SEC, NASD Release Report on Broker-Dealer Sales of Variable Insurance Products

The Securities and Exchange Commission (SEC) and NASD today released a joint staff report on the findings of their examinations of broker-dealer sales of variable annuities and variable life insurance. The report, Joint SEC/NASD Staff Report on Examination Findings Regarding Broker-Dealer Sales of Variable Insurance Products, at http://www.sec.gov and http://www.nasdr.com/white_paper_0600804.asp identifies both "sound" and "weak" broker-dealer practices in the areas of sales suitability, disclosure, supervision, training and records maintenance.

The SEC also today issued an alert to remind investors that variable annuities are not suitable for all consumers, especially investors who need the money in the short term or who borrow against their home mortgage in order to purchase a variable annuity or variable life insurance product.

Variable insurance products are hybrid investments that contain both securities and insurance features. Because of tax implications and potentially high surrender charges, these products are long-term investment vehicles that are not appropriate for short-term goals. Recent estimates indicate significant growth in investments in variable annuities by American investors: assets in variable annuities increased by over 20% in the last year to approximately $985 billion. The SEC, NASD and other regulators have received a large number of complaints from individual investors, many indicating that the customer was sold a variable product without fully understanding the product, or that the product was not appropriate given the customer's investment objectives.

Among the more disturbing weaknesses identified in the report were instances of brokers making unsuitable recommendations to senior citizens and to individuals who could not afford the products without mortgaging their homes. Other weaknesses included failures to disclose fully the various fees, risks, and tax consequences associated with these products.

SEC Chairman William H. Donaldson said, "It is critical that broker-dealers ensure that the securities they sell are appropriate for the individual investor. Given the complexity of variable annuities, extra care is required. The findings of these examinations show that many firms should take steps to improve their practices. Investors considering purchasing a variable annuity can obtain information about the product from the SEC and the NASD."

Given the report's findings, the popularity of variable annuities, and recent investor complaints and enforcement actions, NASD is also proposing new rules tailored specifically to sales of deferred variable annuities, including new sales practice standards, disclosure, supervisory approval and sales force training requirements. More information about the rule proposal can be accessed at http://www.nasdr.com/news/pr2004/release_04_027.html.

"Variable insurance products have always been subject to the suitability, disclosure and other requirements that apply to all securities," said NASD Chairman and CEO Robert R. Glauber. "But given the examination findings, the large number of enforcement cases over the past couple of years and the complexity of these products, we feel we can best protect investors by establishing stronger, more specific rules that apply specifically to variable annuities."

Investors can also protect themselves by asking questions - and demanding answers - before they purchase any investment product, including a variable insurance product. These questions include:

  • Might I need this money in the short-term?
  • Do I have enough money right now to purchase this product?
  • What am I paying for each feature? And are the extra fees worth it for me?

These tips and more appear in the SEC's latest investor education publication, Variable Annuities and Variable Life Products: Questions to Ask at http://www.sec.gov/investor/pubs/varaquestions.htm. For more information about variable annuities, investors should read Variable Annuities: What You Should Know at http://www.sec.gov/investor/pubs/varannty.htm.

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