Elder
Law FAX -- August 1, 2005
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Education |
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State Settles With Securities Firm Over Improper
Variable Annuity Sales to Seniors
CCO Investment Services Corp., an affiliate securities broker-dealer of
Citizens Bank, will pay a $3 million civil fine for unethical and dishonest
conduct in pushing the sale of variable annuities to elderly bank customers.
The agreement was announced on July 22, 2005, by William F. Galvin, Secretary of the Commonwealth of Massachusetts. A consent order was signed by the Secretary and CCO on July 22 after CCO admitted to facts set out in an administrative complaint filed on February 10 by the Securities Division of the Secretary's Office.
CCO has agreed to cease and desist from violating the Massachusetts securities act to offer all Massachusetts customers who were 75 or older when they bought a variable annuity from CCO the opportunity to recover their money without penalty.
"This company pressured elderly bank customers into buying variable annuities without regard for the appropriateness of such an investment," Secretary Galvin said.
A variable annuity is a contract which provides future payments to the holder, usually after a number of years, the size of which depends on the performance of the portfolio's securities. Such annuities are generally not suitable for older investors because of high surrender charges, significant up-front fees, and often-illusory tax and probate benefits.
The complaint against CCO grew out of sales practices at a South Yarmouth, Massachusetts, branch of Citizens Bank. Tellers at the bank earned compensation on a point system by referring depositors, particularly those with maturing certificates of deposit, to stockbrokers.
At least half of one financial consultant's variable annuity sales since January 2003 at the South Yarmouth branch had been to elderly clients.
During 2003, in some instances variable annuities paid up to seven percent in commissions to financial consultants, higher than most investments offered by CCO. Top producers based on sales were eligible for CCO-paid performance trips to such destinations as Puerto Rico, Cancun, St. John, and Jamaica. In additions, top producers were also provided free dinners and awards.
CCO also permitted insurance company wholesalers to have unrestricted access to financial consultants, and to bank employees. The wholesalers also provided gifts, food and beverages, sports tickets to financial consultants.
Although CCO did have a sales policy in place for senior clients (those age 75 and older), it was not followed uniformly by certain CCO financial consultants and sales managers in the sales of variable annuity products.
Sales of variable annuity products have become increasingly common. Typical targets of annuity sales are elderly persons, who may have been bank customers for years. Banks traditionally sold their elder customers low-performing certificates of deposit, touting that the instruments are "federally insured" and hence, safe investments.
Lured by higher interest rates, elderly bank customers are sold variable annuities by affiliate broker-dealer firms. The dealer representatives usually have an office right inside the bank, thereby leading many bank customers to believe that the representative is "with the bank" even though in fact it is a separate (although affiliated) company.
"CCO did not have adequate procedures in place reasonably designed to prevent or detect the improper participation of unlicensed personnel in client meetings with financial consultants," the agreement found, adding that "CCO lack adequate training procedures with respect to determining the appropriateness of variable annuities for Massachusetts customers age 75 and over."
The agreement also requires CCO to adopt sales practice rules for variable annuity sales and to retain an independent consultant to review company policies.
Elder Law FAX is published weekly by Timothy L. Takacs, Attorney at Law. 201 Walton Ferry Road, Hendersonville, Tennessee 37077-0364. (615) 824-2571, (615) 824-8772FAX. Copyright 1995-2005 by Timothy L. Takacs. Would you like Elder Law FAX e-mailed to you free every week? To subscribe, please use the Elder Law FAX Subscription Form.