By Arthur D. Postal
WASHINGTON – The purchase of variable annuities (VAs) by senior investors is the most common area in which noncompliance and nonsuitability issues were found, according to a new report by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
The report highlights recent industry trends in the investment decisions of senior investors as they prepare for and enter into retirement, as well as the regulatory issues impacting this subset of securities industry customers.
For example, the report found, areas of noncompliance dealing with VAs included the section of variable annuity forms or disclosure letters describing the comparative fees and benefits between the current and the proposed annuities. The report found these areas often were incomplete.
In addition, some firms provided what appeared to be inaccurate and misleading disclosures pertaining to VAs. This misleading information included inaccurately disclosing the loss of a death benefit resulting from an exchange or not clearly communicating, inaccurately describing, or failing to disclose surrender charges, the report said.
The report was based on examinations of 44 broker/dealers in 2013 by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and FINRA.
Mutual funds, VAs and equities were the products most often purchased by senior investors, according to the report.
Seniors also purchased more complex securities, such as unit investment trusts (UITs), real estate investment trusts (REITs), alternative investments and structured products, but such purchases were less frequent, the report said.
The report found that, based on sales of products to seniors, 77 percent purchased open-end mutual funds, 68 per cent bought mutual funds, 66 percent bought equities, 25 percent bought fixed-income investments, 20 percent bought UITs and exchange-traded funds, and 20 percent bought non-traded REITs.
The report found that 89 percent of the 44 broker/dealers examined in 2013 made adequate disclosures to seniors regarding a potential transaction, with only 11 percent not in full compliance.
In addition to noncompliance and nonsuitability issues with VAs, “staff observed what appeared to be inaccurate or incomplete disclosures primarily related to non-traditional securities such as REITs,” the report said.
Staff also observed what appeared to be inaccurate, incomplete, or misleading disclosures in relation to affiliated private placements and REITs, the report said.
The report said almost 64 percent of the examined firms allowed their representatives to use senior designations in their sales efforts, and these firms collectively permitted the use of 25 different senior designations. Some firms prohibited the use of senior designations that did not meet certain minimum curriculum and continuing education requirements.
For example, the report said 64 percent of the designations that firms allowed representatives to use required continuing education for the financial professional to maintain the title, 44 percent of the allowed designations were not recognized by any independent accrediting organization, and almost 30 percent of the firms prohibited titles or designations if the corresponding curriculum and continuing education requirement did not meet certain specified standards.
Of the 28 firms that allowed senior designations, 14 percent did not track which representatives had a senior designation, which may violate FINRA’s rule on communication with the public, the report said.
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at firstname.lastname@example.org.
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