Under the terms of the settlement with the NASD and a separate agreement with a coalition of state regulatory authorities, Waddell & Reed will repay up to $11 million to customers whose annuities were exchanged by the company. It will pay a fine of $5 million to the NASD and a fine of $2 million to state regulators.
"Waddell & Reed violated these principles by engaging in a deliberate campaign, motivated by its own business interests and not those of its clients, to switch customers from one variable annuity to another. These switches were recommended without regard to whether the transactions were in the customers' best interests and caused investors to incur substantial unnecessary expenses," said NASD Vice Chairman Mary Schapiro, in an April 29 statement.
In January 2004, the NASD said that Waddell & Reed undertook an aggressive campaign between January 2001 and August 2002 to switch customers from variable annuity contracts issued by United Investors Life Insurance Co. (UILIC) to similar annuities provided by Nationwide Insurance Co.
The switching campaign was initiated after Waddell & Reed failed to obtain an agreement from UILIC to receive a share of annual mortality and expense (M&E) fees collected by UILIC from Waddell & Reed customers. Waddell & Reed then approached Nationwide, which agreed to a fee sharing arrangement, regulators said.
In spite of repeated requests by the Waddell & Reed sales force and its supervisors, the company failed to provide proper guidance to the sales force to determine the suitability of the exchanges, such as analytical tools or other mechanisms that would measure the cost and the potential long-term benefit of an exchange for each customer.
The company failed to take into account relevant objective factors including age, sex, surrender charges, M&E charges, policy features and the costs and benefits of the particular optional policy features chosen by the customers, according to regulators.
As part of the settlement, some of the company's executives will also be subject to a six-month suspension. Former president Robert Hechler is one such executive, who did not admit or deny wrongdoings, and will pay a $150,000 fine.
Former Waddell & Reed National Sales Manager Robert Williams, without admitting or denying the charges, also agreed to a six-month suspension as a supervisor and a $150,000 fine for oversight failures in connection with the exchanges. The NASD found that Williams was involved in the effort to aggressively encourage the sales force to switch customers from UILIC to Nationwide annuities, was aware of instances where inappropriate switches were made, and failed to take reasonable action to supervise the company's switching activities.