Improper Variable Annuity Sales and Exchanges

Regulators have enacted strict requirements governing the sales and exchanges of variable annuities, including the following:

1. that the customer must have the ability to fully appreciate how much of the purchase payment or premium is allocated for insurance or other costs, and a customer’s ability to understand the complexity of variable products generally.
2. the customer’s need for liquidity and short term investment.
3. the customer’s immediate need for retirement income.
4. the customer’s investment sophistication and whether he or she is able to monitor the investment experience of a separate account.

NASD Notice to Members 99-35 requires that financial advisors and brokers may be responsible for variable annuity losses as a result of their:

• Failure to make reasonable efforts to obtain comprehensive customer information, including the customer’s occupation, martial status, age, number of dependents, investment objectives, risk tolerance, status, previous investment experience, liquid net worth, other investment and savings and annual income.
• Failure to “discuss all relevant facts with the customer, including liquidity issues such as potential surrender charges and the Internal Revenue Service penalty; fee, including mortality and expense charges, administrative charges and investment advisory fees; and any applicable state and local government premium taxes; and market risk.”
• Failure to “insure that the variable annuity application and any other information provided by the customer….is complete and accurate and promptly forwarded to a registered principal for review.”
• Failure to “review the customer’s investment objectives, risk tolerance, and other information to determine the variable annuity contract as a whole and the underlying sub-accounts recommended to the customer are suitable”.
• Failure to “have a thorough knowledge of the specifications of each variable annuity that is recommended, including the death benefit, fees and expenses, sub- account choices, special features, withdrawal privileges, and tax treatment”.
• Failure to give current Prospectus when the variable annuities in question were recommended.
• Violation of Rule 2210 by using sales material not approved by a registered principal of the Respondents Corporation.
• Failure to “Inquire about whether the customer has a long term investment objective and failure to make sure that the customer understands the effective surrender charges on redemptions”.
• Failure to “establish procedures to require a principal’s careful review of variable annuity investments that exceed a stated percentage of the customer’s net worth”.
• Failure to “disclose to the customer that the tax deferred accrual feature is provided by the tax qualified retirement plan [in t case the Claimant’s IRA roll over} and that the tax deferred accrual feature of the variable annuity is unnecessary.’
• Failure to “conduct an especially comprehensive suitability analysis prior to approving the sale of a variable annuity with surrender charges to a customer is a tax- qualified account subject to plan minimum distribution requirements”.