NU Online News Service, May 20, 2004, 2:43 p.m. EDT – NASD, Washington, has fined 3 securities firms in connection with allegations of problems with variable products operations.[@@]
The self-regulatory group also has fined 1 broker and barred 2 brokers from the securities industry.
None of the companies or individuals involved in the settlements has either admitted or denied the allegations, NASD says.
In the enforcement actions against individual brokers, NASD says it barred one for converting funds from a variable annuity and a second for forgery and misrepresentation in connection with variable annuity sales. NASD fined a third broker $28,000 and suspended him for 6 months for unsuitable sales of deferred variable annuities.
The enforcement actions against companies involved American Express Financial Advisors Inc., a unit of American Express Company, New York, and Nationwide Investment Services Corp. and Nationwide Securities Inc., which are both units of Nationwide Financial Services Inc., Columbus, Ohio.
NASD imposed a $300,000 fine on AEFA “for inadequate record-keeping during a 4-year period, which was discovered as a result of an investigation into unauthorized withdrawals from a customer’s variable annuity account,” NASD says.
An AEFA representative who converted a customer’s funds avoided detection for almost 2.5 years because he had changed the customer’s address on the AEFA records to the representative’s own address, NASD says.
David Kanihan, an American Express spokesman, emphasizes that the fine resulted only from the allegation that the AEFA failed to keep the records that NASD sought in a “non-rewriteable, non-erasable” format between December 1998 and November 2002.
“The fine has solely to do with the format in which the records were stored,” Kanihan says.
NASD imposed a total of $175,000 in fines on the Nationwide units “for having inadequate procedures and systems governing its sale of variable annuities and for distributing advertising and sales literature that failed to make required disclosures regarding variable annuity investments,” NASD says.
The Nationwide units used variable product advertising that failed to “prominently disclose the charges and fees associated with the product, explain that dollar cost averaging does not insure profit or protect against loss, clearly identify the product as a variable annuity and/or variable universal life insurance product, and provide a balanced presentation of the risks and benefits associated with investing in a variable annuity,” NASD says.
The Nationwide Investment unit “failed to implement procedures to obtain customer information that is critical to evaluating the suitability of an investment in a variable annuity,” NASD says.
In many instances, the Nationwide Investment unit failed to obtain information about tax bracket, prior investment experience, annual income, liquid net worth, risk tolerance, time horizon, investment objective, customer age or the details of the product being replaced by the variable annuity investment, NASD says.
The Nationwide Investment unit also failed to provide registered representatives with specific guidelines for evaluating the information obtained from customers before making variable annuity purchase recommendations, NASD says.
Nationwide Financial agreed when it settled the matter with NASD not to agree or disagree with NASD’s conclusions.
But “NASD did not identify any sales of Nationwide’s products as unsuitable,” and “NASD made no allegations that Nationwide breached its fiduciary duties to investors,” Nationwide Financial says in a response to the NASD announcement about the fines. “Offering products that appropriately meet clients’ needs is of the utmost importance to Nationwide Financial.”
The company adds that it has strengthened its business by substantially revising the practices and procedures that were the subject of the NASD action. “Nationwide no longer does business in some of the areas that were the subject of the NASD’s action,” Nationwide Financial says.