Waddell & Reed
will pay $18 million in fines and restitution to settle allegations the investment firm employed "aggressive" tactics associated with the sale of variable annuities.
Securities regulators contend the Kansas-based investment firm engaged in a national sales campaign to persuade customers to switch variable annuity contracts issued by one life insurer to those issued by another insurer. The campaign generated extra fees for Waddell & Reed, but led to some 5,000 customers paying unnecessary expenses.
Regulators at the
contend Waddell pressured customers to switch annuity contracts "without regard to whether the transactions were in the customer's best interests."
The brokerage launched the campaign in 2001 after it failed to secure a satisfactory fee-sharing deal with United Investors Life Insurance, which had sold variable annuities to Waddell customers. The brokerage negotiated a more favorable revenue deal with a rival insurer, Nationwide Insurance, and began urging customers to switch policies.
A variable annuity is a mutual fund-like product packaged in an insurance contract, which offers a tax benefit to the buyer.
The settlement with regulators calls for the brokerage firm to pay a $5 million fine to the NASD and $2 million in fines to several state securities regulators. The brokerage also must provide up to $11 million in restitution to its customers.
In addition, Robert Hechler, the firm's former president, agreed to a six-month suspension from the securities business and to pay a $150,000 fine.
The NASD charges that Hechler "encouraged the sales force to engage aggressively in switching customers," even those some brokers "expressed concern that these switches were not in the best interests of their clients."
As is customary in regulatory settlements, neither Waddell nor Hechler admitted nor denied the allegations raised by regulators.