is cracking down on sales practices at providers of variable annuities. In one case announced today, the NASD hit InterSecurities, Inc.
a St. Petersburg, Florida affiliate Western Reserve Life Assurance Co. of Ohio, with a $125,000 fine. It also took separate actions against three individuals for unsuitable sales of deferred variable annuities.
The actions are a part of a step-up in the NASD's oversight of the variable annuity industry. The NASD also today issued an investor alert intended to help potential buyers of variable annuities understand the product.
"There has been a dramatic increase in sales of variable products in the last several years and the marketing efforts used by some variable annuity sellers deserve scrutiny - especially when seniors are the targeted investors," said Mary L. Schapiro
, NASD vice chairman and president of Regulatory Policy and Oversight.
Schapiro added that "sales pitches that confuse or frighten investors" would be the subject of enforcement action.
InterSecurities came to the attention of the NASD through numerous investor complaints, according to the association. An investigation of the complaints showed that Western Reserve Life failed to keep adequate records of complaints brought by annuitants and to report them to the NASD as required by NASD rules.
InterSecurities also did not have procedures in place to ensure the proper registration, training or supervision of individuals that handled customer complaints, adequate guidelines for customer complaint investigations or adequate reviews of its complaint handling process, according to the NASD.
The NASD also found that InterSecurities had inadequate procedures and systems governing the sale of variable products over the past four years.
InterSecurities neither admitted nor denied NASD's findings as a part of the settlement.
Separately, the NASD also charged brokers from Banc of America Investment Services, Raymond James and Edward Jones with violations of rules in selling variable annuities.
Ralph T. Grubb
, at the time employed by Banc of America Investment Services made an unsuitable sale of a deferred variable annuity to an 18-year-old high school senior who was seeking a safe investment for a $30,000 legacy while in college, according to the NASD. The student had to use the funds for a down payment on a house or to buy a car after her college graduation. However, the annuity contract was subject to a ten percent additional tax on distributions prior to age 59 ½ and carried surrender charges that would have still been in effect when she intended to liquidate her investment.
The complaint also alleges that Grubb's recommended allocation of 100 percent of the customer's premium to one equity sub-account within the annuity was unsuitable in relation to the customer's risk tolerance, and that the customer had no need for the death benefit feature of the annuity because she was unmarried and had no dependents.
Finally, the complaint says she had no need for tax deferral since she was in the lowest possible tax bracket.
The second complaint was made against Kevin S. Jones
, then an employee of Raymond James & Associates, for making an unsuitable switch of variable annuities. The customer, a self-employed rancher, needed access to her funds and had an investment time horizon of two to seven years. During the sixth year of her ownership of a $300,000 variable annuity, Jones recommended that she switch to another variable annuity in the amount of $315,000, for which Jones received a commission of $8,500.
The original variable annuity would have allowed the customer penalty-free access to her money in eight months, but the switch resulted in limited access to her investment for the next nine years. The switch also caused the customer to pay a $1,600 surrender fee.
The complaint further alleges that the switch resulted in no significant improvement in the death benefit for the customer and caused the customer to pay substantial increased annual costs. Over a six-year period, these increased costs depleted the $15,000 bonus offered by the second variable annuity.
In the final case, the NASD named Gregory Hunter of Edward Jones as making an unsuitable sales transaction for a customer with a portfolio worth approximately $250,000. The portfolio had generated monthly income averaging approximately $1,500. Hunter sold this customer a $60,000 deferred variable annuity by liquidating a portion of her portfolio. The sale cut the monthly income generated by the portfolio to the point that the client needed to make regular monthly withdrawals of $360 from the annuity for living expenses.
Given the customer's need for current income and the fact that she did not need benefits offered by a variable annuity such as tax deferral or a death benefit, the transaction was unsuitable, according to the NASD.
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