Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC Enforcement Actions Put Spotlight On VA Switches

Your article was successfully shared with the contacts you provided.

SEC Enforcement Actions Put Spotlight On VA Switches


The regulatory spotlight is on variable annuity exchanges, as evidenced by three recent enforcement actions taken by the Securities and Exchange Commission.

These actions have important implications for registered representatives who recommend such exchanges and also for their supervisors and broker-dealers.

To see how, take the following “test.” Its designed to help you see if you can tell a good VA exchange from a bad one, according to the standards set forth in the recent rulings. (A “bad” exchange, in this sense, is one that could expose a rep to monetary penalties from the SEC or even lead to the rep being barred from participation in the securities industry.)

Quiz for Sales Reps

Your client is invested in 10 of the 20 investment options offered by a variable annuity. Performance has been bad; indeed, the contracts value today is less than it was two years ago when the contract was purchased. What do you do?

a.) Recommend switching to another contract with a different line-up of investment options.

b.) Point out to your client that contract value can be expected to fall some years over the course of a long-term investment, and recommend that the client “hold tight.”

c.) Evaluate the other investment options available in the contract, and consider recommending a reallocation.

If you picked (a), you better make sure youve documented why the new contracts line-up is better. Heres why:

In a recent enforcement action, the SEC faulted a sales rep for not performing any studies to back up his assertion that the new contract would offer increased diversification and an improved opportunity for return [see In re Raymond A. Parkins, Jr., Securities Act Release No. 33-8055 (January 18, 2002)].

In another recent action, the SEC claimed the investors could have accomplished the same goal without the switching costs simply by selecting different investment options in their original VAs [see SEC Lit. Rel. No. LR 17591 (June 27, 2002): SEC v. Gregory P. Waldon, No. CIV-02-1395 (E.D. California)].

Quiz for Supervisors

You are reviewing an order from a sales rep for a switch. The stated reason for the switch is to lock in the appreciated cash value on the old contract as the starting death benefit for the new contract. What do you do?

a.) Approve the switch.

b.) Contact the rep to confirm the basis for the switch.

c.) Obtain a copy of the account statement to verify whether the old contract had an appreciated cash value to lock in and contact the customer to confirm the basis for the switch.

If you picked (a) or (b), your review may not be adequate. In a recent enforcement action against a broker-dealer principal responsible for approving transactions, the SEC criticized the principal for failing to obtain a copy of the account statement in order to verify the stated rationale for the exchange.

In that ruling, the SEC claimed that, if the supervisor had done so, she would have discovered that the contracts had not in fact appreciated in value, and presumably would have disapproved the exchanges.

The message to supervisors? Taking the reps word for it is insufficient [see In the Matter of Donna N. Morehead, Admin. Proc. File No. 3-10814 (June 26, 2002)].

What if You Guessed Wrong?

The individuals involved in the three actions mentioned above are facing significant penalties.

For instance, the sales rep in the first action noted above was barred from associating with any broker-dealer and investment adviser for two years. This rep was also required to disgorge over $200,000 in commissions from the exchanges (payment was waived upon a demonstration of financial inability to pay).

The sales rep in the second action is facing fraud charges brought by the SEC, which is seeking, among other things, disgorgement of commissions on the exchanges and an additional monetary penalty.

In the third action, the broker-dealer principal was barred from association with any broker or dealer in a supervisory capacity for one year, and required to pay a civil penalty of $10,000.

In conclusion, these actions underscore the importance of making sure every exchange recommended by a rep or approved by a supervisor is in the clients best interests.

is a partner with Sutherland Asbill & Brennan LLP, resident in its Washington, D.C. office. Her e-mail is [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.