Citing investor complaints and increased regulatory actions, the SEC
and the NASD
issued a report
reviewing sales practices in the variable products industry on Wednesday. Disclosure, supervision, training and records maintenance are areas examined in the report.
The report cited higher fees and surrender charges as driving inappropriate sales of variable annuities and insurance products, with variable annuities charging an average of 2.3 percent of assets, compared to 1.44 percent for the average mutual fund.
The agencies said that many individual investors had complained that they were sold products they didn't understand or didn't think were appropriate.
Specifically, the agencies identified "weak" practices that registered representatives engaged in, including: failing to take client-specific information into account, such as age, investment objectives, investment sophistication, and other investments; excessive or simply unsuitable investment switching; and firm-wide compliance, supervisory and training problems.
The report also identified sales practices that it said were "sound."
The agencies have, for the past few years, acted against non-compliant broker dealers, most recently against Nationwide
and American Express Financial Advisors brokers in May. A summary of the NASD and the SEC's actions is listed on the NASD's website
"It is critical that broker-dealers ensure that the securities they sell are appropriate for the individual investor. Given the complexity of variable annuities, extra care is required," said SEC Chairman William H. Donaldson
announced it was proposing new rules relating to sales disclosure, supervision and training in late April.
"[G]iven the examination findings, the large number of enforcement cases over the past couple of years and the complexity of these products, we feel we can best protect investors by establishing stronger, more specific rules that apply specifically to variable annuities," said Robert R. Glauber
, NASD chairman and chief executive officer.
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