WASHINGTON – Private securities regulator NASD today announced that CCO Investment Services Corp., a wholly-owned subsidiary of Citizens Bank of Rhode Island, has agreed to pay fines totaling $850,000 to settle charges of “supervisory, record keeping, telemarketing [and] other violations” relating to the sale of variable annuities.
CCO Investment Services had failed “to establish, maintain and enforce a reasonably designed supervisory system and written procedures relating to a series of issues,” NASD said in a midday news release on PRNewswire, “including customer suitability reviews, telemarketing compliance, internal inspections, review of written correspondence, registration of offices, and review and approval of 529 Plan business.”
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In addition, the news release said, NASD found that CCO “failed to maintain, among other things, business-related e-mail and records of compensation given to its brokers by issuers of variable contracts or mutual funds.”
The regulator said the fine was part of a settlement in which “CCO neither admitted nor denied the charges, but consented to the entry of NASD’s findings.”
NASD said it also had ordered CCO Investment Services
* To review its supervisory system and procedures concerning the preservation of data including: electronic communications; customer-suitability reviews; telemarketing; internal inspections; pre-registration Central Registration Depository (Web CRD) searches; registration of offices; reviews of written correspondence; and review of customer fund-direct 529 Plan business for compliance with NASD rules and federal securities laws and regulations.
* To review the resources it devotes to compliance; to assess the adequacy of those allocations; and to make written recommendations regarding the resources it needs to comply with the laws, regulations and rules concerning those areas.
“Like any securities firm, bank-affiliated broker-dealers must have adequate supervisory systems and controls for ensuring compliance with regulatory requirements,” said James S. Shorris, NASD’s executive vice president and head of enforcement.
“This bank-affiliated firm missed the mark with regard to several important requirements, including some that impacted retirees – an especially vulnerable group for whom NASD rules, the federal securities laws, and the telemarketing laws provide valuable protections.”
NASD found that from October 2003 through March 2005, CCO Investment Services’ suitability reviews of variable annuity contract sales were not reasonably designed to prevent and detect sales practice violations. For example, although the firm utilized surveillance reports and its operations personnel reviewed variable annuity applications before the transactions were completed, it inconsistently provided for reasonable follow-up and review to ensure that noted exceptions were adequately addressed.
Moreover, it found, although the firm had some policies related to variable annuity sales to elderly clients, the firm failed to provide for reasonable follow-up and review to ensure that those policies were implemented for these clients. To the extent that the firm had customer-suitability review procedures, such as mandating the use of customer financial profile forms, it did not consistently enforce those procedures, NASD said. As a result, customer information that could have assisted in assessing suitability was not always available.
NASD also found several violations relating to the firm’s telemarketing efforts. Throughout the relevant period, both CCO Investment Services’ registered representatives and affiliated bank employees made telephone calls to prospective customers during “call nights.” The firm required affiliated bank employees, who were not registered representatives, to use pre-approved scripts and not to discuss specific financial products with customers.
But the firm had no supervisory system or written procedures for monitoring compliance with its supervisory procedures in this area, NASD found. The firm had no reasonable way of even tracking the occurrence of call nights or otherwise monitoring compliance with its procedures.
Moreover, it found, during the relevant period, the firm failed to ensure that the bank customers who were called had not registered on the Federal Trade Commission’s national Do-Not-Call registry.
In addition, NASD found that the firm’s supervisory system and written procedures were not reasonably designed to ensure that searches of the registration records of prospective new hires on Web CRD were performed with the permission of those individuals. During the relevant period, CCO certified to Web CRD that it had obtained the required written consents for its pre-registration searches, but NASD found that for 239 of those searches, the firm had failed to obtain the required consent or lacked the necessary documentation.
Investors can obtain more information about any NASD-registered broker or brokerage firm – and its disciplinary record, if any– by using NASD’s BrokerCheck service, available at no charge at www.nasdbrokercheck.com or by calling (800) 289-9999.
NASD (www.nasd.com) is the leading private-sector provider of financial regulatory services, from registering and educating industry participants, to examining securities firms, to enforcing both NASD rules and the federal securities laws, to administering the largest dispute resolution forum for investors and registered firms.
