15 firms now face annuities inquiries, Regulators look at ties between insurers, brokers

By Andrew Caffrey, Boston Globe Staff
February 18, 2005

Fifteen financial firms, including some of the nation's largest brokerage companies, are being questioned by state regulators in their widening investigation into whether senior citizens are being sold variable annuities that are not appropriate investments for them.

The state Securities Division yesterday issued subpoenas to a dozen additional banks and brokers, seeking information about sales of variable annuities to clients age 75 or older. In particular, regulators are trying to determine if the banks and brokerage firms have favored relationships with insurance companies and receive special compensation for selling the insurers' annuities.

Although regulators have not issued subpoenas to insurance companies, the Massachusetts Division of Insurance is assisting in the state investigation.

''It's snowballing," said Secretary of State William F. Galvin, whose office has received dozens of additional complaints since last Thursday when it accused Citizens Financial Group's investment arm of ''unethical or dishonest conduct" for ''systematically targeting" senior citizens for sales of variable annuities. Galvin previously had disclosed his office also was investigating two other large banks in Massachusetts, Sovereign Bancorp, and the former FleetBoston Financial Corp., now owned by Bank of America Corp.

Some firms were subpoenaed because Massachusetts received specific complaints about them; others got them because regulators wanted to broaden their fact-finding to learn more about variable annuity sales practices.

The banks include Century Bancorp Inc., Banknorth Group Inc., Eastern Bank Corp., and Medford Co-operative Bank, which is now owned by Brookline Bancorp Inc., while brokerage and financial firms that Galvin said he subpoenaed include Morgan Stanley, UBS AG, Merrill Lynch, Wachovia Securities, American Express Co., Advest Inc., and Infinex Investment Inc., a Farmington, Conn., brokerage that provides investment services to around 85 small community banks in the Northeast and Florida and is owned by some of its member banks and associations.

Galvin and other critics argue variable annuities are inappropriate investments for senior citizens, who because of their age may need immediate access to their money, for medical or other emergencies. Variable annuities are uninsured investments that carry high fees, have surrender fees of as much as 7 percent that investors must pay for withdrawing money early, and often expose those investors to greater market risk.

Additionally, Galvin complained that banks and their investment arms are pressuring elderly clients to buy variable annuities, which carry market risks but also pay commissions to brokers, when their certificates of deposits mature, rather than rolling the money over into bank investments that are insured and guaranteed.

The complaints he said his office received include that of a 78-year-old East Springfield woman who was in the early stages of Alzheimer's disease when she was sold a variable annuity by Fleet to replace maturing CDs; and a 75-year-old East Falmouth man who needed access to his funds for his wife's cancer treatments but was instead sold a variable annuity by Advest five years ago that has since lost half its value.

''This is a form of elder abuse if I ever saw it," Galvin said.

Yesterday the National Association for Variable Annuities said the investment vehicles can be ''appropriate" for some senior citizens, ''depending on their circumstances." ''With people living longer, even older investors can benefit from the insurance guarantees offered by variable annuities," the trade group's chief executive, Mark Mackey, said in a statement. ''To the extent that there have been unsuitable sales of variable annuities to seniors, those responsible should be held accountable."

A spokesman for Bank of America, John Yiannacopoulos, said Fleet's Quick & Reilly brokerage unit has received ''a relatively small number of customer complaints related to variable annuities. We're focused on addressing every client complaint we've received. Our policies and procedures are designed to ensure we serve our clients well on the basis of their needs and objectives." Bank of America has since combined Quick & Reilly with its own brokerage unit.

An Advest spokesman said the firm was not aware of a subpoena from Galvin.

Most of the other brokerage firms and banks subpoenaed either did not return calls, or declined to comment beyond expressing a willingness to cooperate with Galvin.

Infinex general counsel Bill Cummings said ''as far as we know there have been no complaints against" the firm.

Brookline Bancorp chief executive Richard Chapman Jr. said Massachusetts will hit a dead-end investigating his company.

"We don't have any broker-dealer relationship. We don't sell annuities," Chapman said." If someone comes in here, we sell them CDs."

Copyright 2005 Globe Newspaper Company

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