July 28, 2006
VIA E-MAIL TO RULE-COMMENTS@SEC.GOV
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Re: File No. SR-NASD-2004-183
Dear Ms. Morris:
Please accept the following comments to Amendment No. 2 to the above-referenced rule concerning variable annuities.
Because of the complexity of variable annuities, I strongly support the Recommendation Requirements as described in subsection (b) of the Second Amendment. The specific disclosures which are mandated in these requirements will assist investors in understanding the essential elements of variable annuities; however, the omission of the disclosure of commissions is a fundamental flaw in the recommendations.
I have represented investors pursuing claims for violation of the securities laws for over 30 years, and have represented both investors and industry representatives in arbitration for most of the last 20 years.
Since the mid-1990s, I have represented many investors with claims arising out of the purchase of variable annuities. These claims involve allegations of breach of fiduciary duty, fraud, violation of statutory securities laws, negligence, breach of contract, and other legal theories.
One issue present in all of the cases is the broker''s failure to disclose commissions. The commissions in these variable annuity cases have been substantial, typically running from 7% to 9% of the amount invested and often totaling tens of thousands of dollars. When investors finally learn of the substantial commissions which were paid to their brokers, they express shock, amazement, and anger. They also state that had they known their brokers were getting paid such substantial commissions, they would not have purchased the variable annuities.
In several cases, during the sales presentation, the investors had actually questioned the broker as to what the broker was being paid for the transaction. The answer was uniform, with the broker stating, ""You don''t pay me anything. I am paid by the insurance company."" The amount of the commissions was not disclosed.
Commission levels in these cases ranged from $5,000 to in excess of $70,000, all for just a few hours of work.
There can be no question that the commissions paid in variable annuity transactions are both a conflict of interest for the broker and material to investors. Often it is the large commission that compels the broker''s decision to recommend variable annuities to the investor. Commissions must be disclosed to the investor.
The federal and state securities laws which require disclosure of material information to investors in connection with the purchase of securities mandates the disclosure of substantial commissions. See Stone v. Kirk, 8 F.3d 1079, 1087 (6th Cir. 1993).
There can be little doubt that the large commissions are a strong motivation for the industry''s emphasis on variable annuities, resulting in variable annuity sales exceeding $200 billion per year. Since the large commissions are often the broker''s primary motivation for selling variable annuities, it is essential they be disclosed to investors.
I strongly recommend that broker commissions be included in the Recommendation Requirements as described in subsection (b) of the Second Amendment.
Very truly yours,
Laurence S. Schultz
Laurence S. Schultz
Driggers, Schultz & Herbst, P.C.
2600 West Big Beaver Road, Suite 550
Troy, Michigan 48084
Telephone: (248) 649-6000
Facsimile: (248) 649-6442