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Securities Regulators Put VA Sales On Scams List

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NU Online News Service, Jan. 15, 2004, 12:18 p.m. EST – An organization of state securities regulators has for the first time listed variable annuities on its annual list of investment scams.[@@]

The North American Securities Administrators Association ranked VA sales 10th on the list of top “scams, schemes and scandals” for 2004 because a survey of state securities enforcement officials found that many regulators are reporting an increase in consumer complaints about VA products.

“Regulators are concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities,” NASAA says. “Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market.”

The Washington-based group charges that some VA benefits, such as tax deferral and death benefits, come with “strings attached” and extra costs.

“High commissions often are the driving force for sales of variable annuities,” NASAA says.

“Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time,” says Ralph Lambiase, NASAA’s president and director of Connecticut’s Division of Securities.

Michael George, general counsel of the National Association for Variable Annuities, Reston, Va., says his group generally disagrees with “the implication that the majority of variable annuities are sold inappropriately.”

Sometimes, he acknowledges, producers sell products, including variable annuities, that are not suitable for the investor. He insists, however, that such incidents are isolated.

“Broker-dealers take their responsibility seriously and abide by the rules of the [National Association of Securities Dealers] in selling VAs,” he says. “Saying there are strings attached is a misleading characterization.”

George says fees charged for variable annuities include standard mortality and expense fees, while fees for add-on features, such as living benefits or enhanced death benefits, “are normally clearly spelled out in prospectuses and by the broker-dealer.”

Only 17 states designate variable annuities as securities. The remainder consider them insurance products.

NASAA is seeking changes in state laws that would empower state securities regulators to act on complaints from investors about variable annuities and the companies and producers that sell them. NASAA says, however, that its proposed changes still would allow state insurance regulators to continue to oversee insurance companies that sell variable annuities.

“Those who buy variable annuities should not be denied the protections enjoyed by every other class of investor,” Lambiase says.

In addition to VA sales, the other top NASAA “scams, schemes and scandals” were, in order of mention:

- Ponzi schemes.

- Investment fraud against seniors.

- Promissory note swindles.

- Unscrupulous broker-dealers.

- Affinity fraud (efforts to target investors of shared religions or ethnic backgrounds).

- Securities sold by unlicensed insurance agents.

- Fraudulent investments sold with a promise of unusually high returns.

- Internet swindles.

- Illegal mutual fund practices.