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<p>By PAUL GENTILE CU Times Editor WASHINGTON – CUNA Brokerage Services, Inc., (CBSI) the broker/dealer arm of CUNA Mutual Group, was one of two firms issued enforcement actions recently by NASD Regulation, Inc. for practices related to the sale of variable annuity and life insurance contracts. The NASD has been cracking down of late on violations in selling variable annuities. Earlier this year it took action against six firms and an individual for various variable annuity violations. The fines tallied $112,000. According to the NASD, the enforcement action against CBSI was the result of special examinations of the sale of variable contracts it conducted in 1999 and 2000. It primarily looked at CBSI annuity sales in 1998. During 1998 approximately 75% of CBSI’s gross revenues were generated from sale of variable products, of which 13% was from the sale of variable life insurance. More than 80% of CBSI’s variable annuity sales were of proprietary products. CUNA Brokerage Services was censured and fined $100,000. Three individuals were fined and suspended as a result of the examination, including Campbell McHugh (formerly CBSI compliance officer), Daniel L. Bernal, and Christian C. Zernich. Bernal left the firm in 1997. McHugh and Zernich are still with the firm, but in different capacities. Prior to these NASD findings, none of the three individuals had been the subject of a formal disciplinary action by any regulatory body. The enforcement action said CBSI failed to adhere to certain supervisory procedures; failed to maintain certain records recording the rationale for the exchange of variable products; and cited other practices. “CUNA Brokerage Services, Inc. has reached a voluntary agreement with the NASD following its 1998 nationwide survey of variable annuity practices and procedures. To continue to provide our customers with the highest levels of service and integrity, CBSI worked proactively with the NASD to develop and improve its practices,” said Syd Lindner, Director of PR for CUNA Mutual. CUNA Brokerage Services, Inc. has settled the charges by agreeing to pay the fines and submit a Letter of Acceptance, Waiver and Consent (commonly known as an AWC). The AWC ensures that NASD Regulation will bring no further actions against CBSI based on the same findings. “During the period from on or about January 1, 1995 through on or about August 14, 1998, CUNA Brokerage Services, Inc., acting through its compliance officer Campbell D. McHugh, failed to establish, maintain and enforce adequate written supervisory procedures governing the sales of variable annuities and variable universal life insurance,” the AWC stated. It goes on to say that CBSI’s supervisory procedures failed to address the following areas: The suitability of recommendations made to purchase or exchange variable annuities and variable life insurance; The processing, acceptance and review of new business for suitability, including the suitability of the allocation of premium payments to investment portfolios or sub-accounts in relation to customers’ investment objectives; The training and supervision of principals; and The investigation and reporting of customer complaints to NASD Regulation. The AWC further breaks down specific violations. One of those detailed how a change in a customer’s financial situation was not adequately taken into account by Bernal. It details how in 1995 a husband and wife opened an account with CBSI. At that time the couple’s specific income and asset information was provided. In 1997, the husband died and the wife’s income substantially declined. The wife had received a distribution from her deceased husband’s pension plan. “At or near this time, Bernal recommended that customer CH use the entire pension distribution to purchase a variable annuity. Despite a change in customer CH’s financial situation due to the death of her husband, Bernal did not update her account information. Customer CH indicated the need for income to Bernal, and was unable to draw on the annuity as needed to satisfy her income needs without incurring liability for the 10-percent additional tax on early distributions,” states the AWC. NASD Regulation also found that on or about January, 1997 through on or about August 14, 1998, of 51 transactions reviewed, CBSI failed to demonstrate “that it made reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives and other information necessary in making a determination of suitability and conducting related supervisory reviews, or information required to be obtained by the firm’s procedures,” states the AWC. Another finding showed that Zernich sold a variable annuity without discussing the 10% additional tax on early distributions from deferred annuity contracts applicable to the part of the distribution that must be included in gross income.”This information was material to the customer’s investment decision in view of her age and investment time horizon,” the AWC states. “It is important to note that in the final analysis, no customer was financially harmed by this matter,” said Lindner. CBSI has also changed a number of practices to address the issue, said Lindner, including hiring 10 field compliance managers and moving compliance from Madison, Wis. to Waverly, Iowa, which was the home of Century Life of America, now called CUNA Mutual Life Insurance Company. CUNA Mutual and Century Life of America established a permanent affiliation about 10 years ago. There is a misconception in the industry that CUNA Century Life of Americ and CUNA Mutual engaged in a merger. Due to tax consequences and a variety of other reasons, the two maintain a permanent affiliation – there was no merger. Certain assets of Century Life’s broker/dealer arm LM Equities were collapsed into CBSI. CUNA Mutual Group acquired CBSI from CUNA in 1993. “We’ve moved compliance from Madison to Waverly; hired additional compliance specialists; instituted new procedures for reviewing business, further documenting practices that are in place to ensure uniformity and consistency,” said Lindner. [email protected]</p>

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