In Focus

February 28, 2005

ecurities regulators in Massachusetts are questioning fifteen financial firms, including some of the largest brokerage firms, regarding the suitability of variable annuities for clients age 75 and older. Other regulators also have placed a spotlight on the sale of variable annuities. A joint report that the SEC and the NASD issued in 2004 highlighted numerous abuses, such as excessive switching of policies, failure to disclose material facts and unsuitable sales.

But the Massachusetts inquiry is notable because of its bright-line test - sales to anyone age 75 or older. Massachusetts Secretary of State has identified "unethical or dishonest conduct" for "systematically targeting" senior citizens, particularly as their CDs (certificates of deposit) mature. Galvin correctly has said, "This is a form of elder abuse if I ever saw it." Variable annuities are uninsured, bear market risk, carry high fees and impose surrender charges as high as 7% for early withdrawals.

The investigation is "snowballing", and now includes large brokerage firms such as Morgan Stanley, UBS, Merrill Lynch, Wachovia Securities and American Express. Banking firms include Citizens Financial Group, Sovereign Bancorp and FleetBoston Financial Corp., now owned by Bank of America Corp.

Good job, Galvin!

— James J. Eccleston
FinancialCounsel.com