Washington, D.C. — NASD announced today that it has censured and fined American Express Financial Advisors Inc. $350,000 for sales practice and supervision violations in connection with its sale of variable annuities and variable life insurance products over a 30 month period, ending in 2000.
NASD's review focused on American Express' sale of variable annuities into tax-qualified retirement plans and accounts. A qualified plan is a tax deferred retirement account such as an IRA or 401(k) plan where taxes are paid only when an employee withdraws money. NASD found that American Express, through certain registered representatives, omitted material facts when selling variable annuities into qualified plans. In making some sales, registered representatives failed to disclose that variable annuities do not provide the benefit or advantage of tax deferred earnings when purchased in qualified plans. In general, tax deferral is one of the primary reasons for purchasing a variable annuity.
In the sale of a variable annuity to an account that is already tax deferred, sales should only be made when other benefits of a variable annuity such as a death benefit or annuity payout options support the purchase. Some American Express representatives failed to determine that customers had a need for a benefit offered by a variable annuity, other than tax deferral, when recommending the purchase of the product. Such sales were in violation of NASD rules since the registered representatives lacked a reasonable basis for believing that their recommendations were suitable.
In addition, in certain instances American Express representatives did not adequately explain to customers the costs and features of variable annuities. They also failed to compare and contrast variable annuities with mutual funds in those instances where the customer's needs might have been better met through the purchase of mutual funds. NASD found that American Express had failed to address these issues adequately when it trained representatives and that certain disclosure documents omitted material facts regarding qualified annuities.
In addition, NASD found that the firm failed to establish, maintain and enforce adequate supervisory policies and procedures governing the sale of variable annuities and variable life insurance products during the 30-month period.
"We will continue to focus on variable annuity sales practices through, guidance to investors, notices to broker dealers and enforcement actions to ensure that variable products are sold in an appropriate manner," stated Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "We continue to see instances of abusive sales practices and suitability problems with variable annuities. It is only through effective training and a comprehensive supervisory system that firms can ensure that customers receive important disclosures concerning these complex products and that they are sold only to customers for whom they are suitable."
This case was brought in connection with a series of special examinations conducted over the last several years by NASD that focused on the sale of variable contracts. Due to the dramatic increase in sales of variable products in the last several years, NASD has issued numerous alerts to both firms and investors to help ensure that these products are properly sold which can be found at:
- www.nasdr.com/pdf-text/9935ntm.pdf, and
In settling the matter, American Express neither admitted nor denied NASD's findings.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web site at www.nasdr.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors 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 member firms. For more information, please visit www.nasd.com.