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Older customers targeted for variable annuities

February 18, 2005

Massachusetts state regulators widened their investigation into the promotions of variable annuities to elderly bank customers, which the Secretary of State William F. Galvin has described as a form of elder abuse.

State regulators are questioning 15 financial firms in a "snowballing" effect, according to Galvin, whose office has received dozens of additional complaints since last Thursday when it accused Citizens Financial Group's investment arm of "unethical or dishonest conduct" for "systematically targeting" senior citizens for sales of variable annuities. Galvin had disclosed his office was investigating two other large banks in Massachusetts, Sovereign Bancorp and the former FleetBoston Financial Corp. that is now owned by Bank of America Corp.

Variable annuities are a tax-deferred investment vehicle with an insurance contract. Critics, including Galvin, argue variable annuities are inappropriate investments for senior citizens because of the uninsured investments that carry high fees. Due to the age of seniors, they might need immediate access to their money, and "surrender" fees can be has high as seven percent for withdrawing money early.

The Massachusetts Division of Insurance is assisting the state investigation to seek information about sales of variable annuities to clients aged 75 years or older. Banks subpoenaed include Century Bancorp Inc., Banknorth Group Inc., Eastern Bank Corp., and Medford Cooperative Bank, which is now owned by Brookline Bancorp Inc., and brokerage and financial firms subpoenaed include Morgan Stanley, UBS AG, Merrill Lynch, Wachovia Securities, American Express Co., Advest Inc. and Infinex Investment Inc.

Subpoenas resulted because Massachusetts received specific complaints about the firms, or because regulators wanted to broaden their investigation to learn more about variable annuity sales practices. Regulators hope to determine if the banks and brokerage firms have favored relationships with insurance companies and receive special compensation for selling the insurers' annuities.

Galvin complained banks and their investment arms are pressuring elderly clients to buy variable annuities, which carry market risks and pay commissions to brokers, when their certificates of deposits mature instead of rolling it over to bank investments that are insured and guaranteed.

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