Annuities are sold by insurance agents and stockbrokers. Insurance agents are licensed with insurance companies and stockbrokers are licensed with brokerage houses. Government regulators are charged with the responsibility to make sure that insurance companies and brokerage houses comply with the law. Here is what the regulators have been saying about the firms that sell these products.

What Government Regulators are Saying About Annuity Abuses

On February 15, 2001, NASD issued an Investor Alert entitled "Should You Exchange Your Variable Annuity," stressing that, although tax law makes 1035 Exchanges free from income tax, investors should be aware of other fees besides income tax which might apply to an annuity exchange. Such fees include surrender charges, mortality and expense risk charges, administrative fees, underlying fund expenses and charges associated with special features, such as guaranteed minimum income benefits. Investors are further warned that brokers are often receiving higher commissions for a variable annuity transaction than for the sale of other securities products.

A January 16, 2002 NASD Investor Alert entitled "Equity-Indexed Annuities - A Complex Choice" explains that Equity-Indexed Annuities ("EIAs") have both fixed and variable annuity characteristics, featuring a minimum guaranteed rate of return combined with an interest rate linked to a market index. The Alert warns that EIAs are typically structured so that they are not registered securities, and therefore not subject to suitability, disclosure and sales practice requirements which would otherwise apply. The wide variety of indexing methods used to calculate the index-linked interest rate makes it hard for investors to predict payouts from their EIA and to compare one EIA to another.

A May 27, 2003 Investor Alert entitled "Variable Annuities: Beyond the Hard Sell" warns investors about fraudulent marketing practices aimed at seniors and sales pitches which attempt "to scare or confuse investors" by claiming that an investment in a variable annuity will protect them in the event of a lawsuit or seizure of assets. The Alert provides simple definitions of common terms and common fees associated with variable products, and explains to investors that variable annuities within IRA's provide no additional tax savings, increase the expense of the IRA, and generate fees and commissions for the salesperson.

On November 3, 2003, NASD Rule IM-2210-2 regarding "Communications with the Public About Variable Life Insurance and Variable Annuities" was amended to state that, although historical performance of a mutual fund may be used to illustrate how a fund would have performed had it been part of a variable annuity or variable life insurance product, such presentations must include all elements of return and deduct applicable charges and expenses. In addition, sales communications may not include the performance of an existing fund if the representative's focus is to sell a similar but new fund (a clone fund or model fund, for example) available in a variable product.

A May 12, 2004 speech by Mary L. Schapiro, Vice Chairman NASD and President of Regulatory Policy and Oversight, focused in part on a perceived increase in abusive variable annuity sales practices, including the targeting of elderly investors who are sometimes encouraged to borrow equity from their homes in order to purchase variable products. Ms. Schapiro stated that NASD had taken more than 80 disciplinary actions in response to troublesome variable annuity sales practices in the previous two year period. Ms. Shapiro also stresses the need to codify the following best practices: (1) heightened disclosure requirements for delivery of not only a prospectus, but "a plain English risk disclosure document" discussing liquidity issues, tax issues, market risk and the availability of a free look; and (2) a registered principal should approve the sale or exchange in writing after considering the investor's age and liquidity.

Notice to Members 04-45, issued in June 2004, requested comment on "Proposed Rule Governing the Purchase, Sale, or Exchange of Deferred Variable Annuities." Previous Notice to Members 99-35 (May 1999) served as the basis for the new rule, which would include suitability, disclosure, principal review, and supervisory and training requirements. NTM 04-45 cites a wide array of misconduct including "excessive switching, misleading marketing, failure to disclose material facts unsuitable sales, inadequate training and supervision of salespeople and deficient written supervisory procedures."

Notice to Members 04-72, issued in October 2004, is entitled "Transfers of Mutual Funds and Variable Annuities." NTM 04-72 was issued to clarify for members that the previous NTM 02-57 did not allow members to issue negative response letters for the bulk transfer of customer accounts to a different broker-dealer where customers hold mutual funds or variable annuity products directly with the issuer. Rather, a member must obtain the customer's affirmative consent to direct a change in the broker-dealer of record in such a mutual fund or variable annuity account.

Notice to Members 05-27, issued in April 2005, is entitled "Principal Pre-Use Approval of Member Correspondence." NTM 05-27 would amend NASD Rule 2211 to require registered principal pre-use approval of any correspondence sent to 25 or more existing retail customers during a 30-day period. This change was meant to capture, and to subject to SEC and NASD sales and advertising standards, member correspondence to multiple existing customers which encourages existing customers to invest in variable annuities or other securities products.

On June 28, 2005, SEC Commissioner Paul S. Atkins gave a speech before the National Association for Variable Annuities. Atkins calls the then-proposed (now adopted) 75% independent mutual fund board requirement too costly, backed by too little study, and benefitting of too little public input. Atkins also criticizes a recent point-of-sale and confirmation disclosure proposal as bombarding investors with information at a point in the investing process where investors may be confused and overwhelmed. In the case of variable annuities, the complexities and nuances of the product were seen as potentially too extensive to express on the proposed disclosure forms. Atkins suggests internet-based disclosure as a possible alternative, so that investors can have easy access to the desired level of detailed information which they want, when they want it. Atkins also opines that rules relating to market timing risks and fair valuation policy may be quite difficult to implement in the variable product context.

Finally, in a June 29, 2005 article in Ignites, NASD senior vice president and enforcement deputy James Shorris states that the NASD is newly focused on the sale of insurance riders and other add-ons to variable products that are duplicative, conflicting or otherwise unsuitable for customers. There is also concern with representatives changing firms and transferring customer variable accounts with them in order to continue to receive trailing commissions, and with unsuitable sales of illiquid EIAs to elderly customers.

Why Has There Been So Much Fraud in Connection the Sale of Variable Annuities?

Although variable annuities are truly insurance policies, they are sold by stockbrokers employed by brokerage firms, because they involve securities. The "behind the scenes" contract between the insurance company and the brokerage firm may say that the insurance company is not responsible for sales fraud by the stockbroker. On the other hand, the brokerage firm may say that annuities are insurance and it has no duty to supervise the sale of insurance. As a consequence, neither the insurance company nor the brokerage firm may exercise actual supervision over the selling agent. Thus, instead of double supervision, there is none.

All of the Major Insurance Companies and Brokerage Houses are Selling Annuities

As in the case of the Limited Partnership scandals of the late 1980's and early 1990's, it seems clear that the vast amount of money to be made on the sale of annuities has drawn virtually all of the major players into a feeding frenzy with annuities. Nearly all major life insurance companies and brokerage houses sell them.

The following is an list of some of the firms that participate in selling annuities:

A

The Academy of Financial Services Studies LLC
ACORD
Actuarial Strategies, Inc.
AdminServer, Inc.
ADP Investor Communication Services
Advanced Sales Corporation
Advantus Capital Management, Inc.
Advest, Inc.
AdvisorCentral, LLC
AEGON Insurance Group
AIG Global Investment Group
AIG/SunAmerica/VALIC
AIM Investments
AllianceBernstein
Allianz Global Investors
Allianz Life Ins. Co. of North America
Allstate Financial
American Century Investments
American Express Financial Advisors, Inc.
American Express Financial Group
American Family Life Insurance Company
American Funds Distributors
American National Insurance Company
American Skandia, a Prudential Financial Co.
Ameritas Variable Life Insurance Company
Annuity Market News
Annuity Price Center, a division of Flexible
Aon Annuity and Insurance Services
Aon Consulting
Art Plus Technology
Associated Securities Corp.
The Atherton Group
AXA Corporate Solutions Life Reinsurance Co.
AXA Financial

B

Bankers Life & Casualty Financial Services
Barger & Wolen LLP
Beacon Research, Inc.
Blazzard, Grodd & Hasenauer, P.C.
Blue Frog Solutions
Boomer Market Advisor Magazine
Bowne & Co., Inc.
Brokerage Design & Development, Inc.
Brookstreet Securities Corp.

C

Cadaret, Grant & Co. Inc.
CANNEX Financial Exchanges
Capital Fulfillment Group
Carstens, Glynn & Pickering
Cathedral Corporation
Cerulli Associates
Charles Schwab and Co., Inc.
Chase Insurance
CitiStreet
ClienTell, Inc.
Cohen & Steers
Columbia Funds Distributor, Inc.
Command Financial Press
Computershare Fund Services
Confluence
Cooperative Technologies, Inc.
COSS Development Corporation
CSC Financial Services Group
CT Insurance Services
CUNA Mutual Life Insurance Company
CUSO Financial Services, L.P.

D

DAK Associates
DALBAR, Inc.
Dasgupta and Perron
Data Life Assoc. Inc.
Davenport Financial Group, Inc.
Davis & Harman LLP
Dechert LLP
Delaware Investments
Deloitte & Touche LLP
Depository Trust & Clearing Corporation
Diaphonics
The Diversified Services Group, Inc.
Dreyfus Service Corporation
DST Output
DST Systems, Inc.
DVFS
Dykema Gossett PLLC

E

E-Z Data
Eagle Asset Management, Inc.
EAI Information Systems
Eastern Point Advisors
Edward Jones
Epoch Investment Partners, Inc.
Ernst & Young
Executive Compensation Planners
Expert Insight, LLC

F

Farm Bureau Life Insurance Company
Farmers Life & Farmers Financial Solutions
Federated Investors
FGS/Demand One
Fidelity Investments Life Insurance Company
Fidelity Investments Institutional Services
Financial Profiles, Inc.
Financial Research Corporation
Financial Service Corporation
Finetre Corporation
First Investors Life Insurance Company
First Trust Advisors L.P.
Fiserv Insurance Solutions
Fiserv Securities, Inc.
Fiserv, Inc.
Foley & Lardner LLP
Foresters
Foresters Equity Services, Inc.
Forrest T. Jones & Company, Inc.
FPC of Fort Washington (Fortune Consultants)
Franklin Templeton Investments
Fred Alger Management, Inc.
Fugent, Inc.

G

Gartmore
Genesis Financial Products, Inc.
Genesys Research
Genworth Financial
Golden Retirement Resources, Inc.
Goldman Sachs Asset Management
Goodwin Procter LLP
Great American Financial Resources, Inc.
The Guardian Insurance & Annuity Co.

H

H & R Block Financial Advisors
Hand Arendall, LLC
Harte-Hanks
Hartford Life, Inc.
Highpoint Partners, LLC
Horace Mann Life Insurance Co.

I

Ibbotson Associates
IBM BTO Insurance Services
ICON Advisers, Inc.
Imeriti, Inc.
Impact Training and Consulting
Independent Financial Marketing Group, Inc.
InfoGraphix
ING America Equities, Inc.
ING Clarion Real Estate Securities
ING U.S. Financial Services
Insurance Strategies Consulting, L.L.C.
Insurance Technologies
Insurer Central Services, Inc.
Integrity Life Insurance Company
Interlink Securities Corp.
Investment Advisor Magazine
Investors Capital Corporation
Inviva
IXI Corporation
IXIS Asset Management

J

J.J.B. Hilliard, W.L. Lyons, Inc.
Jackson National Life
Janney Montgomery Scott Inc.
Janus Capital Group
John Duval Associates
John Hancock Financial Services, Inc.
Jorden Burt LLP

K

Kades-Margolis Corporation
Kansas City Life Insurance Company
Kasina
Kemper Investors Life Insurance Company
Kilcullen & Company
Kirkpatrick & Lockhart Nicholson Graham LLP
Kostmayer Associates, Inc.

L

Lazard Asset Management
The Leaders Group, Inc.
LeBoeuf, Lamb, Greene & MacRae, LLP
Legacy Financial Services, Inc.
Legg Mason Wood Walker, Inc
Lifeco
Lincoln Benefit Life
Lincoln Financial Distributors
Lincoln Financial Group
Lipper, A Reuters Company
LMB Group, Inc.
Lord, Abbett & Co.
LPL Financial Services
Lynch, Jones & Ryan, An Instinet Company

M

Management Recruiters
Marchese & Associates
Market Metrics
Marketing Matrix International, Inc.
MassMutual Financial Group
Mathew Greenwald & Associates
McCamish Systems, L.L.C.
McCarthy Fingar LLP
McDonald Investments, Inc.
McGovern Myles, Inc.
Merrill Corporation
Merrill Lynch Insurance Group
Merrill Lynch Investment Managers
MetLife
MetLife Investors Group
MFS Investment Management
Midland National Life Insurance Co.
Milliman, Inc.
Minnesota Life
Mitchell, Williams, Selig, Gates & Woodyard
Mobular Technologies
Modern Woodmen of America
Morgan Keegan & Co.
Morgan Stanley Investment Management
Morgan, Lewis & Bockius LLP
Morningstar, Inc.
Mutual of America Life Insurance Co.
Mutual Service Corporation

N

National Financial, A Fidelity Investments Co
National Life Insurance Company
Nationwide Financial
NaviSys
Neuberger Berman Management, Inc.
New England Financial
New York Life Insurance Company
NewRiver, Inc.
NFC Consulting Group
NFP Securities Inc.
NLI
Northwestern Mutual
Norton Consulting Group, LLC
NOVON Consulting Corp

O

OAS Software Corporation
OneAmerica Financial Partners, Inc.
Oppenheimer & Co.
OppenheimerFunds, Inc.
Outsearch, LP

P

Pacific Life Insurance Company
Palena Associates, Inc.
Paul J. Mason
Penn Mutual Life Insurance Company
Pershing LLC
Personalized Brokerage Services
Personix
Phoenix
Phoenix Investment Partners
PIMCO
Pioneer Investment Management, Inc.
Piper Jaffray
PLANCO, INC.
The Primary Group, Inc.
PrimeLook Inc.
Principal Financial Group
ProFiles, Inc./Intuitive Selection
ProFund Advisors LLC
Protective Life Insurance Co.
Prudential Financial
Putnam Investments
Putnam Lovell NBF Securities, Inc.
Pyxis

R

Rapid Solutions Group
Raymond James Financial
RBC Dain Rauscher, Inc.
RBC Insurance
RegEd.com
Registered Rep.
Reilly, Richard
Retirement Solutions, LLC
Robert W. Baird & Co., Inc.
RR Donnelley Financial
Ryan Beck & Co. Inc.
Rydex Investments

S

S4 Consulting
SalesFocus Solutions
SalesLink Corporation
Salomon Brothers Asset Management Inc
Scudder Investments
Security Benefit
Sequoia System International
Signix
SimpleLogic Inc.
Smith & Riley, LLC
Smith Barney
SMS Group LLC
SOLCORP
Solon Capital LLC
Source Media
Southern Farm Bureau Life Insurance Company
Southwest Insurance Agency
SparksFly, Inc.
Spencer Stuart
Standard & Poor's
Stanford Group Company
State Farm Insurance Company
State Street Corporation
Still River Retirement Planning Software
Stonewood Financial, LLC
Strategic Insight LLC
Success Continuing Education LLC
Summit Investment Partners
Sun Life Financial
Sun Life Financial Distributors, Inc.
SunGard Insurance Systems
SunTrust Banks Inc (SunTrust Securities, Inc)
Sutherland Asbill & Brennan LLP
Symetra Financial
Systems Engineering Group, LLC

T

T. Rowe Price Associates
Thrivent Financial for Lutherans
Thrivent Investment Management, Inc.
TIAA-CREF
Tillinghast
Topaz Systems / Computime Inc.
Transamerica Capital, Inc.
Transamerica Life Companies
Travelers Life & Annuity Company
Trinity Actuarial Consulting LLC

U

U.S. Securities & Exchange Commission
U.S. Trust Company
UBS Financial Services Inc.
UBS Global Asset Management (US) Inc.
Union Central Life
United Planners Financial Services
USAA Life Insurance Company
USAllianz Investor Services, LLC

V

Vallue Consulting
Van Eck Global
Van Kampen Investments
The Vanguard Group, Inc.
VERTEX, Inc.
Vision Investment Services, Inc.
The VPA Group

W

W.V.H. Inc.
Wachovia Securities
Walnut Street Securities, Inc.
Wellington Management Company, LLP
Wells Fargo Funds Management Group
Wells Fargo Investments
Western & Southern Financial Group
WestMark Ventures, Inc.
WM Financial Services
WM Group of Funds
Wood Logan
Woodmen Financial Services, Inc.

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