Washington, D.C. — NASD Regulation, Inc. today announced two separate enforcement actions involving sales of variable annuities and the supervision of sales activities. Two brokerage firms and three individuals were named in disciplinary actions representing the second set of cases resulting from a series of special examinations focusing on the sale of variable contracts conducted by NASD Regulation during 1999 and 2000. Monetary sanctions in the two settled actions totaled $142,500.
The two cases include findings of violations in the following areas:
- Failure to collect customer financial and other information for use in making suitability determinations, including information regarding variable products being exchanged;
- Deficient supervisory procedures with respect to the suitability of recommendations by registered representatives, including supervisory review of variable product sales and exchanges of one variable annuity product for another; and
- An unsuitable sale and failure to communicate a material fact concerning a variable annuity.
These actions were investigated by NASD Regulation's New Orleans district office, and represent the organization's continuing effort to address problem areas in the sale, distribution and marketing of variable products.
Earlier this year, NASD Regulation took action against six firms and an individual for various violations in the marketing and sale of variable annuities, with fines and restitution totaling $112,000.
Sales of variable products, particularly tax-free exchanges, have increased dramatically over the last several years. To help investors evaluate the factors involving replacement sales, NASD Regulation issued an Investor Alert in February, http://nasdr.com/alert_02-01.htm, providing investors with key points to review before replacing a variable product. NASD Regulation has also offered guidance to its members on the proper sale of variable products through the issuance of Notices to Members 99-35 and 00-44 and an article in the Summer 2000 issue of the Regulatory and Compliance Alert. These information pieces give firms and their brokers sound guidance on how to sell variable annuity and life contracts, and evaluate whether they are suitable investments for particular investors.
Investors can obtain more information about NASD Regulation as well as the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999, or by sending an e-mail through NASD Regulation's Web Site, www.nasdr.com.
The National Association of Securities Dealers, Inc. (NASD) is the largest securities industry, self-regulatory organization in the United States. It is the parent of NASD Regulation, Inc., the American Stock Exchange, LLC and NASD Dispute Resolution, Inc.
Variable Annuity Enforcement Actions:
1. CUNA Brokerage Services, Inc. - Case No. C05010054
CUNA Brokerage Services, Inc. settled the following charges without admitting or denying NASD Regulation allegations. The findings include:
The firm, through its compliance officer Campbell D. McHugh, failed to establish, maintain and enforce adequate written supervisory procedures relating to the sale of variable annuities and variable universal life insurance in the areas of suitability of recommendations, review of new business for suitability, training and supervision of principals, and the investigation and reporting of customer complaints. The firm failed to maintain certain records recording the rationale for the exchange of variable products. The firm failed to demonstrate that reasonable efforts had been made to obtain certain customer information needed for suitability determinations. The firm, through Daniel L. Bernal, recommended a variable annuity purchase without having reasonable grounds for believing the transaction was suitable. The firm, through Christian C. Zernich, failed to communicate a material fact to a customer in connection with a sale of a variable annuity contract.
The firm was censured and fined $100,000, of which $25,000 was assessed jointly and severally against the firm and McHugh. McHugh was also suspended for 45 days in any principal capacity. Bernal was fined $5,000 and suspended for ten days in all capacities, while Zernich was fined $2,500 and suspended five days in all capacities.
2. Mutual Service Corporation - Case No. C05010053
Mutual Service Corporation, Inc. settled the following charges without admitting or denying NASD Regulation allegations. The findings include:
The firm failed to establish, maintain and enforce adequate written supervisory procedures relating to the following aspects of variable annuity and life insurance sales:
The manner in which home office principals were to review and approve the suitability of variable product sales by principals in its offices of supervisory jurisdiction.
The manner in which the activity of variable product surrenders and product cancellations were to be monitored.
The manner and purpose in which exception reports were to be utilized by the firm in supervising variable product business.
The procedure by which representatives of the firm were to effect variable life insurance transactions.
The manner in which principals of the firm were to review, approve and otherwise supervise variable life insurance transactions.
The manner in which a supervisory review was to be conducted of the suitability of the allocation of premium payments to investment portfolios or sub-accounts, in relation to customers' investment objectives.
The firm failed to establish and maintain a supervisory system for retaining information necessary for the review of exchange transactions executed by principals in offices of supervisory jurisdiction.
The firm failed to evidence the review of the initial allocation of premium payments to investment portfolios or sub-accounts.
The firm failed to make reasonable efforts to obtain customer information for making suitability determinations. This information includes customer net worth, risk tolerance and information on products being exchanged such as surrender charges, and allocation of funds in sub-accounts.
The firm was censured and fined $35,000.