| Thursday, May 20, 2004
Nancy Condon 202-728-8379
Herb Perone 202-728-8464
NASD Disciplines Three Firms, Three Brokers For Variable Annuity Abuses
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:
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.
NASD has issued alerts to both firms and investors to help ensure that variable annuity and variable life insurance products are properly sold. The alerts include:
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by calling NASD's BrokerCheck. NASD makes available BrokerCheck at no charge to the public. In 2002, members of the public used this service to conduct more than 2.5 million searches for existing brokers or firms and requested almost 200,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.