Originally created 04/27/04

NASD concerned about sales abuses in variable annuities

WASHINGTON -- Securities regulators say they are concerned about abuses in the sale of variable annuities and are seeking to impose new, tighter requirements on brokers' handling of the popular long-term investments.

The National Association of Securities Dealers, the brokerage industry's self-policing organization, announced Monday that it has proposed a series of new requirements, including clear disclosure to investors of the potential risks of particular variable annuities and standards for determining whether they are suitable for a specific customer. The proposal must be approved by the Securities and Exchange Commission, where officials also have voiced concern about sales abuses in the complex investments.

Sometimes described as mutual funds wrapped in an insurance policy, variable annuities are a popular way to save for retirement and are tax-deferred. They are contracts between an investor and the company selling it in which the company agrees to make periodic payments to the investor, beginning immediately or at some future date. The payments to the annuity holder vary and are determined by the performance of the underlying investments.

They often are sold by insurance companies, which place investors' money in their own subaccounts that invest in mutual funds.

In the past two years, the NASD has taken more than 80 disciplinary actions against brokers and investment firms for alleged abuses in sales of variable annuities.

In January, for example, the NASD levied a $2 million fine against the former brokerage unit of Prudential Financial Inc., charging that several hundred annuity sales violated the organization's rules and those of the New York State Insurance Department. The NASD also ordered the firm to pay affected customers of Prudential Securities $9.5 million.

The company's review of annuities sales in mid-2002 uncovered altered documents, leading it to alert the NASD and other regulators and to fire several employees - including managers at its New York headquarters and in branch offices.

Prudential did not admit or deny the allegations in agreeing to the sanctions.

"We believe this rule proposal represents an appropriate approach to ensuring adequate protection for investors considering or purchasing deferred variable annuities," NASD chairman and CEO Robert Glauber said Monday.

Last May, the NASD issued an "investor alert" warning the public to be wary of aggressive sales tactics by those selling variable annuities. The alert warned seniors in particular that some sellers may use "scare tactics."

On the Net:

National Association of Securities Dealers: http://www.nasd.com

Securities and Exchange Commission: http://www.sec.gov

Prudential Financial Inc.: http://www.prudential.com


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