, which
alleges:
a) Misleading and unbalanced advertising and sales
literature that failed to
adequately disclose that variable contracts purchased in
tax-deferred plans provide
no additional benefit to the customer;
b) Use of a Web site that implied that tax benefits
in tax-deferred plans are only
available if they are funded with annuity contracts;
c) Failure to adequately disclose that the
investment vehicles funding the plans are
variable contract sub-accounts, as opposed to mutual funds; and
d) Inadequate written supervisory procedures.
Under the NASD rules, the individuals and the firms
named in the complaints can
file a response and request a hearing before an NASD Regulation
disciplinary
panel. Possible sanctions include a fine, suspension, bar, or
expulsion from the
NASD.
2.
Prudential Securities, Inc. - Case No. C06010005
Prudential
Securities, Inc. settled the following charges without admitting or
denying NASD Regulation allegations. The findings include:
Failure to
enforce the firm's written procedures relating to the sale of
annuities--
certain documentation (e.g., order tickets and other documents
required under the
firm's own procedures) was missing in 201 transactions reviewed.
The firm was
censured and fined of $10,000.
3. First Union Brokerage Services, Inc. - Case No.
C05010010
First Union Brokerage Services, Inc. settled the
following charges without
admitting or denying NASD Regulation allegations. The findings
include:
a) The firm failed to establish and maintain
adequate written procedures to
supervise the sale of variable annuity contracts in terms of how
reviews were to be
done, how to evidence the review, how to supervise the suitability
of the
allocation of premium payments to sub-accounts, and how certain of
the review
responsibilities could be delegated.
b)The firm failed to obtain customer information
required pursuant to its written
procedures.
The firm was censured and fined $32,500, which
includes $5,000 of
disgorgement.
4. Allmerica Investments, Inc.- Case No. C06010004
Allmerica Investments, Inc. settled the following
charges without admitting or
denying NASD Regulation allegations. The findings include:
Deficient written supervisory procedures relating to
annuity sales routine
procedure not in place to ensure adequate principal review of
customers'
investment objectives.
The firm was censured and fined $15,000.00.
5. Ralph C. Evans - Case No. C05010009
Ralph C. Evans settled the following charges without
admitting or denying NASD
Regulation allegations. The findings include:
Evans sold a $325,000 annuity contract into a
revocable trust for the benefit of a
76-year-old widow. Funds for the purchase were derived from the sale
of Class B
mutual funds, for which the account incurred contingent deferred
sales charges,
and from a margin loan. The transaction was unsuitable because Evans
had not
made any determination about whether the anticipated holding period
was long
enough such that the tax-deferred benefits would be likely to
outweigh the fees
imposed on the annuity relative to other investments. These included
the
contingent deferred sales charges paid in connection with the sale
of the mutual
fund shares and the margin interest.
Evans was censured, fined $10,000, and ordered to
pay restitution to the affected
customer in the amount of $20,130.61.
6. Lutheran Brotherhood Securities Corp. - Case No.
C06010003
Lutheran Brotherhood Securities Corporation settled
the following charges
without admitting or denying NASD Regulation allegations. The
findings include:
a) Failure to collect investment objective
information in connection with 12 of 99
annuity transactions reviewed; and
b) Deficient written supervisory procedures
concerning annuity sales with respect
to (i) collection of investment objective information, (ii)
supervisory review of
financial status information, and (iii) supervisory review of
allocation of premium
payments to sub-accounts in relation to investment objectives.
The firm was censured and fined $25,000. |
