NASD Disciplines Three Firms, Three Brokers for Variable Annuity Abuses
Press Release from NASD
Washington, D.C.—NASD announced today that, as part of its ongoing efforts to curb abuses in the sale of variable products, it has fined three securities firms and one broker a total of $503,000 for violations involving variable annuity transactions. In addition, two brokers were barred from the industry.
NASD censured and fined Nationwide Investment Services Corporation of Columbus, OH and its affiliate, Nationwide Securities, Inc. of Dublin, OH a total of $175,000 for having inadequate procedures and systems governing its sale of variable annuities, and for distributing advertising and sales literature that failed to make required disclosures regarding variable annuity investments. In addition, NASD censured and fined American Express Financial Advisors, Inc. $300,000 for inadequate record keeping during a four-year period, which was discovered as a result of an investigation into unauthorized withdrawals from a customer's variable annuity account.
In the three separate enforcement actions against individual brokers, NASD announced that it barred one for converting funds from a variable annuity, barred another for forgery and misrepresentation in connection with variable annuity sales, and fined a third broker $28,000 and suspended him for six months for unsuitable sales of deferred variables annuities.
"Variable annuities are complex products that are difficult for many investors to fully understand," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "The vast majority of our enforcement actions in this area involve suitability, disclosure and supervision issues, which is why we are proposing tougher rules specifically governing variable annuity sales." (See www.nasdr.com/news/pr2004/release_04_027.html.)
Nationwide Investment Services Corporation and Nationwide Securities, Inc. distributed variable products advertising that contained deficiencies previously identified by NASD's Advertising Regulation Department. Among those deficiencies were failures to: prominently disclose the charges and fees associated with the product; explain that dollar cost averaging does not insure profit or protect against loss; clearly identify the product as a variable annuity and/or variable universal life insurance product, and provide a balanced presentation of the risks and benefits associated with investing in a variable annuity.
Nationwide Investment Services Corporation also failed to implement procedures to obtain customer information that is critical to evaluating the suitability of an investment in a variable annuity. In many instances, the firm failed to obtain information about tax bracket, prior investment experience, annual income, liquid net worth, risk tolerance, time horizon, investment objective, customer age or the details of the product being replaced by the variable annuity investment. The firm also failed to provide registered representatives with specific guidelines for evaluating the information obtained from a customer prior to making a recommendation to purchase a variable annuity.
American Express Financial Advisors, Inc. failed to preserve certain records in a non-rewriteable, non-erasable format as required by SEC rules. The records included copies of account statements, certain confirmations, and letters sent to customers confirming changes of address. These violations came to light as a result of NASD's investigation of the activities of a former registered representative of American Express who made unauthorized sales and cash withdrawals totaling $124,900 from a customer's variable annuity and who then converted the funds. The representative avoided detection for almost two and one-half years because he had changed the customer's address on the records of American Express to the representative's own address.
In other enforcement actions announced today, NASD took action against the following individuals in connection with variable annuity transactions:
* Daniel Karl Park, of Frisco, TX, formerly employed by Northwestern Mutual Investment Services, was barred from association with any NASD member in any capacity for signing the name of his wife to six different variable annuity withdrawal requests and then converting the funds without his wife's authorization.
* Debora A. Fruge, of Sulpher, LA, formerly employed by Banc One Securities Corporation, was barred for making misrepresentations to a customer regarding the balance of a variable annuity account, forging the customer's name to change of address forms, falsifying a confirmation relating to the variable annuity account, and failing to provide truthful information to the NASD. Fruge's course of misconduct began with a misunderstanding between Fruge and the customer regarding the nature of the annuity. The customer believed the annuity to be fixed; however, it was, in fact, a variable annuity. Rather than address the misunderstanding, Fruge misrepresented the balance and attempted to conceal her misrepresentations by creating a false confirmation and redirecting the customer's statements and confirmations for delivery to the branch office. Although the firm had procedures to ensure that change of address forms were not changed to post office boxes or branch office addresses, Fruge avoided detection by changing the address through the variable annuity company, rather than through her firm.
* Michael H. Tew, of Dothan, AL, formerly employed by A.G. Edwards & Sons, Inc., was suspended for six months and fined $28,000 for the sale of three unsuitable variable annuities. The first unsuitable sale was to an elderly couple, both of whom were 76 years old at the time of the purchase. Tew knew that the customers were about to enter an assisted-living facility and had a need for liquidity. He also knew that the customers indicated income as their primary investment objective and wished to preserve the principal of their investment for their heir. Investment in the variable annuity accomplished none of these goals. The variable annuity did not allow the customers full access to their funds for seven years without incurring a surrender charge. The variable annuity purchase did not produce income, because Tew recommended investment in capital appreciation and growth sub accounts. In addition, the investment failed to preserve principal for their heir because the death benefit applied only if the customers died before the tenth contract year. Finally, Tew sold the customers a Retirement Income Guarantee Rider that was only available to contract owners 75 years old or younger. At age 76, the customers were ineligible for this rider. Because the variable annuity accomplished none of the investment goals identified by the customers, the customers could not financially benefit from the purchase, rendering the recommendation unsuitable. Tew also made unsuitable variable annuity recommendations in two other instances.
In settling these matters, the respondents neither admitted nor denied the allegations or findings.
These cases are the latest to result from a series of ongoing special examinations conducted by NASD focusing on the sale of variable contracts. Variable annuity sales have been the focus of increased, NASD-wide attention for the last two years, and the subject of more than 80 disciplinary actions during that time. Last month, NASD's Board of Governors approved a new rule proposal that would impose a wide range of new requirements tailored specifically to transactions in deferred variable annuities - from new sales practice standards and supervisory requirements to increased disclosure and sales force training.