The CCO Investment Services Corp., an affiliate securities broker-dealer of Citizens Bank, has agreed to pay a $3-million civil fine for “unethical and dishonest conduct” in selling variable annuities to elderly customers and failing to maintain internal e-mails.
Massachusetts Secretary of the Commonwealth William F. Galvin announced the fine on July 22. It is part of a consent order in which CCO admits to the facts set out in a complaint issued by Galvin in February and agrees to stop violating the state securities act.
Citizens officials wouldn’t go into detail about their side of the story, but Lawrence K. Fish, chairman, president and CEO of Citizens Financial Group, issued a short statement:
“On behalf of the company, I regret mistakes made by our broker dealer,” he said. “I want to assure our customers, particularly senior citizens, that we have taken prompt and corrective action. We are pleased to have reached an agreement.”
A variable annuity is a contract which provides future payments to the holder, usually after a number of years, based on the performance of the portfolio’s securities. Such annuities are “generally not suitable for older investors,” Galvin said, because of high surrender charges, significant up-front fees and “often-illusory” tax and probate benefits.
But CCO hasn’t been alone in trying to sell variable annuities to the elderly. After launching the Citizens case, Galvin got complaints about other banks and brokerages, including Bank of America, and he issued subpoenas to them as well.
On July 13, Bank of America reached an agreement with Galvin in which it agreed to offer customers who were 78 or older when they bought variable annuities from Banc of America Investment Services Inc. and Quick & Reilly the opportunity to get out penalty-free.
Bank of America is also giving investors who were between 75 and 77 at the time of purchase an “expedited review” of any “suitability concerns” applicable to their investment.
“I commend Bank of America for taking this step here in Massachusetts and extending it nationwide,” Galvin said. “I hope their action serves as an example to the banking and investment industry.”
The CCO case, which Galvin has treated as particularly egregious, grew out of sales practices at a South Yarmouth branch of Citizens Bank. Tellers earned compensation on a point system by referring depositors, particularly those with maturing certificates of deposit, to financial consultants the bank had placed there.
At least half of one financial consultant’s variable annuity sales since January 2003 had been to elderly clients, Galvin said. CCO also permitted insurance company wholesalers to have “unrestricted access” to financial consultants and bank employees, and to give them gifts, food and beverages and sports tickets. Moreover, CCO failed to keep e-mails that documented these practices, also in violation of the securities law, Galvin said.
“CCO did not have adequate procedures in place reasonably designed to prevent or detect the improper participation of unlicensed personnel in client meetings with (financial consultants),” the consent order says. It added that CCO lacked “adequate training procedures with respect to determining the appropriateness” of variable annuities for the elderly.
As part of the consent order, CCO has agreed to offer all Massachusetts customers who were 75 or older when they bought a variable annuity from CCO the opportunity to recover their money without penalty. The offer applies to variable annuities purchased in 2003 and 2004 and will be available for six months after customers are notified. Eligible customers who have already surrendered annuities and paid a fee will get reimbursed, Galvin said.
The agreement also requires CCO to adopt sales practice rules for variable annuity sales and to retain an independent consultant to review company policies.
