Hard-sell VA tactics under fire

NASD plans to come down hard on brokers who resort to scare tactics when pitching variable annuities, particularly to senior citizens.

The brokerage industry’s self-regulatory organization has cases under investigation, yet to be made public, that concern the improper marketing of VAs to seniors or in places where many seniors live, such as Florida, according to NASD enforcement officials.

In an attempt to warn seniors and other buyers about strong-arm methods used by brokers, NASD issued an investor alert last week on its website and through the media. The alert, “Variable Annuities: Beyond the Hard Sell,” is a primer on VAs, with guidance on how buyers can protect themselves.

“The marketing efforts used by some variable-annuity sellers deserve scrutiny, especially when seniors are the targeted investors,” Mary Schapiro, NASD vice chairman and president of regulatory policy and oversight, said in a press release announcing the alert.

“Sales pitches that confuse or frighten investors violate NASD rules and will be the subject of enforcement action.”

One scare tactic used with seniors is to say that a VA protects their assets from lawsuits or seizures, according to the NASD alert.

“Sometimes, seniors can be kind of scared or intimidated into these products where it may not be suitable for them,” says Roger Sherman, an NASD senior vice president.

“Particularly for seniors who may have undetermined liquidity needs, putting them into variable annuities may not be a suitable investment.”

VA providers and sellers have been under heightened scrutiny at NASD because of the products’ complexity, high commissions, and increased sales and exchange activity.

So-called exam sweeps of firms have led to 20 to 25 enforcement actions against companies and brokers in the past two years, says Barry R. Goldsmith, NASD’s executive vice president of enforcement.

Just last week, three complaints were made against broker-dealer representatives for unsuitable sales of VAs dating to 2000, though none of the sales were to elderly clients.

At the time of their alleged offenses, the reps were associated with Banc of America Investment Services Inc., Edward Jones and Raymond James & Associates Inc.

NASD also announced a $125,000 fine against St. Petersburg, Fla.-based InterSecurities Inc., a unit of the Dutch company Aegon Insurance Group, for inadequate procedures governing the sale of its VAs and its handling of customer complaints.

But last week’s investor alert and the two years of NASD sweeps aren’t emblematic of broader industry troubles, says Michael DeGeorge, general counsel at the National Association for Variable Annuities in Reston, Va.

“I’ve not seen any specifics to back up their implication that scare tactics are being used in some instances with seniors,” Mr. DeGeorge says. “They make that statement, but I am not aware of any basis for that.”

He adds that with VA sales of about $113 billion in each of the past two years, 20 to 25 NASD enforcement actions are a “very small percentage of the number of sales.”

Big companies targeted

“I am not suggesting that these 20 or so the NASD found on their sweeps are the only questionable sales out of the whole $113 billion, but we are not aware that there is any widespread problem,” Mr. DeGeorge says.

“We believe this is certainly a very small minority of sales and that the vast majority of people who sell variable annuities do so ethically and follow the NASD rules on suitability and sell them appropriately.”

Mr. Goldsmith says that the products “can be sold appropriately, and I am sure in many cases are sold appropriately. Our job is to really find those instances where there are problems and, where appropriate, bring enforcement cases.”

The continuing efforts to curb abuses in the sale of VA products have led NASD to enforcement actions against a number of notable industry players.

Among the companies that settled with NASD, without admitting or denying a violation, were Allmerica Investments Inc., American Express Financial Advisors Inc., American United Life Insurance Co., CUNA Brokerage Services Inc., First Union Brokerage Services Inc., Lutheran Brotherhood Securities Corp., Mutual Service Corp. and Prudential Securities Inc.

In the latest action, InterSecurities, an affiliate of Western Reserve Life Assurance Co. of Ohio in Clearwater, Fla., was charged with failing to address customer complaints adequately.

NASD also says that InterSecurities had inadequate procedures and systems governing the sale of variable products, such as lacking a written policy requiring a principal to review information on the suitability of recommendations. NASD looked at a period between 1997 and 2000.

In a statement, InterSecurities, which neither admitted nor denied NASD’s finding, said its “current procedures for customer-complaint identification and reporting, for information gathering to allow for a proper suitability determination and supervisory review of such determinations, and for monitoring customer account activity, comply with all applicable NASD and other regulatory rules.”

The firm noted that the sales practices at issue didn’t involve sales to senior citizens.

Since NASD began to focus attention on variable products, firms have made improvements to their internal supervisory and compliance procedures, says Mr. Goldsmith. “Certainly, from when we started this to where we are now, we have seen what I would call a very significant improvement,” he says.

American Express Financial Advisors Inc. in Minneapolis, for one, has made changes to its procedures, making sure clients are better informed and advisers receive additional training about the use of variable annuities, says spokesman David Kanihan.

“We’ve stepped up the degree to which we make absolutely certain that advisers make appropriate sales,” says Mr. Kanihan.

In December, NASD fined American Express $350,000 for misleading investors regarding the costs and tax benefits for some variable annuities and variable-life products sold over a 30-month period ending in 2000.

Mr. Kanihan says the procedural changes were already underway after 2000 and not a direct result of NASD’s investigation.

While the industry overall has come a long way, “I think the problems still are far from being solved,” Mr. Goldsmith adds.

Enforcement actions, some involving marketing to the elderly, will be announced in the near future.