SEC Enforcement Actions Put Spotlight On VA Switches
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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)].