The NASD and Securities and Exchange Commission are beginning to shift their attention away from the widespread mutual fund scandals to spearheading newly proposed guidelines targeting variable annuity sales, The Philadelphia Inquirer reports.

Both regulatory bodies are reacting to grievances stemming from improper variable annuity sales tactics that recently led to a joint report on VA best sales practices ( see MME 6/10/04). Repeated abuses by variable annuity providers have prompted the regulators to float suggested guidelines aimed at bringing variable annuity sales up to par with stringent rules governing volatile investments like options trading.

The new proposals are fueled by the study’s findings of egregious sales practices. For example, the study includes reports of investors who were pressured to generate variable annuity premiums by mortgaging their homes and deceptive sales pitched aimed at vulnerable elderly investors. In the cases of elderly investors, the regulators concluded that some individuals may not have enough time to allow the tax-deferred compounding of variable annuities to offset hefty fees.

The amount of money at stake for variable annuity providers who are concerned about new regulations is enormous. Variable annuity sales last year reached $126.4 billion, a 9.9% increase from the previous year, despite new tax incentives to invest in non-qualified investments and other types of retirement vehicles.

Still, Mary L. Schapiro, the SEC’s senior enforcement official, in an interview called current variable annuity sales guidelines lacking in substance. Some variable annuities charge a 7% commission, a far larger sum than the top 5.75% mutual fund up-front charge – and lock up investors’ assets for several years. Schapiro and other regulators say variable annuity providers need to do a better job communicating these conditions to investors.


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