The NASD is claiming that Waddell & Reed churned the accounts of thousands of variable annuity holders. Also charged in the action were Robert Hechler, Waddell & Reed's former president and National Sales Manager Robert Williams.

The self-regulatory organization contends that the Overland Park-based brokerage firm recommended 6,700 variable annuity exchanges to at least 1,400 customers without determining the suitability of the transactions.

Those "switching" exchanges generated $37 million in commissions for the broker-dealer and cost customers nearly $10 million in surrender fees, charges the NASD.

The NASD is seeking both sanctions and an order requiring the firm to disgorge commissions and compensate customers.

"Today's action should make crystal clear that a brokers may not recommend that clients replace their variable annuity contracts when the broker has no reasonable basis for believing the replacement is in the client's, not the broker's, best interest," said Mary L. Schapiro, NASD vice chairman and president of Regulatory Policy and Oversight in a statement.

"Engaging in a campaign to make such recommendations without an assessment of the suitability of the exchange, simply because it will advance the firm's own commercial interests, is completely unacceptable."

The NASD claims that in January 2001 Waddell began switching the accounts to Nationwide from United Investors Life Insurance Co. (UILIC) after it failed to obtain an agreement to receive a share of certain fees collected by UILIC, the original issuer of annuities sold by Waddell. Nationwide agreed to share some of the fees it collected from Waddell's customers, according to the NASD. It added that the underlying investment options available in both annuities were virtually identical.

Waddell earned approximately $700,000 from fee-sharing arrangements with Nationwide in 2001, and Waddell will continue to accrue such fees annually, according to the NASD.

Waddell's alleged misstep was in failing to take adequate steps to determine whether there were reasonable grounds for the customers make the exchanges and whether they would lose money from them.

In addition, the NASD alleges that more than 700 customers were switched into a more costly Nationwide annuity when a less costly "far more benefits and greater flexibility" was available. The less costly annuity provided a lower payout to Waddell's sales force.

Included in the NASD's are memos from Hechler to the Waddell sales force encouraging them to replace existing UILIC variable annuities with Nationwide variable annuities. In the memos Hechler questioned UILIC's intentions to provide service to Waddell's clients, and compensation to the sales force, as well as its financial strength.  

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