NASD, the securities industry's self-regulatory body, sees a problem with variable annuity sales that goes beyond the complaint last week against Citizens Financial Group Inc., and analysts say the bad press may undermine sales through banks.
John Gannon, the vice president of investor education at NASD, said complaints about variable annuity sales practices had increased by 50% from 1999 to 2003. NASD issued a warning letter in May 2003 to investors, saying that some financial advisers were using scare tactics to confuse older investors into buying variable annuities.
Analysts said more banks and financial services companies can expect scrutiny in coming weeks of how they sell variable annuities and who they sell them to after the Massachusetts Securities Division filed a complaint last week against Citizens charging civil fraud for allegedly "dishonest" variable annuity sales to senior citizens at one of its branches on Cape Cod.
Ken Kehrer, the president of Kenneth Kehrer & Associates, a Princeton, N.J., consulting firm that tracks annuity sales through banks, said the investigations have had a "chilling effect" on annuity volume in banks.
Mr. Gannon said, "We have tried to address the growing problem in the industry both through investor alerts and education and through examinations and enforcement programs."
NASD has proposed regulations intended to govern how members sell and supervise their annuity products, he said. "We are making an effort through these regulations and our enforcement procedures to identify the issues in the variable annuities industry," he said. "We want to make sure suitable products are sold to investors."
Industry experts generally consider variable annuities inappropriate for elderly customers because of their high fees and tax benefits that are only fully realized over decades.
These problems might be overblown, Mr. Kehrer said.
It is standard operating procedure, he said, for banks to contact customers whose certificates of deposit are maturing to try to get them to move their assets to another investment product. "To call this 'preying' is a real leap," he said. "This is a service to customers. Banks just want to let them know that alternatives are available."
Mr. Kehrer said variable annuity sales were flat in 2004. And a comparison of mutual fund sales in banks to variable annuity sales makes it clear that variable annuities have suffered and will continue to suffer because of the investigations, he said.
"We are not sure that financial advisers want to discuss variable annuities with their customers when the product is in such hot water," he said.
Claire M. Percarpio, an analyst at Janney Montgomery Scott LLC, said in a research note Friday that Wachovia Corp.'s brokerage unit could be vulnerable in the context of an industrywide investigation that might depress variable annuity sales. Wachovia gets an estimated 1% of its total revenue from annuity sales, she noted. For Wachovia and most other banks, she said, an industry investigation could lead to fines and bad press but would not have a material impact financially.
Carmen Effron, the president of C F Effron Co. LLC in Westport, Conn., said annuities often are sold to the wrong customers.
"Until people have the right products at their fingertips," she added, "there is potential for mis-selling. Selling variable annuities to someone who is too old for the product isn't something anyone wants to do."
Ms. Effron said investigations into the annuities industry by state and federal regulators will change how banks sell annuities on the platform. She also said every bank will begin to scrutinize its records closely.
"The minute a story like this gets attention in the media, a smart executive wants to know if he has this problem too," she said. "A smart executive wants to see every variable annuity sold to anyone over the age of 60. I think it goes without saying that compliance people want to take a real hard look at this and weed these problems out."
Analysts said enough annuity actions have been taken by regulators for the Citizens charge to be considered more than an isolated instance.
Morningstar Associates LLC, a subsidiary of Morningstar Inc., said in December that it had received a subpoena from New York Attorney General Eliot Spitzer seeking information and documents related to his annuity investigation.
"While the request is very broad," Joe Mansueto, the company's chairman and chief executive officer, said in a press release about the subpoena, "it specifically asks for information about the investment consulting services we offer to retirement plan providers, including fund lineup recommendations for retirement plan sponsors."
NASD announced in November that James B. Moorehead, a former broker at AmSouth Investment Services Inc., had been barred from the securities industry for life for alleged fraud, forgery, and falsification of documents in connection with variable annuity sales.
The suspect transactions took place from March 2000 to April 2001 while Mr. Moorehead was a representative of AmSouth Investment Services, a unit of the Birmingham, Ala., banking company. NASD alleged that Mr. Moorehead misrepresented the risks associated with investing in variable annuities and purposefully omitted risk disclosure statements from the performance hypothetical his firm sent to customers.
Last May NASD censured and fined Nationwide Investment Services Corp. in Columbus, Ohio, and its affiliate, Nationwide Securities Inc. in Dublin, Ohio, an aggregate $175,000 for allegedly having inadequate procedures and systems governing its variable annuity sales and distributing advertising and sales literature that failed to make required disclosures regarding variable annuity investments.
In addition, NASD censured and fined American Express Financial Advisors Inc. $300,000 for four years of allegedly inadequate record keeping, which was discovered as a result of an investigation into unauthorized withdrawals from a customer's variable annuity account.
In January 2004, NASD announced that John Steven Blount of Lake Charles, La., had been barred from association with any NASD-regulated securities firm and ordered to pay more than $1.5 million of restitution, plus interest, to 10 customers for unsuitable sales of variable annuities and mutual funds totaling more than $6 million. The allegedly unsuitable sales generated nearly $220,000 of commissions.
Also in January 2004, NASD fined Prudential Equity Group Inc. and Prudential Investment Management Services LLC $2 million and ordered them 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.
Massachusetts regulators have prosecuted one other case involving variable annuity sales practices. In 2002 the state filed a complaint against two Colorado brokerage firms, Brokers Choice of America and Senior Benefits Center Network, for allegedly selling variable annuities improperly to senior-citizen investors.
The complaint alleged that brokers from the Colorado firms had used a scheme to frighten old people into buying the annuities. The case was settled in December 2002 with the firms paying a $30,000 administrative fine and being barred from selling their products in Massachusetts.
"As regulators have gone through the process of investigating investment banks and researchers and insurance firms, they are working their way down," Janney's Ms. Percarpio said in an interview. "First it was mutual funds and then annuities. This is just another investigation to get banks to look more closely at compliance."
