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more_legal_areas variable_annuitiesNumerous investigations have turned up violations in the way variable annuities are marketed and their risks disclosed, increasing scrutiny over the annuity business on both state and federal levels. Annuities brokers have been long criticized by regulators and consumer advocates for misrepresenting its products and preying on senior citizens, and the Securities and Exchange Commission and the National Association of Securities Dealers found widespread “weak” practices regarding sales suitability, disclosure, supervision and training in a recent broker-dealers examination of variable annuities sales.
Regulators have increased efforts on scrutiny of variable annuity sellers as a result of these findings. Annuity salespeople can reap commissions as high as nine percent, and the industry has seen its annual annuity sales more than double in the past decade to hit a record $1.65 trillion in 2004. Increased sales, however, have also brought mounting complaints, and a number of states are implementing laws to increase oversight and scrutiny of some annuity sales, with special emphasis on provisions regarding surrender charges.
Surrender charges are a type of sales charge used to pay your financial professional a commission should he/she withdraw money within a certain period after the purchase payment. Usually, the surrender charge is a percentage of the amount withdrawn and declines gradually over a period of several years. In 2004, the National Association of Securities Dealers ordered a major brokerage firm to repay more than $11 million to customers persuaded to exchange one annuity contract for another, generating $37 million in commissions. Marketing variable annuities to the elderly has become a lucrative business, generating millions of dollars in commissions.
In July 2005, New Jersey began enforcing its Senior Citizen Investment Protection Act, which limits how long annuity sellers can impose surrender charges. New Jersey was the third state – along with Utah and Washington – to limit to no more than 10 years the length of time during which insurers can impose surrender charges. These states are not the only ones trying to address aggressive variable annuity sales tactics and surrender charges – high ranking government officials in other sates, including California and Missouri, are also pushing legislation that would impose additional regulation or oversight on annuity sales.
In Massachusetts, at least one major financial services company, Bank of America Corp., agreed to allow certain investors to get out of their annuities without penalty, and with recent lawsuits and settlements involving allegations of abusive sales tactics by the variable annuity and insurance industry, other financial services may be forced to offer the same type of refund to their customers.
Federal regulators want to make a new rule making it harder for brokers to sell variable annuities to unknowing senior citizens and other investors the investments might be inappropriate for. In July 2005, NASD proposed regulations that would require disclosure documents to explain annuities in plain language and require a supervisor to double check whether an annuity sale is appropriate before a contract is issued.
The insurance and variable annuity industries oppose the proposed regulations, claiming they duplicate much of the disclosure and supervision that already exists. Investors, in addition to educating themselves as much as possible about variable annuities and abusive sales practices, should get second or third opinions and contact their state’s insurance department to figure out if the broker selling the variable annuity and the firm issuing it have clean records. All investors should make sure they know what their options are before buying anything.