Separately, NASD fined another affiliate, Jefferson Pilot Securities Corp. (JPSC), also of Concord, $125,000 for failing to retain all e-mail communications of its registered persons.
This is the first NASD enforcement action to date involving market timing in VUL sub-accounts. Last June, NASD settled a case involving market timing in the sub-accounts of variable annuities. VULs offer a fixed premium schedule and a minimum death benefit. They differ from traditional whole life insurance in that cash values are allocated to various sub-accounts, each reflecting investments in particular mutual funds that are separate from the general assets of the insurance company.
"Market timing and excessive trading by a few can hurt other fund shareholders by diluting share value and raising transaction costs," said NASD Vice Chairman Mary L. Schapiro. "Jefferson Pilot's failure to conduct a meaningful review of its supervisory systems resulted in the impermissible market timing and excessive trading, which in turn resulted in harm to other policy holders with assets in these sub-accounts."
NASD found that, despite having an electronic system ostensibly designed to recognize and block sub-account transfers in excess of policy limits, Jefferson Pilot failed to determine whether the system was functional. Given the firm's exclusive reliance on this system to monitor sub-account transfers, such follow-up and review was essential. As a result of this failure, 292 Ensemble series VUL policyholders were permitted to exceed the 20-transfers-per-policy-year limit described in the prospectus.
NASD found that in 2003, Jefferson Pilot failed to prevent two VUL policyholders, through the purchase and sale of sub-account units, from engaging in market timing in the shares of three different funds. The two market timers exceeded the prospectus limits by 116 transfers, realizing additional profits of $238,697. From January 1, 2001 through December 31, 2003, at least 290 other VUL policyholders had been following an investment strategy that required periodic rebalancing of their sub-account portfolio. Although not market timers, those policyholders still exceeded the VUL prospectus transfer limitations.
Of the $238,697 in restitution, Jefferson Pilot previously paid $119,024 to the JPVF International Equity Portfolio. The remainder - an additional $119,673 - will be paid to the following funds: American Century Variable Products, Inc. VP International Fund ($66,191) and Franklin Templeton Variable Insurance Products Trust Templeton Foreign Securities Fund ($53,482).
NASD also found that the Jefferson Pilot securities affiliate, JPSC, failed to maintain and preserve all internal e-mail communications for 217 registered persons who were also employed by their affiliated life insurance company. From at least January 1, 2001 through December 31, 2003, JPSC's e-mail system purged the e-mail communications of those 217 registered persons after 60 days. NASD rules require that e-mail communications be retained for no less than three years.
In addition to the fining and censuring both firms, NASD required Jefferson Pilot to certify that it has disclosed all instances of transfers within VUL sub-accounts that contravened the limitations set forth in the applicable prospectus and that it has implemented appropriate supervisory controls to enforce prospectus transfer limits; and JPSC was required to certify that has reviewed its procedures relating to preservation of electronic mail communications and that it has established reasonable supervisory controls to ensure e-mail retention.
In settling this matter, neither firm admitted nor denied the charges, but they consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.
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