NASD Re-examining Policy On VA Sales Contests

By ARTHUR D. POSTAL

WASHINGTON

The National Association of Securities Dealers says it is re-examining its policies on sales contests as a means of selling variable annuities.

The NASD move was disclosed by Elisse Walter, executive vice president for regulatory policy at the agency.

It comes against the background of several lawsuits filed against brokers for allegedly making “false and misleading” statements and “omitting material facts” concerning “undisclosed financial interests” with insurance carriers relating to the sale of variable annuities.

The suits allege that several brokers entered into contracts with certain insurance carriers to receive compensation for the sale of the contest annuities both for the brokerages and the brokers who sold the annuities.

The lawsuits were filed in federal court in San Diego. Amy Lepine, a lawyer at Finkelstein & Krinsk, in San Diego, said the suits allege that purchasers of annuities sold through sales contests were “deceived” in several ways. First, she said, the customers thought they were getting independent financial advice from their customers. “Theyre not,” she said. Second, she alleged, purchasers of annuities “paid inflated premiums to purchase these annuities.”

The suits were filed against A.G. Edwards, Morgan Stanley and Linsco Private Ledger, a broker-dealer with offices in California and Boston. The suit against Morgan Stanley alleges the annuities involved were sold between 1990 and January 2005.

The suits allege that among the carriers that underwrote the annuities are Lincoln Life, Hartford, John Hancock, Manulife and Nationwide. Staff officials at Lincoln Life and Hartford declined comment.

NASD rules allow contests as a means of selling annuities, according to the NASD and officials at the National Association for Variable Annuities, in Reston, Va.

The NASD and the SEC last April issued a report critical of annuity sales practices, especially those sold to the elderly. The NASD has proposed a rule that would impose sweeping new disclosure rules on brokers selling variable annuities, proposals which the industry believes are too broad and costly. Among the provisions, it requires managers to keep far closer tabs than currently on the sales activities of brokers. The rule has been forwarded to the SEC for action.

Mike DeGeorge, general counsel of NAVA, said the sale of annuities through sales contests complies with the NASD rule dealing with non-cash compensation. The rule is NASD Rule 2830 (l) (5) (D).

“Broker-dealers need to comply with NASD conduct rules,” DeGeorge said. And if the NASD proposes modifications to the rules governing sales contests, “we will look at the proposal and work with the NASD to determine whether any changes are necessary,” he added.


Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 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.