Experts debate if B of A deal's 1-shot or trend

Jul 25, 2005 @ 12:01 am

By Gary S. Mogel

NEW YORK - Experts are debating the repercussions of the settlement between Bank of America Corp. and Massachusetts regulators.

The settlement requires the Charlotte, N.C.-based bank to offer refunds to clients age 78 and older who purchased variable annuities in 2003 or 2004. Among the allegations were charges that the bank sold variable annuities to clients with Alzheimer's disease or who otherwise lacked the ability to understand the investment risks.

"This is earthshaking news to the variable annuity industry," said John Duval, president of a New York-based securities litigation consulting firm bearing his name. "Variable annuity providers will be forced to rethink how they sell this product."

The National Association of Variable Annuities in Reston, Va., has "not gotten a lot of calls from our members on the settlement and have taken no specific position on it," said Deborah Tucker, a spokeswoman.

Prelude to other settlements?

"I don't know what led to them choosing age 78 for the refunds," she added. "Federal and state regulations on variable annuities have not been age specific, although age is a factor built into many companies' suitability screens."

William Galvin, secretary of the commonwealth of Massachusetts, said in a statement that he hopes the bank's settlement will lead to agreements with other banks and broker-dealers involved in his investigation of variable annuity marketing practices.

Probes are under way in other states, including California, Connecticut, New Jersey and New York (InvestmentNews, July 11).

Some industry observers view the settlement as a prelude to similar settlements of charges involving questionable variable annuity sales to the elderly. For instance, there have been charges against Citizens Financial Group Inc., based in Providence, R.I., of selling variable annuities to elderly people who needed the money for more pressing purposes such as paying for an assisted-living facility.

Others view the settlement as a drastic remedy that will be used sparingly and only when a pattern of abuses is found.

Although the settlement was negotiated with the Massachusetts Securities Division in Boston, the bank will offer the refunds - without surrender penalties - to thousands of people age 78 and older nationwide. It also agreed to review the suitability of sales to clients who were 75 to 77 when they purchased variable annuities in 2003 or 2004.

Banks 'too aggressive'

Variable annuity sales practices by non-bank marketing channels such as broker-dealers also are being investigated. But banks are more likely to become liable for mass refund settlements, because their reps are not as well trained in screening variable annuity applicants, according to advisers not affiliated with banks.

"Banks in this state were way too aggressive in how they were marketing variable annuities," said Chris Provo, a financial adviser in Worcester, Mass. "Banks were selling the annuities - promising 6% annual returns - as if they were 6% certificates of deposits, with similar risks."

"Many bank reps don't receive as large a share of the commissions of the products they sell as non-bank reps do, so they try to sell in greater quantities to increase their compensation," he added. Mr. Provo's firm, Provo Financial Services Inc., manages about $25 million.

Fee-only advisers aren't worried about becoming embroiled in variable annuity marketing disputes, because they don't have the type of commission-based motives that lead to the abuses that are targeted by the settlement.

"As a strictly fee-based adviser, we don't sell any products," said Debra Morrison, a wealth manager with Regent Atlantic Capital LLC in Chatham, N.J. She added that she doesn't think much of variable annuities and seldom recommends or discusses them with clients of any age. Ms. Morrison's firm has almost $1 billion under management.

May set precedent

"The BofA scenario was not unique or novel, so I can see other states' using this mass refund settlement as precedent in their own investigations," said Bill Singer, a securities compliance lawyer with Gusrae Kaplan Bruno & Nusbaum PLLC in New York. He said that the bank probably agreed to settle because it is busy integrating its recent acquisitions and has "bigger fish to fry."

"These abuses are systemic problems and not isolated examples," said Mr. Duval. "This type of refund settlement might in the future be forced on variable annuity providers by the NASD," he added. "Settlements are actually the cheap way out - the variable annuity providers might have to pay fines and punitive damages if there's a trial."

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