NASD Charges Waddell & Reed With Violations
The NASD Wednesday slapped Waddell & Reed with more than 6,700 complaints, charging that the firm systematically encouraged brokers to recommend unsuitable variable annuity exchanges to its customers. Two company executives were cited. The firm’s president, Robert Hechler, has been charged with encouraging the transactions in question, and national sales manager Robert Williams with supervisory failures.
According to the complaint, between January 2001 and August 2002, Waddell aggressively pushed brokers to switch variable annuity contracts with United Investors Life Insurance to similar annuities provided by Nationwide Insurance. The move was prompted by UILIC’s unwillingness to share certain fees it received on sales of annuities at Waddell. The NASD alleges Waddell & Reed failed to determine whether these switches would be beneficial to customers.
These exchanges generated $37 million in commissions and cost Waddell customers $10 million in surrender fees, according to the NASD. According to the NASD’s analysis, at least 1,400 of the firm’s customers were likely to lose money by making these switches.
“Engaging in a campaign to make such recommendations without the assessment of the suitability of the exchange, simply because it will advance the firms’ own commercial interests, is completely unacceptable,” says Mary Schapiro, NASD vice chairman and head of regulatory policy and oversight.
Waddell & Reed has denied the allegations and plans to defend its sales practices and compliance procedures, according to a company release. Company officials did not return calls seeking comment. The firm’s release says that the complaint is “factually and legally inaccurate” in many places, and went on the attack against UILIC. Waddell says the NASD’s inquiry was initiated “without a single customer complaint and was promoted by UILIC to further its litigation interests.” Waddell, however, does not address specific charges in the NASD’s release, simply saying the complaint is based on a “hypothetical model” that no firm would ever use.
According to the NASD, the switching campaign began when UILIC, the original issuer of annuities sold by Waddell, did not agree to share a portion of the fees it collected from annuity sales at Waddell. At this time Nationwide Insurance stepped in and agreed to the fee sharing arrangement, spurring a push by Waddell management to have advisors switch clients to Nationwide’s variable annuities.
The push, apparently, worked. Switches from one to the other jumped more than 500 percent in March 2001, and another 490 percent in April 2001, the NASD alleges. Clients paid surrender charges to switch, as well as incurring a new surrender-charge period limiting their ability to surrender their new annuity contracts. In addition, switchers paid higher ongoing fees.
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