SEC Enforcement Actions Put Spotlight On VA Switches

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.