Post on 15-Dec-2015
transcript
Variable AnnuitiesVariable Annuities
Abusive Sales Practices Abusive Sales Practices and Liabilityand Liability
By Joel D. Feldman
Anapol, Schwartz, Weiss, Cohan, Feldman & Smalley
IntroductionIntroduction
Individual InvestorsNASD and NYSE Arbitration
ProgramsTort Law ConceptsPersonal Injury Settlement Proceeds
Variable AnnuitiesVariable Annuities
What are they?– Annuities – Insurance Contracts– Tax Deferred Growth– Annuitization
Sub-accountsSub-accounts
Variable Annuities subject to stock market risk based upon the nature of sub-account investments
Potential for AbusePotential for Abuse
1990 – $35 Billion2000 – $850 Billion
Complicated Product– Insurance and Securities
High Fees and Commissions for Brokers
Suitability Suitability RequirementsRequirements
Supervisory Supervisory ResponsibilitiesResponsibilities
&
SuitabilitySuitability
NASD Conduct Rule 2310– Recommending Purchase, Sale, or
Exchange– Reasonable Grounds for Believing
Recommendation is Suitable for the Customer
Facts Disclosed by the Customer– Other Security Holdings– Financial Situation
Supervision Supervision
NASD Conduct Rule 3010(a)(1)Members must establish systems to
supervise activities of agents designed to achieve compliance with applicable securities laws and regulations.
Mr. and Mrs. JonesMr. and Mrs. Jones
Mrs. is retired – age 62Mr. is retired – age 66Both have a high school educationBoth need a current incomeNeither need life insuranceBoth are Risk Averse
Mr. and Mrs. JonesMr. and Mrs. Jones
Prior Investment Experience– U.S. Savings Bonds– Bank CD’s– Mr. Jones – Participated in Company
Retirement Plan
Investment ObjectivesInvestment Objectivesand Risk Toleranceand Risk ToleranceI do not want to worry about losing
my moneyI do not need to make a lot of
money, I just want to be secure and have a guaranteed income
I do not trust the stock market
Mr. and Mrs. JonesMr. and Mrs. Jones
Mrs. Jones Personal Injury Settlement
Net $750,000
What should be done with the money?
Financial Advisor
Broker RecommendsBroker Recommends
$500,000 into a variable annuity8 sub-accounts
– Equally divided as to $– 2 Bond Mutual Funds– 6 Equity Funds
•International Portfolio
•Aggressive Growth
•Small Cap Growth
•Capital Appreciation Portfolio
•Small Cap Value
•Mid Cap Growth
ConfusionConfusionMisunderstanding Misunderstanding Deception?Deception?It is guaranteed you cannot lose your
initial investmentA minimum level of income
payments is guaranteed
Guaranteed Minimum Guaranteed Minimum Income BenefitIncome BenefitYes – But
– Policy must be in force for 10 years– Annuitization is Necessary
Other NegativesOther Negatives
Not a short-term investment, lack of liquidity – CDSC
Unfavorable tax consequences – conversion of capital gains tax rates to ordinary income
No “stepped up” cost basis if appreciation when assets passed at time of death
Fees – 1.25% to 3%
Mr. and Mrs. JonesMr. and Mrs. Jones
Never should have been sold any variable annuity– Tax deferral not important– No need for life insurance– Had a real need for guaranteed principal
Negligence, Breach of Contract, Breach of Fiduciary Duty, Uniform Trade Practices Consumer Protection Law (UTPCPL), Fraud
DamagesDamages
Rescission– Return of $500,000 investment
(less actual value)
Interest from Date of Sale of Variable Annuity
Attorney’s Fees and CostsUTPCPL – Treble Damages
NASD Conduct RulesNASD Conduct Rules
Actual and Proposed
Heightened Suitability Requirements“Plain English” Risk Disclosures
– See Exhibit ??
Heightened Supervisory Requirements
Warning SignsWarning SignsOlder ClientsQualified AccountsNeed for LiquidityNo Need for Life InsuranceUnsophisticated ClientsNeed for Income and Preservation of
Capital“1035” Exchanges