(February 16) – “The National Association of Securities Dealers has a new warning for variable-annuity investors: Beware the broker bearing a switch letter, writes Jeff Opdyke in today’s Wall Street Journal.

“Investors may be losing money — not gaining if they exchange a current annuity for a new one, says an alert from the self-regulatory arm of the securities industry. It cautions that generally, the exchange or replacement of annuity contracts is not a good idea.

“The concern is that many switches may be little more than ‘churning,’ the practice of excessive trading that typically generates a commission for the broker while providing little benefit for the investor. Churning is illegal under Securities and Exchange Commission and NASD rules.

“The NASD warning was issued Thursday in connection with a series of enforcement actions against five firms and one individual, alleging improper marketing and sale of variable annuities, including encouraging investors to switch from one annuity to another. The group was fined more than $112,000 combined, including restitution.

“Regulators elsewhere also are taking a close look at so-called 1035 exchanges, the name for the process used by brokers to switch investors between one annuity and another. Paul F. Roye, director of the SEC’s division of investor management, told members of the Practicing Law Institute last month that the agency is ‘concerned about exchange programs because they create a high potential for sales-practice abuse.’

“The SEC late last year filed an action against a Florida broker for improper annuity switching, and state regulators are taking a hard look at the practice, as well. Among other things, annuity switches can trigger “surrender” penalties under the old contract (such penalties are levied when investors cancel a contract early), while locking the investor into a new period in which withdrawals are subject to penalties.