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Archive for February 2011

Feb/11

24

Equity-Indexed Annuities—A Complex Choice Says FINRA

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In an article from the Financial Industry Regulatory Authority (FINRA)’s website,  they write that the sales of equity-indexed annuities (EIAs)—also known as “fixed-indexed insurance products” and “indexed annuities”—have grown considerably in recent years. Although one insurance company at one time included the word “simple” in the name of its product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.

The FINRA article states that before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner or other financial professional lots of questions about whether an EIA is right for you.

What is an Annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity’s rate of return is not stable, but varies with the performance of the stock, bond and money market investment options that you choose. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC).  

What is an Equity-Indexed Annuity?

EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. 

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

 What is the Guaranteed Minimum Return?

When EIAs were first sold in the mid-1990s, the guaranteed minimum return was typically 90 percent of the premium paid at a 3 percent annual interest rate. More recently, in part because of changes to state insurance laws, the guaranteed minimum return is typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10 percent tax penalty that will reduce or eliminate any return. 

How good is this guarantee?

Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens. There are several private companies that rate an insurance company’s financial strength.  

What is a market index?

A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. There are indexes for almost every conceivable sector of the stock market. Most EIAs are based on the S&P 500, but other indexes also are used. Some EIAs even allow investors to select one or more indexes.

 How is an EIA’s index-linked interest rate computed?

The index-linked gain depends on the particular combination of indexing features that an EIA uses. The most common indexing features are listed below. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment. 

  • Participation Rates. A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80 percent, which means the annuity would only be credited with 80 percent of the gain experienced by the index.
  • Spread/Margin/Asset Fee. Some EIAs use a spread, margin or asset fee in addition to, or instead of, a participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10 percent and the spread/margin/asset fee is 3.5 percent, then the gain in the annuity would be only 6.5 percent.
  • Interest Rate Caps. Some EIAs may put a cap or upper limit on your return. This cap rate is generally stated as a percentage. This is the maximum rate of interest the annuity will earn. For example, if the index linked to the annuity gained 10 percent and the cap rate was 8 percent, then the gain in the annuity would be 8 percent.

 Caution! Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return. Read your contract carefully to see if it allows the insurance company to change these features.

 Indexing Methods. As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.

Indexing Method Description
Annual Reset (Rachet) Compares the change in the index from the beginning to the end of each year. Any declines are ignored.Advantage: Your gain is “locked in” each year.Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
High Water Mark Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.
Point-to-Point Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.

 

  • Index Averaging. Some EIAs average an index’s value either daily or monthly rather than use the actual value of the index on a specified date. Averaging may reduce the amount of index-linked interest you earn.
  • Interest Calculation. The way that an insurance company calculates interest earned during the term of an EIA can make a big difference in the amount of money you will earn. Some EIAs pay simple interest during the term of the annuity. Because there is no compounding of interest, your return will be lower.
  • Exclusion of Dividends. Most EIAs only count equity index gains from market price changes, excluding any gains from dividends. Since you’re not earning dividends, you won’t earn as much as if you invested directly in the market.

Can I get my money when I need it? 

EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA.

 Also, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10 percent tax penalty in addition to any gain being taxed as ordinary income. 

Is it possible to lose money in an EIA? 

Yes. Many insurance companies only guarantee that you’ll receive 90 percent of the premiums you paid, plus at least 3 percent interest. Therefore, if you don’t receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if the index linked to your annuity declines. The other way you may not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.

Do EIAs and other tax-deferred annuities provide the same advantages as 401(k)s and other before tax retirement plans?

 No, 401(k) plans and other before-tax retirement savings plans not only allow you to defer taxes on income and investment gains, but your contributions reduce your current taxable income. That’s why most investors should consider an EIA and other annuity products only after they make the maximum contribution to their 401(k) and other before-tax retirement plans.  

This very valuable investing information was obtained from FINRA’s website.

Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

24

Big Promises but Skimpy Returns Plague Equity-Indexed Annuities.

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AARP’s website posted an article from The Kiplinger aimed at the baby-boomer investor. The article, written by Kimberly Lankford goes on to say that the pitch is compelling: Participate in the stock market’s upside and avoid the downside. That’s how sales agents who collect lucrative commissions peddle equity-indexed annuities. Their targets are baby-boomers who are trying to rebuild their nest eggs and are now fearful of the stock market and frustrated with bonds’ low interest rates.

Most equity-indexed annuity contracts promise that you will never lose money, even if the market index declines. But these costly products give you only a portion of the market’s gains, and their protection against loss is minimal. If you’re looking for principal protection, consider buying a deferred variable annuity with guaranteed benefits.

The Fuzzy math. Despite the title, equity-indexed annuities don’t actually invest in the stock market. Your returns may be loosely based on a market index, but you get a lot less than investors in the actual index would receive because of caps on returns and other limitations.

For example, if Standard & Poor’s 500-stock index returns 26% this year, as it did in 2009, investors in some of the Phoenix Companies’ equity-indexed annuities would receive just 6.5% or less — fairly typical for these products. Some equity-indexed annuities offer higher caps but reduce your returns by other means, such as restricting your participation rate to 80% of an index’s increase or subtracting a fixed percentage (a spread rate) from the index’s return. Worst of all, these limitations can change even after you’ve purchased the annuity. Plus, you may be locked in to the investment for seven to ten years and pay a penalty if you cash out early.

Indexed annuities are regulated as insurance products, not securities, so they offer few of the usual required disclosures to help you decipher their fees, calculate performance or even figure out how the money is invested. And the new financial-reform bill would keep it that way; it bars the Securities and Exchange Commission from implementing a rule to oversee them. 

Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

24

Principal Protected Notes Fail To Live Up To Their Hype

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The complex securities sold as 100% principal protected notes have failed to live up to their hype. Recently, numbers of investors have witnessed billions of dollars in losses because of so-called investments that were touted by brokers as good as cash investments.

A New York Times article by Gretchen Morgenson, highlights the questions surrounding 100% principal protected notes and how these complex securities became the darling of Wall Street and a disaster for many investors.

Principal protected notes are essentially zero-coupon notes whose return is partly tied to the performance of an equity index, such as the Standard & Poor’s 500 or the Russell 2000. How an investor makes money on these types of investments, however, is a complex process. The securities promise to return an investor’s principal, typically at the end of 18 months, along with the added gain from the index’s performance if that index trades within a certain range.

For an investor with one of these notes to earn the return of the index, as well as get his principal back, the index cannot fall 25.5% or more from its level at the date of issuance. The index also cannot rise more than 27.5% above that level. If the index exceeds those levels during the holding period, an investor would receive only his principal back.

The New York Times article points out, 100% principal protected notes were sold by many brokerages to conservative investors who typically put their money in low-risk financial products like certificates of deposit. Many investors quickly became disenchanted with their decision to buy into principal protected notes, especially those who bought notes issued by Lehman Brothers Holdings. Those investments are now worth mere pennies on the dollar following the company’s bankruptcy filing in September 2008.

The article lists two investors who lost big on 100% principal protected notes with Lehman were Corinne and Gregory Minasian, according to the New York Times. On the suggestion of their UBS broker they invested almost $100,000 – more than half of their savings – into Lehman notes in early 2008. They ultimately lost everything, and currently have an arbitration case pending in an attempt to recover their losses.

The Minasians contend their UBS broker failed to explain the risks in the securities, and never provided them with a prospectus. They contend they didn’t’ even know their investment had been issued by Lehman Brothers until the firm actually collapsed in 2008.

“I am not a sophisticated investor,” said Mr. Minasian in the NYT’s article. “Many years ago I dabbled in the stock market, but I learned my lessons. Over the past 10 to 15 years my wife and I invested in CDs.”

UBS sold $1 billion of these notes to investors. Commissions were 1.75%, a percentage that is far higher than those generated on sales of CDs. When Mr. Minasian asked about the commission, he says his broker said none existed.

Did your broker or financial advisor sell you 100% Principal Prtected Notes and tell you it was safe and secure? If so, you may have a claim against your broker and the brokerage firm for your losses. Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority

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Feb/11

23

Broker Trust Levels Remain Less-Than-Encouraging; Community Banks Remain Highly Regarded

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They say, trust is easy to lose and hard to regain, writes Andrew Osterland in a recent article in Investment News.

A recent survey conducted by public relations firm Edelman on investors’ attitudes towards the financial services industry seems to confirm the aphorism.

In the survey, Edelman interviewed 503 investors with $10,000 or more invested in liquid assets and/or mutual funds, and 38% of them said that their level of trust in the financial services industry had decreased in the last year. Fifty-three percent of respondents said it had remained the same, and just 9% said that they trusted the industry more compared with a year ago.

“We would have thought that as the economy has improved and the bad news has faded, the level of trust in the industry would have increased, but it hasn’t,” said Julie Crothers, a senior vice president at Edelman. “The state of consumer trust in the industry is not good.”

The attitudes were worse for some than others. Edelman asked investors for their attitudes towards eight financial service provider groups. Private-equity firms — with whom few of the investors likely had personal experience — were ranked the least trustworthy. Just 32% of respondents gave such firms a ranking of 6 or higher on a scale of nine as to their level of trust that such institutions would “do what is right.” Investment banks (35%), and property-and-casualty insurers (37%) scored only slightly higher. Life insurance companies (42%), brokerage firms (43%) and large national banks (45%) fared better still.

Also, the survey reported that the institutions that scored the highest marks were community banks (67%) and mutual fund companies (55%).

Edelman broke out the top 18% of the investor group as “entry level affluents.” These investors have annual incomes of more than $150,000 and investments of more than $100,000. They are highly educated (92% have a college degree), majority male (61%) and predominantly white (93%).

In contrast to the broader group, these investors tended to have relatively more trust in large national banks, brokerage firms and investment banks compared than the less affluent investors. “That is likely a reflection of the fact that more-affluent investors have a need for more-complicated services such as those offered by large banks and brokers,” Ms. Crothers said.

The more interesting insight from the survey was that investors tended to view client-facing employees as the most credible sources of information about a financial-services firm. Thirty-seven percent of investors said that brokers, advisers, agents or bankers were the most credible source of information. Portfolio managers ranked second (15%) in this regard, with affluent investors (21%) finding them substantially more credible. Chief executives and senior managers, on the other hand, scored a miserable 5% —3% from affluent investors — on the credibility meter.

“It sends a clear message to the firms’ marketing divisions that CEOs may not be good spokespeople for the companies at this point,” said Ms. Crothers.

Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority

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Feb/11

23

The Manifest Disregard of the Law is No Longer Grounds to Vacate an Arbitration Award

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In  recent article in “Reverse and Render,” Byron Henry writes that The United States Court of Appleals for the Fifth Circuit recently held that the United States Supreme Court’s decision in Hall Street Assocites v. Mattel  “restricts the grounds for vacatur” of an arbitration award and, thus, “manifest disregard for the law is no longer an indepdendent ground for vacating arbitration awards under the FAA.”  Consequently, the only  bases for setting aside an arbitration award are (1) fraud or corruption in obtaining the award; (2) evident partiality by the arbitrator; (3) misconduct or misbehavior by the arbitrator; and (4) where the arbitrator exceeded its power.  See 9 U.S.C. sec. 10(a). 

The article goes on to say that in reaching its conclusion, the Fifth Circuit disagreed with decisions from the Sixth, Second, and Ninth Circuits holding that “manifest disregard” survived the Supreme Court’s decision in Hall.  The Fifth Circuit noted the Supreme Court’s “repeated statements [in Hall] that: ‘We hold that the statutory grounds are exclusive.’ “  As a result, the Fifth Circuit held that “manifest disregard of the law as an independent, nonstatutory ground for setting aside an award, must be abandoned and rejected.”  The Court also expressly overruled any precedent to the contrary.    

Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority

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Feb/11

16

Workman’s Security Corporation Reaches Agreement With FINRA

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Workman’s Security Corporation, a broker-dealer that was a prominent seller of high-risk private placements that wound up going bust has almost wiped the slate clean of costly litigation that could have impaired the firm’s financial condition writes Bruce Kelly of Investmentnews in a February 14, 2011, article.

Workman’s reached an agreement with the Financial Industry Regulatory Authority Inc. this month to pay $700,000 for partial restitution to more than a dozen clients who had sued the firm over investments in Medical Capital Holdings Inc. and Provident Royalties LLC — two series of private placements that the Securities and Exchange Commission charged were fraudulent in 2009.

The Medical Capital and Provident deals were widely distributed by dozens of independent broker-dealers, some of which have shut down because they were unable to face the burden of litigation costs.

“Workman views this as a terrific resolution so it can move forward,” said Benjamin Skjold, partner at Skjold Barthel PA and attorney for Workman, which has 171 reps. The firm has “effectively” paid the $700,000 and now turns to face about a half dozen remaining individual securities arbitration claims from clients.

The insurance carrier for Workman’s, Catlin Specialty Insurance Co., has paid $2.3 million to clients who sued the firm, Mr. Skjold said, adding that the process of settlement and restitution took about a year. “We’ve worked diligently internally, with the insurance carrier and with Finra to get claims resolved,” he said.

Workman’s reps sold a little more than $9 million of Provident Royalties private placements, from last summer in the Northern District of Texas. The amount of Medical Capital notes the firm’s reps sold to investors is not known. According to Workman’s profile on Finra’s BrokerCheck system, the firm’s supervision and due diligence when selling Regulation D private placements had big holes.

“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” Finra alleged. “The firm failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.”

James Shorris, executive vice president and executive director of enforcement with Finra, noted that Regulation D private placements and non-traded real estate investment trusts are listed as the first and second areas of focus for Finra, in a meeting of brokerage executives this month in Phoenix. 

Kelly goes on to say in the Investmentnews article that other broker-dealers have not fared well in settling the gusher of litigation that erupted after the SEC charged Medical Capital and Provident with fraud. On Friday, QA3 Financial Corp., another leading seller of Provident deals, submitted a request with Finra and the SEC to terminate it’s license as a broker-dealer (b-d). QA3 and its insurance carrier, also Catlin, had been sparring in court and exchange lawsuits in the past six months about the amount of coverage owed to the firm.

If you feel you have been a victim of the alleged broker-dealer private placement fraudulent schemes of   Workman’s Securities Corp.,or any other broker-dealer, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

16

Additional ETFs Close as Funds Flood the Market

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Another great article on ETFs by Jessica Toonkel, appeared in Investmentnews on February 13, 2011.  She states that with fund firms launching a seemingly endless parade of exchange-traded funds, a dark side to this glut of offerings is emerging: Portfolio liquidations, once rare, are becoming more common.

This trend is frightening some financial advisers. Indeed, some said that they are more than a little worried about getting stuck in an ETF that ends up being shut down.

“With the proliferation of ETFs, this is becoming a greater concern,” Sailesh S. Radha, a vice president at CCM Investment Advisers LLC, a registered investment advisory firm that manages $2.5 billion in assets, said last week at IndexUniverse.com’s Inside ETFs conference.

Toonkel goes on to say that for advisory firms such as CCM, which has a $20 million country rotation portfolio, choosing the right fund is vital to keeping clients’ trust.

“Telling an investor that an ETF is shutting down is not news you want to give them,” Mr. Radha said.

Although as more advisers rush into sector-based ETFs, the chance of being in a fund that closes is on the rise. In 2006, just one ETF closed, according to Morningstar Inc. In 2007, none did. But in the past three years, there have been 160 ETF liquidations.

For example, last year, Grail Advisors LLC, which is up for sale, and Claymore Securities Inc. closed a number of funds. Grail closed two of its seven ETFs in August and Claymore closed four ETFs in October because they failed to attract assets.

CAN YOU SPOT TROUBLE?

The advisers may be able to spot trouble before it strikes, said Ron Rowland, president of Capital Cities Asset Management Inc., who runs a monthly column about ETFs in danger of closing in his Invest with an Edge newsletter. “There is no specific sector that is usually represented in the list, but it’s a lot of smaller ETFs,” he said. Mr. Rowland said that ETFs headed for trouble tend to have a similar profile. An ETF that has been around for at least 28 months and has less than $10 million in assets should raise a red flag for advisers, he said.

Also, Mr. Rowland gives new ETFs a six-month grace period to gain assets before they become eligible for his ETF deathwatch.

It is important to pay attention to how long an ETF has been around.

“No one launches ETFs then closes them a couple months later, except for Northern Trust,” said Matt Hougan, president of ETF analytics at IndexUniverse.com. Northern Trust Corp. closed 17 ETFs last February, just 11 months after launching them.

Toonkel goes on to say that advisers also should pay attention to how an ETF trades and whether the fund is best-in-class, said Matt Hougan, president of ETF analytics at IndexUniverse.com. An ETF may have very little in assets, but if it is one of the few funds in an asset class that is poised to take off, the fund may succeed, he said.

These advisers also should take note of the investment adviser for the funds.

“As long as you have a few ETFs that are the moneymakers, you can afford to have a few that take longer to gain assets,” an executive said.

When ETF providers terminate funds, they often put out a press release and let investors know that the liquidation will take place in three to four weeks, conference participants said. Often the providers will encourage investors to stay in the funds until they are liquidated, at which time the providers will pay the investors back. Mr. Rowland warns investors against being swayed by this pitch.

THE ‘SALES HOOK’

“The sales hook is that if you go with them through the liquidation, you save yourself the commission,” he said. “But the risks far outweigh the savings.” For one thing, many ETFs hit investors with a termination fee. Also, fund operators often start liquidating ETFs slowly, which can lead to tracking errors during the wind-down period, Mr. Rowland said.

Sticking with a fund through liquidation could cause advisers to lose an opportunity to put their money somewhere else. “You usually get your money back within six to 10 days of liquidation,” Mr. Rowland said. “However, you have to wait those six to 10 days, and you may have lost an opportunity to employ that cash elsewhere.”

If you have invested in ETFs and lost money, you may have valuable legal rights to be compensated for your losses. Call a Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

16

National Securities Corporation Faces Disciplinary Action From FINRA’s Private Placement Crackdown

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Yesterday, Bruce Kelly’s article from InvestmentNews stated that National Securities Corp. is the latest broker-dealer to face disciplinary action from Finra over the sale of private placements gone bust.

According to National Securities’ profile on Finra’s BrokerCheck system, the firm received a Wells notice last month from the Financial Industry Regulatory Authority Inc. A Wells notice indicates that the regulator intends to bring an enforcement action against an individual or a firm.

Kelly goes on to say that National Securities reps sold investors about $3.7 million of notes issued by Provident Royalties LLC, according to the latter’s bankruptcy court filings. The Regulation D offering from Provident involved a series of oil and gas private placements that the Securities and Exchange Commission in 2009 claimed were fraudulent,Mark Roth, the firm’s general counsel for National Holdings Corp., the parent of National Securities, did not return phone calls Tuesday seeking comment.

In the Investment News article they say that National Securities received the Wells notice regarding violations of product suitability rules, e-mail supervision rules, and standards of commercial honor and principles-of-trade rules, according to the BrokerCheck report. The product mentioned in the report was a “private placement.”

The Finra officials have made broker-dealers’ sale of private placements that failed during the market collapse their No. 1 enforcement priority this year.

Broker-dealers have begun to feel the pinch. Workman Securities Corp. this month reached an agreement with Finra to pay $700,000 for partial restitution to more than a dozen clients who had sued the firm over investments in Medical Capital Holdings Inc. and Provident Royalties. Like Provident, the SEC charged Medical Capital with fraud in 2009.

In a meeting of brokerage executives this month in Phoenix, James Shorris, executive vice president and executive director of enforcement with Finra, said Reg D private placements and non-traded real estate investment trusts are listed as the first and second areas of focus for Finra, respectively.

If you feel you have been a victim of the alleged broker-dealer private placement fraudulent schemes of  the brokerages listed above , National Securities Corp., Medical Capital Holdings, Workman’s Securities Corp.,or Provident Royalties,call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

14

Vairable Annuities Are Hard For the Consumer to Understand

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In a February 13, 2011, article for InvestmentNews, Liz Skinner writes that the summary prospectuses for variable annuities are supposed to help consumers make informed decisions about buying these complicated investments.

Hardly anyone understands the documents, despite years of industry pressure on the Securities and Exchange Commission to make them more investor-friendly. The Insured Retirement Institute, an annuity trade group, is not giving up.

They are working with SEC staff members on a draft summary prospectus that it first submitted to the agency two years ago, trying to make it a “plain-English” document that is about 10 pages long. A document of that length would be a far cry from the 200- to 300-page variable annuity prospectuses that are common today.

Throughout the next two months, the IRI will submit the sample prospectus to the commission’s staff for review, according to Lee Covington, the group’s senior vice president and general counsel.

“Today’s prospectus isn’t achieving a consumer goal,” he said. “The challenge is how to blend the objective of being a good disclosure document with one that is also consumer[-friendly] and written in plain English.”

December of 2009, SEC Chairman Mary Schapiro said that her staff was developing a simplified summary prospectus for VAs, but it never issued one. Eileen Rominger, who replaced Andrew “Buddy” Donohue as the director of investment management, took over that role this month but hasn’t mentioned the idea.

In a study by Cogent Research LLC for the IRI last March found that 89% of investors would be more likely to read a variable annuity prospectus if it had a short summary. Out of 961 surveyed retirees and pre-retirees with at least $100,000 in investible assets, only 20% read their investments’ prospectuses.

In addition to being helpful to investors, an easy-to-understand document may be even more important for financial advisers.

“These will make it easier for financial advisers to compare products,” Mr. Covington said. Advisers want clarity and confidence, and this is a tool that will help them with that, he said.

NO ONE READS THEM

Financial adviser Rick Bloom, a principal at Bloom Asset Management Inc., which has about $800 million in client assets, said: “No one reads the current variable annuity prospectuses.” He said he’d consider recommending variable annuities if the documents were easier to understand.

“If I can’t understand the ins and outs of the investments, I’m not going to get into them,” Mr. Bloom said.

The disclosure documents that were only one or two pages would be even better than the one about to be proposed, he said.

Neal Frankle, a financial adviser who sells only no-load variable annuities — and not very many of those — said he might be willing to re-examine variable annuities if they were easier to understand and compare. “If a variable annuity company called and said, ‘Here are three reasons why we think you should consider our product,’ I would owe my clients the due diligence to look at it,” said Mr. Frankle, whose Wealth Resources Group has $100 million in client assets.

Regulators already require plain-English versions of mutual fund prospectuses and disclosure documents for financial advisers, and a 1998 SEC handbook helps public companies write sections of their prospectuses in straightforward prose.

The SEC staff has asked the IRI for a sample prospectus that is written in plain English, with less legalese and fewer technical terms that are confusing to a normal consumer, according to Mr. Covington.

An IRI working group has brought in consultant Lightbulb Press Inc. to improve its sample summary prospectus. The consultant, which has worked on simplified-language projects for Texas state securities regulators and others, last month recommended making the prospectus understandable no matter what page is read first. Additionally, it found that the sample included some terms that were being used before they were defined, he said. Within the next two months, the IRI will finalize the document, run it by its own committee on federal regulatory affairs and submit it to the commission’s staff for review, Mr. Covington said.

“We want to get a sample summary prospectus that everyone thinks is good for the consumer,” he said.

The variable annuity companies support the move because consumers will understand their product better and the smaller prospectuses will be cheaper to prepare, print and mail. Even after incurring some costs to translate their prospectuses into plain English, the expense should be less than the hundreds of thousands of dollars companies now spend each year, Mr. Covington said. A new prospectus should also reduce consumer complaints. People don’t want these long documents that they know they’ll never read, and they worry about wasted trees, Mr. Covington said.

“We continue to work to get it right for consumers,” he said. “No process is as fast as you want it to be, but we’re pleased with the commitment that the SEC has on it.”

Do you feel you were alledgedly scammed in the variable annuities market by your broker?  You may have legal rights to recover your money from the broker or brokerage firm that sold you your annuities. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Feb/11

14

The New Finra Reporting Rule 4530, Alarms Broker-Dealers

Comments off · Posted by admin in FINRA

In an article for InvestmentNews.com, Dan Jamisen writes that industry observers are worried that a new Finra reporting rule — set to go into effect July 1 — could open up brokerage firms to enforcement actions.

Finra’s Rule 4530 will require the self-reporting of violations, which means that broker-dealers will have to report to the Financial Industry Regulatory Authority Inc. within 30 calendar days whenever they have “concluded, or reasonably should have concluded,” that a firm or a broker “has violated any securities-, insurance-, commodities-, financial or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization.”

The new rule, which consolidates NASD Rule 3070 and NYSE Rule 351, largely parallels existing New York Stock Exchange rules but will be new for legacy NASD firms.

“The reporting of internal conclusions is a big change,” said Dave Bellaire, general counsel of the Financial Services Institute Inc., which represents independent-contractor firms.

“It’s a different mindset to look internally” and report problems, he said.

The broker-dealers always have reported external findings to Finra, including regulatory actions or certain arbitration awards and other information.

“Some of the internal-control reporting is going to be very problematic,” said Lisa Crossley, regulatory-compliance liaison for the National Society of Compliance Professionals. It “will be an administrative burden, and firms can get into trouble over something that Finra says should have been reported,” but wasn’t.

The broker-dealers will have to develop procedures to determine what they need to report, Mr. Bellaire said.

“With July 1 fast approaching, broker-dealers need to be designing systems,” he said.

These new rules will catch some broker-dealers unaware because of the long rulemaking process and the fact that firms are now busy with annual compliance reviews, Ms. Crossley said.

“This sort of thing goes off the radar until it starts brewing again,” she said.

FINRA GIVES B-D GUIDANCE

The new standard, requiring a report when a firm “reasonably should have concluded” that a violation occurred, was floated in a draft last summer — and came as a surprise. The similar NYSE rule has no such standard.

The Securities Industry and Financial Markets Association and other industry groups protested the reporting trigger in comment letters.

Firms, the regulator said, should report “conduct that has widespread or potential widespread impact,” arose from “a material failure of the firm’s systems” or involves “numerous customers, multiple errors or significant dollar amounts.”

In the final rule approved by the SEC in November and in its notice this month, Finra provided more guidance on the type of internal conclusions that must be reported.

Finra has said in other SEC filings that the purpose of the should-have-known standard is to ensure that firms do not intentionally ignore a reportable event.  A Finra spokeswoman declined to comment further.

“We think Finra has largely resolved those concerns” over the should-have-known standard, said James McHale, managing director and associate general counsel at SIFMA.

“[Finra has] clarified the types of events that would need to be reported, and clarified a reasonable-man standard” for what has to be reported, he said.

Some industry observers said Finra has given itself too much leeway to go after broker-dealers.

“At some point, I think you’re going to see regulators beat up on some firms for not reporting allegations or findings that the regulators deem should have been reported,” said Joel Beck, founder of The Beck Law Firm LLC and a former Finra attorney.

“It’s not necessarily an objective standard,” he said.

Previously, Finra enforcers have taken into consideration whether a firm self-reports problems and fixes them, Mr. Beck added. But that might change.

“With the new rule, it appears a firm will have to report a problem; it’s no longer optional,” Mr. Beck said.

Thusly, self-reporting may no longer earn any leniency with enforcers.

These rules also expand reporting requirements in other areas. More customer disputes may have to be reported, for example. Firms report to Finra customer settlements or awards with damages against a broker of $15,000 or more and against a firm of $25,000 or more. Finra now wants firms to include in those threshold calculations attorney’s fees and interest penalties, a change that will increase the number of cases firms have to report, Ms. Crossley said.

Industry observers also have been concerned about the duplicate reporting of information through the new Rule 4530 and disclosure forms. In response, Finra said firms won’t have to file disclosures that have been made on the Form U5, the broker termination report. Finra told the SEC that it will work to eliminate duplicate filings for disclosures made on Forms U4 and BD.

The FSI isn’t buying that promise. In a December comment letter, the group noted that in 1995, Finra, then known as NASD, made the very same pledge “without [any] resulting progress.”

Finra is “trying to move in the direction of reporting information once,” Mr. Bellaire said, “but there’s still a lot of … ground to be taken” in eliminating duplicate filings.

Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority

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