Articles Posted in Variable Annuities

The National Association of Insurance Commissioners (NAIC) has agreed to steps that will allow for the easier identification of brokers who have been barred from the securities industry yet continue to sell other products. The association is tasked with providing states regulatory guidance, as well as drafting model laws.

It is not uncommon for securities brokers to sell insurance, as well as other products and services. Even after someone has lost the license to sell bonds and stocks, he/she is still legally allowed to sell insurance with an insurance license. This type of license also lets individuals sell products that are like securities, such as fixed annuities and equity indexed annuities. Now, regulators are worried that such leniency will enable further bad behavior from brokers who have already been barred.

It was the Wall Street Journal that first reported on how many states can’t do a lot to track these brokers. Because of inconsistent coordination between regulators and insurance watchdogs, the latter may not even know that a broker has been barred from the securities industry. An insurance license lends credibility to ex-brokers even when they have a questionable broker record.

James “Jeb” Bashaw, the former star financial adviser at LPL Financial (LPLA) from Texas is now registered with International Assets Advisory, a small brokerage firm. LPL Financial fired Bashaw last month over allegations involving selling away. Then, for a while this month, he was with Wunderlich Securities Inc.

Selling away typically involves engaging in private securities transactions sans the required written disclosure or brokerage firm approval. It can also include borrowing from a client, as well as engaging in a transaction that is a potential conflict interest, again without the required disclosure in writing or firm approval.

Responding to the selling away allegations, Bashaw noted that he was “home supervised” and underwent more than a dozen perfect audits while affiliated with LPL. After his firing, Wunderlich took steps to hire Bashaw but there was a delay in transferring his license to the firm. In the end, the broker-dealer and Bashaw reportedly decided not to pursue a working relationship.

According to his report on the central registration depository, LPL Financial (LPLA) branch manager James Bashaw was fired last month for allegedly engaging in selling away, which involves taking part in private securities transactions without written disclosure or approval from a brokerage firm, as well as borrowing from a client and taking part in a business transaction that created a possible conflict, again without obtaining the necessary firm approval or written disclosure.

Bashaw, also known as “Jeb” Bashaw, is considered one of the leading financial advisers in Texas. Barron’s magazine ranks him as number one in the state with assets totaling $3.8 billion.

According to Investment News, while the CRD, which is the central licensing and registration system for the securities industries and regulators, provided these details regarding Bashaw’s termination, LPL has not elaborated, except to report on his BrokerCheck profile that the broker did not follow industry regulations and firm policies. Bashaw is now registered with Wunderlich Securities Inc.

The Financial Industry Regulatory Authority has barred Jo Ellen Fischer, an Raymond James independent financial advisor, for purportedly stealing nearly $1 million from a 95-year-old client. At the time, Fisher worked for Peoples Bancorp.

According to the self-regulatory organization, from July to December 2013, the Raymond James advisor converted $924,750 from the elderly customer’s trust without permission. She did this by moving funds and securities into a brokerage account under her daughter’s name. Fisher then liquidated securities and used the money to cover her personal spending, including two Rolexes, motor vehicles, a 2-carat diamond ring, and other expenses.

FINRA says that Fisher claimed that the elderly client was her daughter’s godfather and he wanted her to have the money when she was older. The SRO, however, contends that the Raymond James advisor falsified documents regarding this matter. She has agreed to the bar without denying or admitting to the findings alleging elder financial fraud.

In a settlement reached with the Illinois Securities Department, LPL Financial (LPLA) agreed to pay a $2 million fine and $820K in restitution for inadequate books and records maintenance involving 1035 exchanges. According to the firm’s BrokerCheck file, LPL Financial did not enforce “supervisory system and procedures” when certain persons documented variable annuity exchange activities.

Following the settlement, a company spokesperson said that LPL Financial is enhancing its procedures related to surrender charges resulting from variable annuity exchange transactions. This is to make sure these are accurately documented in records, books, and any disclosures that are issued to clients. The brokerage firm is also taking steps so that advisers are properly documenting why variable annuity recommendations were made.

State regulators have been taking a closer look at LPL as they investigate investment product sales. Last year, the broker-dealer settled with the Massachusetts for at least $2 million and a $500,000 fine over nontraded real estate investment trusts. Financial Industry Regulatory Authority fined the firm $7.5 million for 35 e-mail system failures.

According to Financial Industry Regulatory Authority chief risk officer Carlo di Florio, variable annuities continue to among the products named the most in customer complaints. He spoke at the Insured Retirement Institute’s Government Legal & Regulatory conference in D.C. on Monday.

Di Florio, who is also the head of strategy at the self-regulatory agency, said that some variable annuities are taking on features similar to complex structured products. This includes caps that restrict how high returns can reach during market rallies and buffers that place a limit on how much annuities are allowed to fall when the market drops.

Annuities that have caps and buffers are different from the more conventional annuities in that the two make a product even more complex by varying market volatility exposure. FINRA wants to make sure that investors know what they are getting involved in when they purchase any kind of variable annuity.

The Securities and Exchange Commission has filed charges against brokers Michael A. Horowitz and Moshe Marc Cohen, investment adviser BDL Manager LLC, and four others for their involvement in a variable annuities scam. The financial fraud purportedly aimed to make money from the deaths of terminally sick patients living under hospice care and in nursing homes.

Variable annuities are supposed to act as long-term investment vehicles to offer income upon retirement. One common feature is that a beneficiary of an annuity, usually a child or spouse, is paid a death benefit if the annuitant passes away. There is also usually a bonus credit that the issuer of the annuity adds to the value of the contract according to a specific percentage of purchase payments.

The SEC Enforcement Division claims that Horowitz set up a scam to exploit the benefits offered in annuities. Working with the help of others, he used the information of terminally ill patients in Southern California and Chicago, Illinois and sold variable annuity contracts, along with the bonus credit and benefit, to rich investors.

According to The New York Times, a number of insurance companies that sold variable annuities with healthy death or income benefits prior to the financials crisis are regretting this decision. One reason for this is that they are finding it hard to meet the obligations-payouts of at least 6% or guaranteed returns-that come with them.

Now, some insurers are currently trying to get annuity owners to agree to buyouts or move into investments that have lower returns. In some cases, the penalty for not complying is the loss of the payment that was guaranteed to them. Unfortunately, says The Times, the notice of these changes and potential ramifications are not being made explicitly clear to annuity owners, who may be hearing them via generic-seeming notices sent in the mail that don’t show no indication that the letter might be urgent.

One company, The Hartford, has notified advisers and clients that they have until October to change the asset allocation in specific variable annuities. This is to decrease the balance of the client, which would lower how much the company has to pay out. Rather than a 5% lifetime guaranteed payout, the annuity’s owner would receive a lower payout according to a decreased account value. Failure to comply will result in the loss of the rider that guaranteed payment no matter what the annuity’s value in cash. (A spokesperson for The Hartford, which is exiting the annuities business, said that the investment changes only apply to owners with contracts where such changes are allowed.)

Securities and Exchange Commission Chairman Mary Jo White says that the agency will direct more resources toward going after financial fraud and accounting fraud. She was, however, clear to point out that this did not mean that a new accounting and financial fraud unit would be created, despite calls for one by some industry members. White spoke at the CFO Network 2013, where she also announced that the Commission was modifying its “neither admit, nor deny” settlement practice. This is an announcement that our stockbroker fraud law firm addresses in a different blog post.

The Commission is currently assessing its Enforcement Division’s specialized units, and this review is expected to result in certain size refinements and mandates, as well as the establishment of maybe one or more new units. Enforcement Division co-director George Canellos, however, said that the same reason why such a unit wasn’t set up three years ago when five specialized units (focusing on market abuse, asset management, the Foreign Corrupt Practices Act, public pensions, and municipal securities) were established still holds.

The SEC said then that nearly every regional office has attorneys and experienced accountants they believed are able to handle such cases. That said, the Commission will give over more resources to surveillance and become even more proactive about identifying where there are risks in accounting issues. This will include the Division of Economic and Risk Analysis’s development of an “Accounting Quality Model” that would let the SEC identify financial statement outliers. There also will be more partnering between the Enforcement Division’s Office of the Chief Accountant and the Division of Corporation Finance to come up with more accounting leads.

FINRA has filed a temporary cease-and-desist order barring WR Rice Financial Services Inc. and Joel I. Wilson, its owner, from taking part in allegedly fraudulent sales activities and the conversion of assets or funds. The SRO is also filing a securities complaint accusing both the Michigan based-brokerage firm, Wilson, and other registered representatives of selling over $4.5 million in limited partnership interests to approximately 100 investors while leaving out or misrepresenting material facts.

Per the broker fraud case, the broker-dealer and Wilson got investors to participate by promising them that their funds would be placed in land contracts in Michigan on residential real estate and that the interest rate they would get would be 9.9%. The money was instead allegedly used for unsecured loans to companies under Wilson’s ownership or control.

In other securities news, the SEC’s Division of Investment Management director Norm Champ recently stated that the Commission’s report on retail investors and their financial literacy gives basis for creating a summary prospectus for variable annuities. Speaking via teleconference at the American Law Institute-Continuing Legal Education Group conference on life insurance products on November 1, Champ reported that investors in the study agreed that the mutual fund summary prospectuses were user-friendly. He expressed optimism that a summary prospectus for variable annuities could give significant disclosures and related benefits if designed and implemented well and that the framework used for the mutual fund summary prospectus should prove to be an effective model.

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