1. Annuities
William A. Despo
830 Third Avenue
New York, NY 10022
(212) 430-8020
(973) 491-3325
william.despo@leclairryan.com
January 2013

2. The Evolving World of Annuities
 Marketplace is changing
• Sun Life Insurance stopped selling annuities.
• Hartford Insurance stopped selling annuities,
and plans to diverse Woodbury Financial.
• Increase regulation by insurance regulators.
• FINRA regulating its brokers that have
customers who sell securities to buy annuities.
• Litigation and class actions.
• Types of annuities constantly changing.
2

3. Senior Citizen Victims?
 NY Times and WSJ have pointed to
problems with the use of professional
designations such as “Certified Retirement
Financial Adviser,” “Certified Senior
Advisor,” “Chartered Senior Financial
Planner,” etc.
 Titles seemed to be more a marketing tool.
 Titles used in marketing of unsuitable
annuities.
3

4. States React to Senior Abuse
 Insurance commissioners across the
country have examined the background and
training of all those sell annuities.
 States have developed training programs
for producers.
 Producers must meet minimum knowledge
standards regards to the product as well as
the law.
4

5. National Suitability Standard
 NAIC calls for a national standard of
suitability products for non-registered
products.
 NAIC drafted a model setting suitability
standards for life and annuity products.
 Focus on sales to persons over the age of
65.
 Model Act called Senior Protection in
Annuity Transactions Model Regulation.
5

6. FINRA Reacts
 FINRA adopts rules to deal with variable
annuities and annuities in an attempt to
govern the conduct of the registered
personnel.
 Sanctions, fines, suspensions and bars.
 FINRA also serves as an arbitration forum
for customers who have claims involving
annuities.
6

7. Typical Claims in a Senior Abuse
Claim
 Breach of fiduciary duty, suitability,
negligence, fraud, consumer fraud, RICO
 Class actions
 Mental capacity
 Reliance and control
 Enforceability of arbitration clauses
7

8. Overview to Annuities
Neil Hartzell, LeClairRyan
One international Place
Boston, MA
(617) 502 8209
neil.hartzell@leclairryan.com
January 2013

9. 9
What are they?
 Contract between purchaser and life insurance company
designed to meet retirement and other long term money
management goals. Purchaser makes a lump sum payment or
series of payments; in return insurer agrees to make periodic
payments to purchaser; payments from insurer can begin
immediately or at some future date.
 Defined by Internal Revenue Code and regulated by individual
states. Variable annuities (discussed below) are regulated by
the Securities and Exchange Commission and overseen by
the Financial Industry Regulatory Authority (FINRA; the largest
non-governmental regulator for all securities firms doing
business in the United States).

10. 10
Benefits
 Typically offer tax deferred growth of earnings and may
include a death benefit; death benefits vary; typical death
benefit payment can be amount paid for annuity (either the
lump sum amount or the total of payments made by
purchaser).
 Withdrawals are taxed at ordinary income rates, not capital
gains; once retired likely in lower income tax bracket.
 Typically offer guaranteed rate of return; amount determined
by agreement/contract with insurance company.
 No maximum investment restriction unlike 401K
and IRA Accounts.

11. 11
Disadvantages
 Early withdrawal may result in tax penalties and
surrender charge (sometimes substantial) from
the insurance company.
 Not very liquid. If purchaser may need access to
funds before payments begin, early withdrawal
fees can be as high as 10% in first year (usually
percentage of penalty reduces in following years).
 Annuities can be sold on secondary market but
such sale will likely incur transfer fees (most
investors do not read contacts carefully and thus
can claim to be unaware of such fees).

12. 12
Disadvantages (cont.)
 Common criticism is that fees for buying an
annuity can be high (some brokers or
financial planners like to recommend and sell
annuities because commission fee is high).
 Company will say that fee is not deducted from
amount purchased.
(Example: Annuity purchased for $100,000; broker gets fee
of $4,000. Amount showed on contract is $100,000, but
commission fees is usually deducted from annuity over time
in the form of yearly expenses.)

13. 13
Disadvantages (cont.)
 Subsumed in income/expense statement if
annuity withdrawn early; most purchasers
unaware that this is how commission is paid.
 Trail commissions can add to costs (trail
commissions paid for each year annuity
remains in force).
 Fees can sometime reduce
annual yield by up to 2-3%.

14. 14
Types of Annuities

15. 15
Immediate or Life Annuity
 Distributes savings with a tax deferred
growth factor; return is part principal (not
taxed) and part investment income (that is
taxed)
 Provides income for life of annuitant similar
to a defined benefit or pension plan

16. 16
Deferred Annuity
 Accumulates savings with a view to
eventual distribution either in manner of
immediate annuity or as a lump sum
payment.
 Generally 3 types of deferred annuities:
fixed, indexed and variable. There are
different types within these 3 groups.

17. 17
Types of Deferred Annuity: Fixed
 Typically offer guaranteed rate of return
over life of contract. Similar to bank CDs.
Guaranteed rate may, however, only be the
same for first 5 years. After that, may
fluctuate, with a minimum base rate
(e.g. no lower than 3%).
 Typically allow some percentage of
interest/principal to be withdrawn early
(e.g. 10% per year) without penalty.

18. 18
Types of Deferred Annuity: Equity Indexed
 Is a type of fixed annuity
 Performance typically tied to a stock market index
(S&P 500, Dow Jones Industrial Average).
 Caps, spreads crediting methods and margins can
reduce returns
• Disadvantage is they don't pay participating
market dividends
• Advantage is purchaser can never earn
less than 0%, even if indexes are negative
for the year

19. 19
Types of Deferred Annuity: Variable Annuities
 Insurance companies invest money in
subaccounts
 Functionally equivalent to mutual funds
 Primary use to allow investors to engage in
tax deferred investing for retirement
accounts greater than amounts permitted
by IRA or 401K plans

20. 20
Types of Deferred Annuity: Variable
Annuities (cont.)
 Many offer guaranteed rate of return even if underlying
accounts perform poorly.
 Such guarantees come with costs in form of fees and
expenses.
 Regulated by individual states as insurance products and
Securities and Exchange Commission as securities under
federal laws.
 Underlying investment can take many forms: can be in stocks,
bonds, mutual funds or combinations some annuities come
with automatic rebalancing feature as purchaser (the
annuitant) ages or to reduce risk over market fluctuations.

21. 21
Types of Deferred Annuity: Variable
Annuities (cont.)
 Many different types of performance guarantees: guaranteed
minimum death benefits (several different forms, return of
premium, roll-up of premium at a particular rate, maximum
anniversary value); guaranteed living benefits.
 Generally highest area for criticism as claims arise for being
sold to wrong person who claim investments could have
performed better elsewhere and these products typically have
higher fees than other annuities. Commissions can range
from 1-12%.; average is about 6%.
 Fees reduce rate of return.
 Guaranty of no loss of principal is not really a benefit since
over long term US financial markets have generated positive
returns.

22. 22
Annuities and 401K and IRA Plans

23. 23
Annuities/401K & IRA Plans
 401K and IRA Plans are already tax deferred, so
no additional tax benefits.
 If death benefit on variable annuity funded
with IRA or 401K funds exceeds account value at
death of policy owner, beneficiary will be taxed on
total amount of death benefit received forfeiting
life insurance policy tax-free death benefit.
 Can be appropriate if retiree needs lifetime
income at retirement; particularly if annuity
provides for guaranteed income, death benefit.

24. 24
Annuities and Trusts

25. 25
Charitable Remainder Trusts
 Very complex area, intersection between state
trust law, IRS regulations and FINRA regulations.
 May be suitable in some circumstances.
 IRS letter ruling suggests a charitable remainder
trust may invest in annuities without compromising
trust status.
 Does annuity create the income needed by the
trust beneficiaries? (This can depend on what
annuity is invested in; dividends may be income,
increase in value may not be income.)

26. 26
Charitable Remainder Trusts (cont.)
 Does trust need income or guaranteed
income?
 Are other investments more suitable
(i.e. income producing real estate)?
 Criticism over high commissions
 Evidence that broker considered other
investments
 What was explained to grantor of trust?

27. 27
Insurance Company Default Risk

28. 28
Insurance Company Default Risk
 Many companies have gone out of
business in recent years.
 Insurance company defaults governed by
state law.
• What is insurance company rating when
annuity was sold?
• What is state guaranty fund policy when insurer
goes out of business?
• Caps on benefits?
• Taken into account when annuity sold?

29. 29
Claims/Damages in Annuity Cases

30. 30
Claims/Damages: Theories
 Typical claims involve suitability, failure to
supervise, negligence, breach of fiduciary
duty
 Factors –
• Age and financial circumstances of investor
• Sophistication of investor
• Forms/Disclosures signed, risks explained
• Evidence that financial goals reviewed

31. 31
Claims/Damages: Theories (cont.)
 Factors –
• Documentation of recommendations
• Documentation if recommendations ignored
• Witnesses
• Alternative, better suited investments
• Credibility of claimant
• Credibility of broker

32. 32
Claims/Damages: Damages
 Proof that underlying amount paid into
annuity (either lump sum or amounts paid
in over time) would have performed better
in another investment.
 What is comparison?
• Is it a high growth fund that may have
performed well over a specific period of time,
but that which the investor (who was looking for
a low-risk guaranteed return) would likely never
have invested in?

33. 33
Claims/Damages: Damages (cont.)
 Comparisons between performance of
mutual funds that tracked the same
mix/type of underlying securities have been
upheld by courts/arbitrators as appropriate
comparisons.
 Must factor in costs/commissions for
comparison funds in damage calculations.
 Punitive damages under FINRA rules, state
law or state law applicable Elder Abuse Act.

34. 34
Claims/Damages: Damages (cont.)
 Attorneys fees under FINRA, state law, any
applicable contracts, or state law applicable
Elder Abuse Act.
 Did monthly distributions reduce principal
amount or were they just based on income
generated by underlying investments (i.e.
dividends)?
 Claims can include withdrawal amounts if
plaintiff proves annuity was unsuitable in
the first place?

35. 35
Know-Your-Customer and
Suitability Rules
Changes to the New FINRA
Richard A. McGuirk
70 Linden Oaks, Suite 210
Rochester, NY 14625
(585) 270-2105
richard.mcguirk@leclairryan.com

36. FINRA’s Requirements Governing
Suitability of Variable Annuity Transactions
 Former Regulatory Framework
• FINRA Rule 2330 (Variable Annuities)
• NASD Rule 3210 (Suitability)
• NASD Rule 3010 (Supervision)
36

37. Suitability of Variable Annuity Transactions
 Current Framework
• FINRA Rule 2111 (Suitability)
• FINRA Rule 2090 (Know-Your-Customer)
• FINRA Rule 2330 (Variable Annuities)
• FINRA Rule 3110 (Supervision)
37

38. The New Suitability Rules
 Recommended transactions and
investment strategies
 Detailed customer information
 Specific requirements of suitability
(reasonable-basis; customer-specific;
Quantitative)
 KYC Rule
38

39. 39
Two New FINRA Rules
 Effective July 9, 2012
 FINRA Rule 2090, the Know-Your-
Customer Rule
• Replaces and is modeled on the old NYSE
Rule 405(1)
 FINRA Rule 2111, the Suitability Rule
• Modeled after former NASD Rule 2310

40. 40
Know-Your-Customer Rule
 Requires firms to use “reasonable
diligence” in opening and maintaining
accounts and to know the “essential facts”
concerning the customer
 Unlike the former NYSE Rule 405, the new
rule does not specifically address orders,
supervision or account opening

41. 41
Essential Facts
 Required to –
• Effectively service the customer’s account
• Act in accordance with any special handling
instructions for the account
• Understand the authority of each person acting
on behalf of the customer
• Comply with applicable laws, regulations and
rules

42. 42
Suitability Rule
 Modeled after former NASD Rule 2310
 Requires the firm 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 on the information
obtained through the reasonable diligence
of the [firm] to ascertain the customer’s
investment profile.”

43. 43
Suitability Rule (cont.)
 A “customer’s investment profile includes,
but is not limited to 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 [firm] in connection with
such recommendation.”

44. 44
Suitability Rule (cont.)
 New rule broadens the explicit list of
customer-specific factors that firms must
attempt to obtain and analyze, including the
customer’s age, investment experience,
time horizon, liquidity needs, and risk
tolerance.

45. 45
Role of a “Recommendation”
 The rule continues to use a “recommendation”
as the triggering event for application of the
rule and continues to apply a flexible “facts
and circumstances” approach to determining
what communications constitute such a
“recommendation.”

46. 46
Role of a “Recommendation” (cont.)
 Whether a “recommendation” has occurred is an
objective rather than subjective determination.
 “An important factor in this regard is whether –
given its content, context and manner of
presentation – a particular communication from a
[firm] to a customer reasonably would be viewed
as a suggestion that the customer take action or
refrain from taking action regarding a security or
investment strategy.”
Source: FINRA Regulatory Notice 11-02, “Know Your Customer and Suitability,”
January 2011.

47. 47
Suitability Rule Applies to “Strategies”
 The term “strategy” “should be interpreted
broadly … Among other things, the term
‘strategy’ would capture a broker’s explicit
recommendation to hold a security or
securities.”
Source: FINRA Regulatory Notice 11-02.

48. 48
“Recommendation” Suitability
 Reasonable-basis suitability
 Customer-specific suitability
 Quantitative suitability

49. 49
Reasonable-basis Suitability
 Firm must have a reasonable basis to
believe that the recommendation is suitable
for at least some investors.
 Firm’s reasonable diligence must “provide
the firm … with an understanding of the
potential risks and rewards associated with
the recommended security or strategy.”
Source: FINRA Regulatory Notice 11-02.

50. 50
Reasonable-basis Suitability (cont.)
 It is not sufficient protection under this requirement that a firm’s
“product committee” conduct the required diligence.
 Broker or associated person involved in the recommendation to the
customer must still comply with the reasonable-basis obligation.
 Broker “can rely on a firm’s fair and balanced explanation of the
potential risks and rewards of a product. However, if the associated
person remains uncertain about the potential risks and rewards of a
product or has reason to believe that the firm failed to address a
particular issue … then the associated person would need to engage
in further inquiry before recommending the product.”
Source: FINRA Regulatory Notice 11-25, “Know Your Customer and Suitability,” May 2011.

51. Reasonable-basis Suitability (cont.)
 Reasonable basis
• Lack of training is now a suitability violation!
51

52. 52
Customer-specific Suitability
 Firm must have a “reasonable basis to
believe that the recommendation is suitable
for a particular customer based on that
customer’s investment profile.”
Source: FINRA Regulatory Notice 11-02.

53. 53
Quantitative Suitability
 Broker who has actual or de facto control
over a customer account must “have a
reasonable basis for believing that a series
of recommended transactions, even if
suitable when viewed in isolation, are not
excessive and unsuitable for the customer
when taken together in light of the
customer’s investment profile.

54. 54
Quantitative Suitability (cont.)
 A broker has actual control, for example, where he
has discretionary trading authority.
 A broker would have de facto control over an
account if the customer routinely follows the
broker’s advice because the customer is unable to
evaluate the broker’s recommendation and
exercise independent judgment.
Source: FINRA Regulatory Notice 12-25, “Suitability”, May 2012 (copy attached).

55. 55
Quantitative Suitability (cont.)
 Thus, the new rule “makes clear that a
broker must have a firm understanding of
both the product and the customer. It also
makes clear that the lack of such an
understanding itself violates the suitability
rule.”
Source: FINRA Regulatory Notice 11-02.

56. 56
Customer’s Best Interest
 In certain guidance, for example in FINRA
Regulatory Notice 11-02, cases standing for
the proposition that a broker’s
recommendations must be consistent with
his customer’s best interests.
 Effectively, that means that the broker
should not put his own interests in front of
the customers.

57. 57
Customer’s Best Interest (cont.)
 In FINRA Regulatory Notice 12-25, FINRA
provided a list of examples in which FINRA
and the SEC found brokers in violation of
the suitability rule by placing their interests
ahead of a customer’s.

58. 58
Customer’s Best Interest (cont.)
 Violation examples –
• Motivation for recommending one product over
another was to receive larger commissions.
• Mutual fund recommendations were made to
maximize commissions rather than establish an
appropriate portfolio.
• Broker who recommended new issues being
pushed by his firm so that he could keep his
job.
See FINRA Regulatory Notice 12-25 (and cases cited therein).

59. FINRA Rule 2821: Heightens Suitability
Standard for Deferred Annuities Enhance broker-dealers compliance
supervisory systems
 Rule 2821 applies to both purchases and
sales of deferred variable annuities.
• Exceptions: tax qualified, employer-sponsored
retirement or benefit plan
59

60. FINRA Rule 2821
 Registered representative must have a
reasonable basis to believe that the customer
has been informed, in general terms, of the
material features of a deferred variable
annuity. Features include potential surrender
period and surrender charges, potential tax
penalty, mortality expenses, charges for and
features of enhanced riders, insurance and
investment components, and market risk.
60

61. FINRA Rule 2821 (cont.)
 May not ignore product-specific features.
 Informed is more than deliver of written
material.
 Registered representative must have a
reasonable belief that the customer will
benefit.
61

62. FINRA Rule 2821 (cont.)
 Requires registered representative to make
reasonable efforts to obtain and consider various
other types of customer-specific information.
• Customer age, annual income, financial situation
and needs, investment experience, investment
objectives, intended use of the investment, time
horizon, other assets, liquidity needs, liquid net
worth, risk tolerance, tax status and other
information that reasonable registered
representative would consider in making
recommendations.
62

63. EQUITY INDEX ANNUITIES
WILLIAM A. DESPO
63

64. Equity Index Annuity (EIA)
 EIA are financial instruments in which the
insurance company guarantees a stated
interest rate with some protection from loss
of principal, and provides an opportunity to
earn additional interest based on the
performance of a securities market index.
64

65. Regulation of Equity Index Annuities
 Prior to the adoption of the Dodd Frank
Wall Street Reform and Consumer
Protection Act of 2010 –
• Uncertainty existed as whether an EIA was a
security or an insurance product.
• FINRA Notice to Members 05-50 express
concern about the marketing and supervision of
sales of unregistered EIAs.
• In 2007 SEC Rule 151A declared that EIA were
securities.
65

66. Regulation of EIAs (cont.)
 National Association of Insurance
Commissions issues Model Suitability Rule
for EIAs
 The Model Rule defines “Suitability
information” to include, but not limited to,
age, annual income, financial situation and
needs, financial experience, financial
objectives, intended use of the annuity,
financial time horizon, and risk tolerance.
66

67. Regulation of EIAs (cont.)
 Model Rule created duties for the insurers
and insurance producers when
recommending an EIA.
• Reasonable basis exists when the
recommendation is suitable for the customer.
• A reasonable basis exists when it is believed
that the customer was reasonably informed of
the product, including surrender charge, and
the customer will benefit from the product.
• Follows FINRA Rule 2821.
67

68. Regulation of EIAs (cont.)
 Dodd Frank Act exempts EIAs as securities
provided one of the conditions are satisfied:
• A State adopts the model suitability rule by
June 16, 2013;
• EIA is XX by a company that is domiciled in a
state that adopts the model suitability rule by
June 16, 2013; or
• EIA is XX by a company that adopts and
implements practices on a nationwide basis
that meets or exceeds the model suitability law
requirements.
68

69. Regulation of EIAs (cont.)
 State Regulation of EIAs
• As of July 2012, 47 States have adopted some
form of the Model Suitability Rule.
• In North Carolina, “The Suitability in Annuity
Transaction Act” became effective January 1,
2008. The purpose of the Act is to set
standards for annuity-related recommendations
made to consumers by insurance agents and
companies.
69

70. Regulation of EIAs (cont.)
• The Act requires insurance companies and
agents to assess the financial objectives of the
consumer before recommending the purchase
or exchange of an annuity. It requires the
company or agent to make reasonable efforts
to obtain information about a customers
circumstances.
70

71. Regulation of EIAs (cont.)
• Insurance companies and agents must have
reasonable grounds for believing that their annuity
recommendations are suitable based on the
information collected from the consumer. If a
consumer elects not to provide the information,
provides false information, purchases something
that the agent or insurance company did not
recommend, then agents and insurance companies
have no obligations under the Act.
71

72. Regulation of EIAs (cont.)
• Violation of the Suitability in Annuity
Transactions Act is considered an unfair and
deceptive trade practice. Violators are subject
to penalties and treble damages.
72

73. Defense Comments to Annuity Claims
 The Senior Citizen (65 years and older)
• Class Actions
– Yokoyama v. Midland Life Insurance Co., 243 F.D.R.
400 (D. Haw. 2007). Class action alleged that
defendant deceptively marketed equity index annuities
to senior citizens by way of false written material,
failed to have sufficient procedures to ensure
suitability of the annuity sales. Class action
certification denied. Suitability is an subject to an
individual assessment and cannot be done on a class
wide basis. Individual questions predominate the
class and the predominance requirement in Rule 23.
73

74. Defense Comments to Annuity Claims (cont.)
– Negrete v. Alliance Life Insurance Co. of North
America, 23 F.R.D. 482 (C.D. Cal. 2006). Plaintiff
claimed that Alliance engaged in a misleading
marketing scheme to sell to senior citizens indexed
annuities, which were not suitable. Violations of
RICO and California’s “elder abuse” statue and
consumer abuse law. The court certified the class
action.
– DeCesar v. Lincoln Benefit Life Co., 852 A.2d 474
(R.I. 2004). Plaintiffs alleged that defendant
breached the annuity contract by unilaterally
changing the participation rate. The equity index
policy specified a 80-percent participation rate but
Lincoln revised the rate to 70 percent. Class
certified. 74

75. Defense Comments to Annuity Claims (cont.)
 FINRA enforcement actions
• United Planners Financial Services of America
– September 24, 2012 – Fined $200,000 over variable
annuity sales for failure to properly supervise and
detect unsuitable sale of variable annuities
– April 14, 2009 – Fined $1.75 million for 250
unsuitable variable annuity sales.
75

76. – December 6, 2012 – Investment News reported that
FINRA is investigating sales of variable annuities
issued by Sun Life Financial, Inc. The annuities
contained subaccounts invested in hedge funds. In
2010, the hedge funds were forced to closed due to,
among other things, naked options trading in the S&P
500. Arbitration cases have been filed against the
brokers who sold the annuities to customers, including
SagePoint Financial, Geneos Wealth Management,
Inc., Lincoln Financial Network, FSC Securities Corp.,
and National Planning Corp.
76
Defense Comments to Annuity Claims (cont.)

77.  Mental capacity of a senior citizen
• Capacity issues relate to a number of legal
issues
– Capacity to enter into a contract
– Breach of fiduciary duty
– Negligence
– Fraud
– Consumer protection
77
Defense Comments to Annuity Claims (cont.)

78.  Mental capacity can be defined as an individual’s
impairment by reason of mental illness or mental
deficiency to the extent that he lacks sufficient capacity
to govern himself and manage his affairs.
 Defense must obtain all medical records of the senior
citizen, including a detailed diagnosis, how the
condition was determined, and a careful review of all
mental examination tests, including the Mini Mental
State Examination Test. The MMSE is a short
questionnaire of 10 to 30 questions that is used to
screen for cognitive impairment and estimate the
definition of impairment. It is typically given by a
someone other than a doctor.
78
Defense Comments to Annuity Claims (cont.)

79.  Important factors
• Retain a qualified medical expert to review the medical
records.
• Independently investigate the background of the senior
citizen. If able, speak with the person’s accountant,
banker, neighbors, and friends.
• Examine tax returns and investment accounts.
79
Defense Comments to Annuity Claims (cont.)

80.  Consider the senior citizen’s –
• Ability to formulate reasonable decisions concerning
financial transactions (i.e., can he/she utilize a checking
account and issue checks?)
• Knowledge of assets he/she owns
• Ability to perform own personal care in an acceptable
manner such as personal hygiene
• Orientation to time and place
• Impairment of ability to remember current events
80
Defense Comments to Annuity Claims (cont.)

81. Fact Pattern Case Study
 Eleanor Smith was a small business owner who retired in 2008. She
was a high school graduate and took several courses at the local
community college. Her work experience is basically on the job
training. She was a sales person in the clothing industry, eventually
starting her own sales company in 1960. Her company highest sales
volume was $1.5 million, and never had more than4 employees. In
2008 she sold her company for $455,000.
 In 2008 Ms. Smith rolled over her company retirement plan into an
individual IRA at Foremost Broker, Inc., a FINRA member. The
broker, Joe Quick, recommended an equity index annuity. She
purchased the annuity for $2,100,000 for her IRA. The annuity had a
surrender charge of $235,000 during the first 4 years and then
reduces for the next 8 years to no surrender charge. The annuity
was issued by New Insurance Company, Inc. Joe Quick left the
securities industry after the Ms. Smith purchased the annuity.

82. Fact Pattern Case Study (cont.)
 Innocent Larry was assigned Ms. Smith’s account by
Foremost Broker in 2008. In 2009 Innocent Larry joins Honest
Financial Services, Inc. and solicited Ms. Smith. She agreed
to transfer her stock accounts from other brokers to Innocent
Larry, and also gives him discretionary control to trade one of
her accounts. At the same time Ms. Smith approaches
Innocent Larry with concern about her annuity and New
Annuity Insurance Company. She had read that the financial
industry was in stress due to the financial meltdown of the
industry. Innocent Larry says that he will look into New
Annuity Insurance Company. Ms. Smith is also upset that the
company had reduced the participation rate. Innocent Larry
reports back that the insurance company has been
downgraded from an A rating to junk status by Best Rating.

83. Fact Pattern Case Study (cont.)
 Ms. Smith is extremely concerned about the safely of her
money and directs Innocent Larry to look into other annuity
companies and annuities. Innocent Larry reports that he
believes that Major Insurance Company, one of the oldest and
largest insurance companies in the industry, represents an A
rated company with strong balance sheet. The annuity
recommended by Innocent Larry offered by Major Insurance
Company offers a better participation rate than New Insurance
Company. However, there is a surrender charge of $190,000
over the first 3 years, reducing thereafter to the point there is
no surrender charge after year 8.

84.  Ms. Smith worried about safety of her annuity and decides to
surrender her New Insurance Company annuity, and incurred
a $235,000 surrender charge. She then buys a $1,800,000
annuity from Major Insurance Company.
 Six months later, Innocent Larry receives a notice from Trust
Company, Ms. Smith’s power of attorney, questioning the
exchange of annuities, and claiming that he and Honest
Financial Services acted improperly in exchanging the
annuities. Trust Company alleges that Ms. Smith suffers from
dementia, and did not have the mental capacity to approve the
subject transactions.
Fact Pattern Case Study (cont.)

85. 85
Thank You
Financial Services Litigation
and Regulation Team
William Despo, LeClairRyan (973) 491-3325 william.despo@leclairryan.com
Neil Hartzell, LeClairRyan (617) 502-8209 neil.hartzell@leclairryan.com
Nancy Reimer, LeClairRyan (617) 502-8215 nancy.reimer@leclairryan.com
Warren Hutchison, LeClairRyan (617) 502-8210 warren.hutchison@leclairryan.com
Richard McGuirk, LeClairRyan (585) 270-2105 richard.mcguirk@leclairryan.com