NASD Acts on Annuity Advisor
The National Assn. of Securities Dealers filed a disciplinary complaint Wednesday against financial advisory firm Waddell & Reed Inc. of Overland Park, Kan., charging it with selling unsuitable investments to thousands of clients.
The firm’s former president, Robert Hechler, and its national sales manager, Robert Williams, were named in the complaint. The NASD alleges that the firm advised 6,700 clients to switch their variable annuities from one insurer to another in transactions that generated millions of dollars in fees for the firm but did not benefit the clients. Roughly 20% of the exchanges are likely to result in the clients’ losing money, according to the NASD.
The NASD, which said this was the largest annuity case it has ever filed, suggested that Waddell return $37 million in sales commissions and pay unspecified damages to compensate the firm’s customers.
“Today’s action should make crystal clear that a broker may not recommend that clients replace their variable annuity contracts when the broker has no reasonable basis for believing the replacement is in the clients’, not the broker’s, best interest,” said Mary L. Schapiro, NASD vice chairman and president of regulatory policy oversight.
The NASD has increased its oversight of variable annuity sales, which it says are ripe for abuse because of their complex fee structures and rules. Since 2001, the Washington-based regulator has brought more than 75 disciplinary actions against sellers of variable annuities, which are retirement-savings products that combine mutual fund investments and insurance benefits.
The NASD charged Waddell with suitability and supervisory violations, Hechler with causing the firm’s suitability violations by encouraging the sales force to switch customers, and Williams with supervisory failures in connection with the variable annuity exchanges.
Under NASD rules, the individuals and firms named in the complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, suspension or bar from the securities industry.
Waddell Chairman Keith A. Tucker said the NASD’s complaint contained “factual misrepresentations, factual omissions and half-truths.”
“We believe our actions were consistent with NASD rules and guidance,” he said in a statement. “We also believe that the two individual respondents -- at all times -- acted responsibly and in the best interests of our clients.”
The complaint said Waddell, a national firm that operates 29 offices in California, engaged in an “aggressive campaign” to switch the variable annuity contracts of its customers from those produced by United Investors Life Insurance Co. to those of Nationwide Insurance between January 2001 and August 2002.
The firm’s stock fell 75 cents to $24.40 in New York Stock Exchange trading Wednesday.
Reuters and Bloomberg News were used in compiling this report.
