SEC Official Offers Supervisors Tips For Combatting Improper Sales Practices

By Richard Hill

C. Joshua Felker, an assistant director in the Securities and Exchange Commission's Division of Enforcement, June 28 outlined several best practices and suggested other advice for mitigating risk for those supervising the sales of variable annuities. Speaking at the National Association of Variable Annuities' 2005 regulatory affairs conference, Felker noted that some dealers have established centralized, second-tier reviews of certain transactions. He said transactions that trigger exception reports and those that lead to higher-than-typical commissions are good candidates for extra scrutiny.

Some offices, he said, review and monitor all variable annuity insurance products in such a manner. Regarding higher commission transactions specifically, Felker suggested looking for "red flags" that might be signs of impropriety. For instance, he mentioned researching "where are they getting their sales leads."

Another point made by Felker is to monitor the training--either ongoing or previous--received by sales staff and others. "What other training are they getting?" he asked rhetorically. "As a defense mechanism, you want to know how your agents are being trained."

Beware 'Switching.'

Another topic Felker cautioned dealers to be wary of is "switching," the practice of moving clients from one annuity product to another. The practice can quickly lead to outsized commissions and fees for the sales agent, at the expense of the client's welfare and best interest. "Where there are greater commissions available, you need extra scrutiny," Felker said. Felker also said sales supervisors must follow their intuition. He related the story of one who had a feeling his representative was not properly selling the firm's products. The supervisor talked to the agent and came away convinced that everything was on the level.

Later, however, it turned out the agent had made up facts and the supervisor's qualms had been correct. "What did he do wrong as a supervisor?" Felker asked. "The problem was, he didn't check" the story. As an added measure of security, Felker advised also that supervisors check with clients.

On that matter, he further suggested that clients be asked to fill out written reports describing their transactions and reasons for doing so. Felker specifically said clients should be asked to write out their rationale and not simply fill in checklist forms.

Another topic, market timing the sub-accounts of variable annuities, deserves special consideration, Felker said. The problem is that timing in-and-of-itself is not illegal. However, when only select clients are allowed to do so, it may be fraudulent.

Because market timing is not illegal, devising best practices in this area can be problematic, Felker said. "The key here is, the best practices are what the firm wants them to be," he advised. But, he cautioned, "the policy needs to be enforced evenly among all customers."

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