NASD Fines Prudential $2 Million; Orders $9.5 Million to Customers for Annuity Sales in Violation of NY Insurance Regs
NASD announced today that it has fined Prudential Equity Group, Inc. (formerly known as Prudential Securities, Inc.) and Prudential Investment Management Services LLC, $2 million and ordered the firms to pay customers $9.5 million for sales of annuities, including variable annuities, that violated a New York State Insurance Department regulation and NASD rules.
From November 1998 through mid-2002, certain Prudential employees repeatedly circumvented Regulation No. 60 of the New York State Insurance Department, which governs replacement sales of annuity contracts. The regulation requires documentation of two separate interactions with a customer, documentation of specific information about the old annuity contract, and disclosure of comparison information before a replacement sale can be completed. The regulation is intended to protect investors by requiring disclosure of information in order to reduce opportunities for misrepresentation and to allow investors to make comparisons between their current annuity and the proposed replacement annuity.
In an organized effort to circumvent the regulation, Prudential employees compressed the procedures to one contact during which customers were instructed to sign, but leave undated, all required forms. Subsequently, employees would insert dates in the documents in order to create an appearance that the two-step procedure had been followed and that there had been an appropriate interval between the steps during which information had been obtained from the issuer of the annuity proposed for replacement. In some instances when customers had dated documents despite instructions not to do so, Prudential employees would alter documents so that it appeared that Regulation No. 60 and the two-step procedure had been followed.
“The procedures required by New York State regulations exist to protect investors from unsuitable recommendations and hasty decisions and to arm investors with the information necessary to understand the complexities of variable annuity contracts as well as the cost and other implications of replacement,” said Mary Schapiro, NASD Vice Chairman. “Because of the complexities of variable annuities, short-cutting the rules and regulations governing sales cannot and will not be tolerated.”
During the three and one-half year period at issue, Prudential completed 906 annuity replacement sales subject to Regulation No. 60, and a substantial number of these involved violations of the regulation.
Additionally, during the same time period, certain Prudential employees prepared and used incorrect annuity performance illustrations in sales of annuity contracts.
Prudential discovered the violations in mid-2002 when a review of a replacement sale uncovered altered documents. Prudential promptly reported the matter to NASD and other regulators, and in consultation with NASD, initiated a remediation program for all affected customers that will result in payments of more than $9.5 million.
In concluding this settlement, Prudential Equity Group, Inc. and Prudential Investment Management Services LLC neither admitted nor denied the charges.
Information regarding variable annuities can be found in the following NASD Investor Alerts:
Investors can obtain more information 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 2003, members of the public used this service to conduct more than 2.9 million searches for existing brokers or firms and requested almost 180,000 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 continue to access this service by calling 1-800-289-9999.
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