NASD Regulation continues to monitor sales of variable annuities and fine dealers who violate suitability rules and record-keeping requirements. Two firms were named in the most recent enforcement action and more actions are possible, industry experts say.
The actions are the second this year to result from special examinations NASD Regulation conducted during 1999 and 2000. Earlier in the year, six firms and an individual were fined a total of $112,000 for marketing and sales violations, also involving variable annuities.
The regulation arm of the National Association of Securities Dealers said the new actions were against firms that violated rules relating to sales of variable annuities and leveled fines totaling $142,500 against the responsible brokerages and individuals. The investigations were carried out by NASD's New Orleans district office.
In the first action, CUNA Brokerage Services settled the charges without admitting or denying NASD Regulation's allegations by paying $100,000. Of that amount, $25,000 was paid jointly by the firm and its compliance officer, Campbell McHugh.
CUNA Brokerage Services is the securities broker-dealer of CUNA Mutual Group, which serves credit unions and their members worldwide. It is headquartered in Madison, Wis. CUNA Brokerage Services has 650 brokers and $8 billion in assets under custody. The firm services over 1,300 credit unions nationwide.
Questionable Sales Practices
Among the findings NASD Regulation cited was that CUNA Brokerage Services "failed to establish, maintain and enforce adequate written supervisory procedures relating to the sale of variable annuities and variable universal life insurance" concerning suitability, training and supervision of the firm's principals and investigation and reporting of customer complaints.
Two of CUNA Brokerage Services' brokers were also fined. One was alleged to have recommended a variable annuity despite not "having reasonable grounds for believing the transaction was suitable." He was fined $5,000 and suspended for 10 days. The other allegedly withheld a material fact from a customer in connection with the sale of a variable annuity contract. He was fined $2,500 and suspended for five days.
Sydney Lindner, director of public relations for CUNA Mutual Group, said, "CUNA Brokerage Services reached a voluntary agreement with the NASD following its nationwide survey of variable annuity practices and procedures. In order to provide our customers with the highest level of service and integrity, we worked proactively with the NASD to develop and improve our practices."
No Customer Complaints
The other firm cited by NASD Regulation was Mutual Service Corp., a wholly owned subsidiary of Pacific Life Insurance Co., headquartered in South West Palm Beach, Fla. Mutual Service serves a network of more than 1,350 independent financial analysts as a broker-dealer, the company's Web site states.
Mutual Service allegedly was responsible for various procedural deficiencies, including not establishing or enforcing written supervisory procedures for aspects of its variable annuity and variable life insurance sales. Among the missing procedures were how home office principals were to review and approve suitability of variable product sales by brokers in branch offices; monitoring variable product surrenders and product cancellations, and reviewing variable life insurance transactions.
Without admitting or denying the allegations, the brokerage paid a $35,000 fine. In response to a request for a comment, Mutual Service Corp. President John Poff said, "We thought it was appropriate to settle. Over two years have passed since this examination began. This was an inquiry related to procedures only. No customer complaints were involved and there was no finding of any harm to customers."
Poff said that the firm believes it has been responsive to regulators in making appropriate changes to its procedures, he added. Poff explained that the comments a member is allowed to make under the terms of a settlement with NASD Regulation are very limited.
Tom Conner, general counsel for the National Association for Variable Annuities, echoed Poff's comment that NASD cited the firms for procedural peccadilloes. "They involve the alleged failure to follow procedures or obtain information, but generally do not allege that these sales themselves were unsuitable," Conner said.
NASD has been focusing on the variable annuity industry for several years, Conner said, due to the dramatic rise in sales of the product. "They feel that it's an important segment of the financial industry and they wanted to take a close look at it," he said.
The lag between the examinations and the enforcement actions did not surprise Conner. "The process involved in any type of regulatory scrutiny and bringing enforcement actions can take several months, if not years," he said. Additional cases are possible, since the NASD has made it clear that examinations are continuing.