Tim O'Connor's Blog

Hidden Costs Associated with Variable Universal Life (VUL) Insurance Policies

Fri, 10 May 2013 18:56:00 GMT

The various costs associated with variable annuity policies includes surrender charges and fluctuating costs of insurance charges, all of which means that the underlying cash values of the Variable Universal Life policy must work that much harder in order to maintain (and pay for) the life insurance benefit provided by the policy. Other monthly deductions from a Variable Universal Life insurance policy include various face amount charges, administrative charges, and separate line-item charges associated with various benefits.

Life insurance companies may increase various VUL policy loads, charges, and rates, and in certain instances this in turn can have the affect of consuming the cash value surrendered from a paid-up, guaranteed whole life insurance policy over a period of years, particularly during the time frame of poor stock market performance.

Insurance companies also reserve the right to lapse (cancel) a policy in circumstances wherein the cash surrender value can no longer support applicable charges, fees, and costs, including surrender charges, to keep the policy in effect.

Many investors have been talked into converting a paid-up, guaranteed whole life insurance policy to a Variable Universal Life insurance policy, only to see the entire value of the VUL policy consumed by various costs, charges, and surrender fees.

We offer a free consultation to investors who feel they have been victimized with the sale of Variable Universal Life insurance policies, based upon the recommendation of the representation of an existing whole life insurance policy.

The Law Offices of Timothy J. O’Connor is one of the only law firms practicing securities law in the Tri-City Capital District of Albany, Schenectady and Troy. We also represent victimized investors throughout the rest of New York State, including Buffalo, Binghamton, Syracuse, Watertown, Utica, Kingston, New York City/Manhattan, Long Island, and everywhere in between, as well as in the surrounding states of Massachusetts, Vermont, New Hampshire, Connecticut, and New Jersey.

Variable Universal Life Horror Stories

Tue, 07 May 2013 04:00:00 GMT

The replacement of paid-up whole life insurance policies by Variable Universal Life (VUL) insurance policies has seen many retirees lose a lifetime of savings in a matter of years, due to various of the hidden cost features of Variable Universal Life insurance.

Whole life insurance policies offer life insurance coverage for the lifetime of the policyholder, with guaranteed premium, death benefit, and cash value schedules. The underlying value of these policies is generally based on long-term, predominantly stable, and fixed-income holdings.

Variable Universal Life insurance policies, on the other hand, can include various sub-accounts and investments based upon the performance of the stock market, with sales pitches oftentimes utilizing sales illustrations assuming a gross investment return of as much as 12% -- an amount which history has shown is generally unsustainable for long-term whole life policies and likewise unsustainable in the equity markets.

The cash value of a Variable Universal Life insurance policy is based upon the investment performance of the underlying investments, such that there is generally no assurance of a guaranteed cash value. Also notable, Variable Universal Life insurance policies are deemed to be securities for purposes of the federal securities laws, given their underlying holdings in securities.

Unfortunately, many seniors have been talked into replacing paid-up, guaranteed whole life insurance policies, with considerable cash value, by Variable Universal Life insurance given the favorable rate of return illustrations (as high as 12%), without being advised of the lack of guaranteed cash value, lack of a guaranteed death benefit, and no assurance of fixed premiums to keep the policy, cash value, and death benefit in place.

Insurance for Theft From Brokerage, Investment and Insurance-Type Accounts

Mon, 22 Apr 2013 14:46:00 GMT

The victims of Ponzi schemes and theft involving their financial accounts may be afforded protection offered by broker blanket bonds, fidelity bonds, broker/dealer professional liability insurance coverage, errors and omissions policies, Registered Representative professional liability coverage, fiduciary coverages, and the like.

Many investors who have been victimized in theft schemes abandon all hope of repaying counsel or making due inquiry into the availability of various insurance coverages which can afford recovery to victimized investors.

We offer a free initial consultation to investors who have had monies embezzled or stolen from their financial accounts.

FINRA Addresses Complex and Non-Traditional Investments

Fri, 19 Apr 2013 16:00:00 GMT

The past few years of unstable financial markets, while yielding fixed income products and declining interest rates, have seen an explosion of investment products. Many of these investment products are structured or packaged investments, which do not have a readily-available market and which cannot be priced. The Financial Industry Regulatory Authority (FINRA) has addressed the various aspects of various directives which would encompass such products, including NASD Notice to Members 03-70, 05-26, and 12-03.

Likewise, FINRA’s new suitability Rule 2111, effective July 9, 2012, imposes an obligation on FINRA-registered brokers to “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based upon the information obtained through the reasonable diligence of the member or associated person, to ascertain the customer’s investment profile.”

This new suitability rule requires that FINRA-registered brokers, when considering the customer’s investment profile, assess the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.

We offer a free initial consultation to customers who feel they may have been improperly sold non-conventional investments, new products, or complex products.

Whistleblower Protection Under the Procedures of the Securities and Exchange Commission

Thu, 11 Apr 2013 13:58:00 GMT

Professionals employed in the Financial Services Industry have led many initiatives in restoring transparency and honesty to the financial markets, thanks to protections afforded by the SEC’s recently-enacted whistleblower protection procedures. Investment and financial professionals faced with the stressful situation of reporting securities law violations and other wrongdoing are afforded job protection, as well as financial remedies and damages, in the event of an adverse reaction on the part of their employers against whom they have reported wrongdoing.

The whistleblower reporting requirements include the filing of a TCR form with the whistleblower unit of the Securities and Exchange Commission in Washington DC. Other additional approaches which can be pursued simultaneously include reporting notices of wrongdoing to the various respective regional offices of the Securities and Exchange Commission and the United States Department of Justice, including disclosures to the various United States Attorney’s Offices in the various and several United States District Courts throughout the United States.

The enhancements of the recently-enacted whistleblower provisions include 2 x back pay with interest, employment position preservation, legal fees, and expense reimbursement, as well as monetary awards ranging from 10-30% of monetary sanctions collected by the SEC against firms determined to have engaged in wrongdoing.

We offer a free consultation to financial professionals who feel that their employment positions and associated compensation have been harmed as a result of their involvement with the reporting of wrongdoing in the financial markets.

Supervisory Requirements Under NASD Notice to Members 12-03 Relating to Complex Products

Mon, 08 Apr 2013 21:23:00 GMT

The heightened supervision of complex products [see below blog] is designed to require:

a) The preapproval of the products after the exercise of reasonable due diligence and research, assessing the product for customer suitability.

b) Post-approval review to monitor the product for their performance for purposes of a continuing, ongoing suitability assessment.

c) Training of Registered Representatives to assure their knowledge of such products, as well as their suitability parameters.

d) Ongoing considerations of a customer’s financial sophistication and understanding of the risks of these products.

e) Giving due consideration as to whether or not a less complex or costly product could achieve the same objectives for the customer.

NASD Notice to Members 12-03 is an all-encompassing directive designed to protect the investing public from newly-introduced and unconventional complex products that have been introduced to the financial markets over the past several years.

We offer a free consultation to investors who feel they have been improperly-sold complex products.

Stop Quotation Order Guidelines Under FINRA Regulatory Notice 12-50

Tue, 02 Apr 2013 19:51:00 GMT

Regulatory Notice 12-50 defines other alternative order types, such as a “stop quotation order” or “stop quote order” or an alternative order type that triggers transactions using a quotation at the stop price, which requires separate written disclosures to the customer in paper or electronic form prior to the placement of such alternative orders, including a description of any such alternative order type and a specific description of the triggering event.

We offer a free initial consultation to investors who feel they have been victimized as a result of failure to implement stop order or stop limit order instructions in their accounts.

Stop and Stop Limit Orders – FINRA Regulatory Notice 12-50

Mon, 25 Mar 2013 13:17:00 GMT

The Securities and Exchange Commission has approved amendments relating to stop orders in customer accounts, with an effective date of January 21, 2013. This Regulatory Notice addresses new FINRA Rule 5350 (Stop Orders), which replaces the stop order provisions of FINRA Rule 6140(h).

Many investors have been lulled into a sense of false security when their brokers have advised their clients that they have been pursuing a general (or vague) strategy of assuring the sale or purchase of securities at, above, or below a specified price.

So what is a stop order? It is an order to buy or sell a security that becomes a market order to buy or sell when a transaction occurs at or above (below) the stop price.

A stop limit order is an order to buy or sell that becomes a limit order to buy or sell at the limit price when a transaction occurs at or above (below) the stop price.

We offer a free initial consultation to investors who feel they have been victimized as a result of failure to implement stop order or stop limit order instructions in their accounts.

Supervisory Red Flags Under FINRA Rule 2111

Tue, 12 Mar 2013 13:26:00 GMT

Rule 2111 of the Financial Industry Regulatory Authority (FINRA) requires firms to have a supervisory system to focus on the detection, investigation and follow-up of “red flags” indicating that a Registered Representative may have recommended an unsuitable investment strategy with both a security and a non-security component. For example, a Registered Representative’s recommendation that a customer with limited means purchase a large position in a security might raise a red flag regarding the source of funds for such a purchase. Additionally, the liquidation of a large position in blue chip stocks paying regular dividends is cited in the Notice as a “red flag” as to whether or not that recommendation is part of a broader investment strategy.

The suitability rule has also been determined to apply in the context of a recommended investment strategy involving a security and an outside business activity, requiring the brokerage firm to obtain a general understanding of the outside business activity (see FINRA Rule 3270). The Regulatory Notice closes by indicating “. . . broker-dealers must keep in mind that, in addition to suitability and supervisory responsibilities, firms have other regulatory obligations to investigate unusual activity.”

We offer a free initial consultation to investors who feel they may have been victimized by the improper recommendation of an improper investment strategy, or non-security product or improper outside business activity.

FINRA Announces Requirement of Heightened Supervision of Complex Products in NASD Notice to Members 12-03

Tue, 05 Mar 2013 22:35:00 GMT

The Financial Industry Regulatory Authority (FINRA) has recently defined complex products to include many of the investment vehicles whose risks were exposed during the financial crisis of 2008-2009. Examples of complex products include the following:

Asset-backed securities secured by a pool of collateral, such as mortgages, payment from consumer credit cards, or future royalty payments.

Embedded derivative component products, such as structured notes with an embedded derivative for which the reference asset is a constant maturity swap rate.

Structured notes with payoffs contingent upon the future performance of a reference asset.

Reverse convertible notes in which an investor might incur a capital loss as a result of the fall in the value of a reference asset.

Reverse convertible notes with a “knock in” or “knock out” feature.

Range accrual notes.

Structured notes with “worst-of” features.

Exchange-traded products such as products providing inverse or leveraged exposure (i.e., CBOE volatility index [VIX]).

Principal protection products, which can lose their principal protection based upon a stated event.

Structured products with leveraged returns that are reset daily (i.e., leveraged or inverse exchange-traded funds, including leveraged and inverse ETF’s that are reset daily, meaning that they are designed to achieve their stated leverage or inverse objectives on a daily basis.)

Products with complicated limits or formulas for the calculation of investor gains.

We offer a free consultation to investors who feel they have been improperly sold complex products.

FINRA Suitability Rule 2111 Also Applies to Investment Strategy and Non-Security Investments

Fri, 01 Mar 2013 17:53:00 GMT

A customer has been determined to include “a person who is not a broker or dealer who opens a brokerage account at a broker dealer or purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation, even though the security is held at an issuer, the issuers affiliate or the custodial agent (e.g. direct application, business, investment program, securities or private placements), or using another similar arrangement.

FINRA Suitability Rule 2111 has been determined to apply when a broker-dealer or Registered Representative makes a recommendation to a potential investor, who then becomes a customer.

The Rule focuses on whether the recommendation was suitable when it was made. Additionally, the new suitability rule has also been determined to cover a broker-dealer’s or Registered Representative’s recommendation of an “investment strategy” involving both a security and a non-security investment: for example, a brokerage recommendation of an investment strategy to use home equity to purchase securities or to liquidate securities to purchase an investment-related product that is not a security.

The Regulatory Notice also addresses broker obligations involving a recommendation to purchase a non-security investment in determining which securities he or she should sell to fund the purchase of the non-security investment. The Notice also states that a brokerage firm must have a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules when brokers recommend investment strategies involving a security and a non-security investment.

FINRA Offers Guidance on FINRA Suitability Rule 2111

Tue, 26 Feb 2013 22:00:00 GMT

In Regulatory Notice 12-55, FINRA addressed a requirement of FINRA Rule 2111 (Suitability), that a broker-dealer or Registered Representative “have a reasonable basis to believe that a recommended transaction, or involving a security or investment strategy involving a security or securities, is suitable for the customer” based upon the customer investment profile. Since the implementation of Rule 2111, questions have arisen regarding the meaning of “customer” and “investment strategy.”

The “investment strategy” language of FINRA Rule 2111 has also been determined to be applicable to:

- Recommendations to customers to invest in specific types of securities or securities within a market sector regardless of whether the recommendations identifying any particular securities;

- Bond ladder type recommendations

- Day trading

- Liquified home equity

- Margin strategy involving securities irrespective of whether the recommendations mention particular securities

- A specific recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.

We offer a free initial consultation to investors who feel they may have been victimized by the improper recommendation of an improper investment strategy, or non-security product or improper outside business activity.

Deferred Variable Annuities and Client Suitability

Sat, 23 Feb 2013 05:00:00 GMT

Deferred variable annuities are investment products which have features with both insurance

and securities (mutual fund) characteristics. They may be purchased in non-qualified (non-retirement) type accounts as well as in tax-qualified, employer-sponsored retirement or benefit plans.

FINRA Conduct Rule 2330 requires that brokers selling these products adhere to FINRA’s new Suitability Rule 2111 and Regulatory Notice 12-55 and that the customer be informed of applicable surrender periods and surrender charges, tax penalties if the product is sold or redeemed prior to reaching the age of 59 ½, mortality and expense fees, investment advisory fees, charges for features of policy riders, market risk and the insurance and investment components of deferred variable annuities.

Brokers are also required to make the determination that the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit.

We offer a free initial consultation to purchasers of deferred variable annuities who feel they have been victimized by the sale of these products to them.

Capital Region and Upstate New York Banks Are Selling Variable Annuity Contracts to Senior Citizens - Securities/Investment Law Update

Tue, 04 Dec 2012 19:41:00 GMT

Over the past several years, a number of banking institutions have been involved with the sale of variable annuities to retirees and senior citizens. These sales take place through their FINRA-registered broker-dealer affiliates, such as Uvest (First Niagara Bank), Key Investments (KeyBank), COO (Citizens Bank), and M&T Securities (M&T Bank).

Through branch offices in the Buffalo, Rochester, Syracuse, Utica, Binghamton, and Albany areas, many customers of sizeable bank-custodied IRA accounts or CD accounts have been recommended to liquidate such holdings for the purchase of variable annuity contracts – but are variable annuity contracts suitable for retirees?

As reported in previous blogs, while variable annuities are not always safe and secure investment vehicles, they are often presented to be so. Variable annuities can decline drastically in value with market fluctuations. Also, annual carrying costs for administrative fees, mortality fees, insurance-related expenses, investment management-related expenses, administrative expenses, and other costs approaching 3% per year can certainly eat into whatever income your variable annuity investments might be generating for you. Additionally, variable annuities come with considerable sales commissions paid to the selling firms and their brokers, which can approach the 7% and 8% range.

When faced with a variable annuity sales pitch from a bank-affiliated brokerage firm, it is important to ask who is really profiting from the sale. Bank customers are often lulled into a sense of security, oftentimes being sold variable annuity products in the same location where their bank deposits have been held, believing that their variable annuity contracts are just as safe as their bank account deposits – they are not!

If you feel you have been victimized with the improper sale of a variable annuity contract, we offer a free initial consultation to assess your case.

Living Benefit Annuities - Securities and Investment Law

Tue, 27 Nov 2012 05:00:00 GMT

In an article entitled Buying Your Own Pension, in the July/August 2012 edition of the AARP Bulletin, veteran financial writer, Jane Bryant Quinn, examines the wisdom of living benefit variable annuities.

In the article, those considering the purchase of variable annuities with living benefits are advised to first look at the annual expenses and also consider tax penalties, surrender fees, and other charges associated with early withdrawals and excessive withdrawals, suggesting that lower fee annuities can be purchased from Vanguard Group or Fidelity Investments.

The article also suggests that a deferred-income annuity, with guaranteed payments starting at a future date, might be the better option, investing your growth and inflation protection component in low cost U.S. and international stock funds. Prospective living benefit annuity purchasers are also urged in the article to consider the advice of Moshe Milefevsky, author of The Seven Most Important Equations For Your Retirement, to consider the equity mix contained in the proposed annuity sub-accounts.

If you feel you have been victimized with the improper sale of a variable annuity contract with living benefits, we offer a free initial consultation to assess your case.