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Regulator Caused Disruption In Fixed Index Annuity Distribution (12/15)
Iowa Bul 14-02 on Misleading Marketing (10/14)
Colorado No Longer Safe (8/14) 
Kansas Bulletin/A Marketing Company Asking For Trouble   (6/14) 
A Fiduciary-only Standard Discriminates Against Minorities (5/14) 
FIO Report (1/14)

FINRA - Do BDs Feel Anti-FIA Pressure? (5/13) 
Illinois Hearing With Questionable Jurisdiction (5/13)
Disclosure Forms Cause Less Disclosure (10/12) 
Dementia & Financial Abuse On Securities Regulators’ Radar (6/12)
Iowa Bulletins Define What Agents Can Say (7/11)

Illinois Declares FIAs Are Securities In Case #0800064 (6/11)

Regulators Biased In Hindsight (5/11)
Illinois Securities Department Bars Fixed Annuity Agent For Life (3/11)

Source of Finds Facts (9/10)

Repeal FINRA Notice to Members 05-50 (8/10)

SEC 151A - Let's Not Lost The Media Battle Again

SEC 151A - We Won! (8/10)

Florida “Safeguard Our Seniors” Act Passes (6/10)
If the regulators drop by, call an attorney! (3/10)
Agents Acting As Advisors (12/09) 
Reverse Mortgages/Annuities (9/09)

State Mandated Annuity Discrimination: Asymmetric Paternalism  (5/09)
An Alternative To FINRA Regulation Of Annuity Producers (2/09)
Do Securities Regulators Want To Control Annuities Or End Them? (1/09)

151A (1/09)

GLWBs: The New Compliance Problem (11/08)

Industry Designations Under Growing Scrutiny (12/07)

A Target On Your Back (11/07)
The Washington Senior Series (10/07)
Crossing The Line (10/07)
Bushwhacked By The Commonwealth Cowboy (1/07)
Insurance Regulatory History (10/06)
MOs Are Feeling Effects Of NASD 05-50 (10/06)

NASAA “Trash Talk” (9/06)

NASD Intensifies Power Grab (6/06)

Annuity Regulatory Changes In The Wind (4/06)

A Series 6 Does Not Qualify You To Sell Index Annuities (2/06)
A Broken Model: Regulating Annuity Producers (1/06)
Not Losing The Lawsuit (12/05)
NASD Notice 05-50 (9/05)
The Devil’s In The (Lack of) Details (8/05)



151A (1/09) 
Agents Acting As Advisors (12/09)
An Alternative To FINRA Regulation Of Annuity Producers (2/09)  
Annuity Regulatory Changes In The Wind (4/06) 
A Broken Model: Regulating Annuity Producers (1/06)
A Series 6 Does Not Qualify You To Sell Index Annuities (2/06)

A Target On Your Back (11/07)
Bushwhacked By The Commonwealth Cowboy (1/07)

Colorado No Longer Safe (8/14)

Crossing The Line (10/07)
Dementia & Financial Abuse On Securities Regulators’ Radar (6/12)

The Devil’s In The (Lack of) Details (8/05)

Disclosure Forms Cause Less Disclosure (10/12)
Regulator Caused Disruption In Fixed Index Annuity Distribution (12/15) 
Do Securities Regulators Want To Control Annuities Or End Them? (1/09)

FINRA - Do BDs Feel Anti-FIA Pressure? (5/13) 
FIO Report (1/14)
Florida “Safeguard Our Seniors” Act Passes (6/10)
GLWBs: The New Compliance Problem (11/08)
Illinois Securities Department Bars Fixed Annuity Agent For Life (3/11)

Illinois Declares FIAs Are Securities In Case #0800064 (6/11)

Illinois Hearing With Questionable Jurisdiction (5/13)
If the regulators drop by, call an attorney! (3/10)
Industry Designations Under Growing Scrutiny (12/07) 
Insurance Regulatory History (10/06)
Iowa Bul 14-02 on Misleading Marketing (10/14)
Iowa Bulletins Define What Agents Can Say (7/11)
MOs Are Feeling Effects Of NASD 05-50 (10/06)

NASAA “Trash Talk” (9/06)

NASD Intensifies Power Grab (6/06)

NASD Notice 05-50 (9/05)
Not Losing The Lawsuit (12/05)

Regulators Biased In Hindsight (5/11)

Repeal FINRA Notice to Members 05-50 (8/10)

Reverse Mortgages/Annuities (9/09)

SEC 151A - Let's Not Lost The Media Battle Again

SEC 151A - We Won! (8/10)

State Mandated Annuity Discrimination: Asymmetric Paternalism  (5/09)
Source of Finds Facts (9/10)  
The Washington Senior Series (10/07)


Regulator Caused Disruption In Fixed Index Annuity Distribution (12/15)
Almost twenty years ago Clayton Christensen’s 1997 book, The Innovator’s Dilemma, said the reason many established companies fail is because they don't or can't respond to disruptions. Most of the disruption cited was caused by technology (e.g. cell phones replacing the need for Kodak cameras and film), but sometimes politicians and regulators were the cause.  Before 1 May 1975 commissions on stock trades were fixed and rather profitable – a stockbroker could make a nice living trading stocks for his customers. However, on that date the SEC stated that stock trades could be negotiated and discount brokerages such as Charles Schwab & Co., Inc. became major players. To maintain their income, stockbrokers were forced to vastly increase the number of trades conducted, specialize in areas that allowed them to maintain higher margins – such as initial public offerings, expand their  offerings or change occupations.

Regulatory disruption forever changed distribution in the securities industry. Regulatory disruption has already changed distribution in the fixed annuity channel and these changes will dramatically increase over the next few years. Although the use of annuities will flourish as never before, the disruption to marketing organizations (MOs) and independent agents will be profound.  

A snowball moving downhill
The implementation of the proposed Department of Labor (DOL) fiduciary regulation would cause the avalanche to finally hit, but this disruptive regulator snowball has been heading towards agents and MOs for years. The attention started when annual sales of fixed index annuities (FIAs) soared from $14 billion in 2003 to $23 billion in 20041. The increased visibility and potential oversight revenues caused a handful of securities regulators to attempt to gain control over these fixed annuities by relabeling them as securities and the culmination was the passage of SEC Rule 151A. The rule was neutered, but the result was increased supervision and suitability requirements. The compliance environment for FIAs began to look more like the securities environment. Another consequence of increased sales was  more attention paid to FIA compensation. In 2002 the average FIA agent commission earned was 10.3%, today it's roughly 45% less. Even though the average sale size has increased over 250%, the number of sales in the independent agent/MO channel is declining. Part of the decrease in commission percentage is due to the adoption of state rules limiting agent compensation; low interest rates are a greater factor in the decline. If the DOL proposal goes into effect both agent and MO commissions will decline even further, if not disappearing altogether.   If the DOL proposal is implemented the supervision of agents becomes a focal point. Determining whether to contract an agent will be based as much on the potential liability and cost the agent creates as on the sales generated. Relationships with agent recruiters (MOs) will be based as much on how much of the liability can be transferred as on how many agents can be recruited. In this regard, securities firms are a better fit  since they are already directly supervising most aspects of the representative/agent's business and thus lower carrier risk. There will be less need for an MO to recruit agents and provide product training, unless the MO can also take over some the carrier's supervisory responsibility.  

Fresh powder or whiteout conditions?
Without the DOL proposal enacted, FIA distribution will continue to move towards B/Ds and banks. This will maintain the downward pressure on overall compensation, even as bond yields increase. The number of sales in the independent agent channel will continue the decline that began in 2005. Overall sales volume in this channel had risen due to annuity-to-annuity exchanges, but these are also now declining because of guaranteed lifetime withdrawal benefits and heightened scrutiny of the suitability of exchanges. If the DOL proposal is enacted the best case is the timetable towards a more securities-like model becomes a bit rushed; the worse case is the independent channel comes to resemble the fee-based advisory model, but using more annuities.        

Disruption Responses
The fixed annuity distribution channel is shifting; the only real questions are how fast and how far. Here are a few courses of action that MOs or agents might follow in reaction to the shift:  

Do Nothing –  For the agent, this means diminishing compensation. For the MO, under the best case DOL scenario, revenues decline due to lower overrides and fewer sales. However, if overhead can be reduced, this response can     remain viable for several years.  

Broaden Product Focus – A number of MOs have told me they have been expanding their life insurance business side for several years and it is more than offsetting weakness on the annuity side. Expanding into life insurance and other   insurance means higher margins and is an area that securities regulators have not tried to control. When SEC 151A was a possibility some MOs became affiliated with or formed registered advisory firms or broker/dealers (B/Ds). Having an advisory firm or B/D model makes it easier to keep and attract agents affected by the disruption. Agents also can increase the breadth of products they offer to either wire around or better manage any disruption. One strategy both MOs and agent should do today is increase the percentage of business done that pays trailing commissions. Essentially this creates a compensation annuity at today's higher commission rates.  

Narrow Market Focus – Retirees or soon-to-retire consumers are a not target markets, they are demographics (it's like saying my shoe company will be successful because my market is everyone that has feet). However, if you sell a shoe that doesn't cause bunions or corns to hurt and does a better job of traction when climbing up walls, you might capture the entire market of footsore daredevils. An affinity group can be a market focus for an agent, as well in specializing in a certain occupation. Retirees are too broad a net, but an agent that gets known for expertise in handling retirements where one spouse worked for the city and the other is a foreign national, or retirement planning for those with disabilities, can carve-out a not-easily-duplicated niche. Offering fixed index annuities is not tight enough for a marketing organization, but offering training, back office and compliance friendly services on FIAs to B/Ds that are too small to have their own dedicated annuity expert is such a focus.

Scale Waaay Up – Agents need a website that says who they are, where they are located and what they sell. It is a waste of effort to festoon the site with calculators and content. The same holds true for trying to create meaningful sales volume through social media. Based on my surveys, agents report zero to very few sales ever resulting from their web site or social media. The exception to the few sales rule is when thousands of dollars on internet marketing and hundreds of hours of effort each year are spent promoting your brand. Search engine ads do generate some business – but I can’t quantify it. If you write articles frequently and pugnaciously your name will rise in the search rankings and this too will generate leads, but for this to work you basically need to devote resources to become an internet marketer first and an annuity agent second.   In this disrupted future a marketing organization would be valuable if some or all of the agent   liability could be shifted from the carrier to them – becoming a type of annuity office of supervisory jurisdiction (AOSJ) as it were, but this model has not been proposed. There will be less demand from carriers to use MOs as agent      recruiting sources, since the bulk of the annuity business will come from securities firms and banks. However, MOs that can efficiently and effectively provide training on both products and annuity concepts, as well as helping in processing business and working as translators between the securities and annuities world, are of value. Very large MOs will be able to provide higher quality training at a lower cost (the incremental cost of producing a webinar for 10,000 agents rather than 100 is small). In addition, training and services can become more standardized. In this new world you wouldn't have 100 MOs collectively doing $50 billion of annuity sales and earning a 2% to 3% override. Instead there might twenty firms involved with $100 billion of sales and earning 0.5%.    

Surrender – Today an independent FIA agent can sell an annuity a month and still make around $60,000 a year from FIAs. If the DOL proposal doesn't happen, this effort in a few years will generate $40,000 a year and if the proposal does pass the income from the effort could be in the teens (but the income would build up from there). In addition to lower revenue, expenses will increase due to higher risk exposure driving up Errors & Omissions insurance premiums as well as new premium expense for professional liability insurance if a fiduciary standard is imposed. A broad based study I conducted in 2011 found that two-thirds of FIA producers sold less than $2 million of annuities each year and slightly less than half sold under $1 million. Many agents may decide the game isn't worth the candle and shift occupations or retire.   A marketing company can survive and prosper by broadening/narrowing/scaling, but it will not be the same world as it was. The culture of the annuity marketing organization channel is unique and this culture is already changing. Some MOs may decide to sell out before the disruption is better recognized and the business as they knew it is gone.

Disruption in industries is a regular occurrence, but the cause is usually technology. However, politics and regulators also act as disruptors and they are the primary ones in the FIA channel. The annuity establishment can fight against these disruptions and should – the DOL proposal being a prime example, because the disruption can be stayed – stopping Rule 151a is a prime example, but the annuity distribution model is inexorably heading towards the securities model and it is only a matter of time. There are a variety of ways to take the edge off the effects of disruption or adapt to the new world for both agents and marketing organizations. Many will prosper. The only bad plan is to not plan at all.  

1.Advantage Compendium Sales & Market Report 2. ibid 3. Index Compendium 12/14   

Iowa Bul 14-02 on Misleading Marketing (10/14) 
On 15 September the Iowa Insurance Division released Bulletin 14-02 regarding misleading  advertising by producers and insurance marketing organizations. The bulletin was prompted by...  

  •  Annuity ads guaranteeing "8% returns" when that 8% instead referred to a guaranteed lifetime withdrawal roll-up rate that is in no way, shape or form a return;  

  •  Stressing the uncapped nature of managed volatility indices, but not saying the very design of the index limits the potential return;  

  • Cherry-picking the best performing historical periods as "representative";  

  • And not indicating that hypothetical illustrations are truly hypothetical because the index did not even exist in the period shown.  

What the bulletin reminds annuity players of is that misleading consumers about what annuities can do is a violation of regulations and they are subject to administrative action and penalties if the marketing is unfair and deceptive. And “Insurers are reminded that they are responsible for any of these misleading practices by IMOs, related to the insurers’ products.” The bulletin only apples to those insurers, marketing companies and agents operating in Iowa, but as a practical matter the other state insurance departments will look to this bulletin for guidance in how they deal with deceptive marketing.  

Create Realistic Expectations  

Getting on my soapbox, I'm delighted by Iowa's bulletin and their approach to a real problem. A decade ago the FIA industry got into trouble   because some carriers and some marketing companies were...not being completely clear...about how some annuities worked. I believe not taking corrective action and stopping  these practices at that time ultimately resulted in SEC Rule 151A which would have, if it had remained, essentially ended index annuities. The industry lucked out and got a second chance. Unfortunately, there are a few marketing companies that are creating   materials and talking points that generate unrealistic expectations about how certain annuity product features really work.    

For anyone that believes the bulletin is a bit heavy-handed, here's what Iowa didn't do:   They didn't say you couldn't mention GLWB roll-up rates in marketing materials,   They didn't ban the use of hypothetical back-casting,   And they didn't ban the use of proprietary indices or indices with short track records.   Instead the department said "industry, fix the problem". I hope the industry does.  

Colorado No Longer Safe (8/14)  
Quietly, the Colorado Insurance Division amended Section 4-1-2 of Regulation 3 CCR 702 relating to "Advertising and Sales Promotion of Life Insurance and Annuities" by adding the word "safe" to the list of suspect words. The change went into effect on 1 July.   This only applies to "advertisements" but that definition is so broad it applies to anything in writing seen by a consumer. Section 5B says:   "No advertisement shall use the terms “investment,” “investment plan,” “founder’s plan,” “charter plan,” “deposit,” “expansion plan,” “profit,” “profits,” “profit sharing,” “interest plan,” “savings,” “savings plan,” “Certificate of Deposit or CD”, “private pension plan,” “retirement plan”, “risk-free”, “safe”, “secure” or other similar terms in connection with a policy in a context or under such circumstances or conditions as to have the capacity or tendency to mislead a purchaser or prospective purchaser of such policy to believe that he or she will receive, or that it is possible that he will receive, something other than a policy or some benefit not available to other persons of the same class and equal expectation of life."  

Does this mean you can't use the word "safe"? Not at all. You can use the word safe as long as it's not used in a misleading manner – as determined by the Insurance Commissioner. The letter of the law suggests you could use safe as long as you define what is meant by safe (as you could also use certificate of deposit if you were, say, showing how a fixed annuity differs from a CD). Common sense dictates that an insurance carrier compliance department will continue to permit usage of "safe" as long as the context is clear and not mindlessly ban the word from usage.  

Just for fun, I looked at the last 13 years of enforcement actions on the Colorado Insurance Division site and I can't see where it was alleged using the word "safe" had somehow harmed a consumer. Nor can I even find a consumer complaint mentioning misuse. Frankly, this makes me wonder whether this change was prompted by a securities rep that competes against annuity agents making up a story.  

Kansas Bulletin/A Marketing Company Asking For Trouble (6/14)
On 22 May Kansas Insurance Commissioner Sandy Praeger issued bulletin 2014-1. The topic was misleading annuity and insurance advertising. In the bulletin the Commissioner wanted to make it clear that marketing organizations are responsible if they violate K.A.R. 40-9-118 which includes a provision against making "Exaggerated and unsubstantiated claims   regarding the benefits of a product".  

A few days earlier I had received an email originating from an annuity marketing company that stated in bold print "Why limit your client's earnings when you can offer UNCAPPED   interest crediting strategies?" It then went on to show a chart without labeled axes on how their annuity produced a 12.23% yield while a "traditional" annuity produced a 4.59% yield. If the reader somehow missed the difference there was another bold box saying "That's 283% more earnings!"  

That's a powerful story! It appears they are claiming their annuity actually credited 12.23% a year in interest for their annuity owner? Where do I sign up?  Wait a minute – in smaller type it says those results never happened and they are hypothetical. Well, so what, 12.23% from an  annuity over the last few years is darn good. Whoops – in smaller type it says the period they used to get that 12.23% figure was from 8/28/1990 to 8/28/2000 – a period not even in this century, and, probably by sheer coincidence, a period using very specific start and end dates that make it among the very highest returning 10 year period over the last 30 years.   The Kansas Bulletin has said they will go after marketing companies that make exaggerated and unsubstantiated claims. In my opinion this email is a poster child for "exaggerated and unsubstantiated claims". The larger type claim is very clear – this annuity earned 12% interest a year. Did it? No! Could you? It's possible, but even based on applying their current methodology participation to the broad past of the underling index it is very unlikely.  

In the administrative hearing the state insurance department could bring against the IMO I'm guessing it would take the department's lawyer one PowerPoint slide to get a conviction.   The sad part is this is a tried and proven index annuity crediting method that was first used over 15 years ago. Without any exaggeration it is competitive with other crediting methods, so there was no reason to exaggerate. The bigger problem is if an agent uses these claims with a consumer to sell the annuity it could eventually create the same “creating unrealistic expectations” backlash from regulators and the media that tarnished the industry a decade ago and had index annuities declared securities by the SEC.  

The timing of the Kansas Bulletin and the marketing company's email was a coincidence. The Kansas Insurance Department was not responding to this IMO's marketing. However, if the marketing company continues this type of marketing I am confident that the two shall meet.  

Kansas Bulletin 2014-1 (excepts) 

IMOs and FMOs are playing an increasingly important role in the marketing and distribution of life insurance and annuity products as well as in the recruitment, training, and education of producers. In many instances, advertisements and marketing material produced by IMOs and FMOs exhibit potential violations of K.A.R. 40-9-118 which is based on an NAIC life insurance and annuities advertising model regulation. 

Examples include:  

• Exaggerated and unsubstantiated claims regarding the benefits of a product 

The Department expects insurers to treat this as a serious matter and to take appropriate steps to ensure compliance with K.A.R. 40-9-118 such as regular communications with IMOs and FMOs regarding advertising compliance requirements and to actively monitor IMO and FMO marketing and advertising activities including agent recruitment and training efforts.  Failure to do so may lead the Department to take administrative action against any life     insurer utilizing IMOs and FMOs employing  unfair and deceptive methods to advertise and market that insurer’s products.  

 A Fiduciary-only Standard Discriminates Against Minorities/font> (5/14)
Requiring a fiduciary-only standard unintentionally discriminates against minorities because a disproportionate percentage do not have sufficient assets to be accepted as clients by most fee-based fiduciary advisors. The Department of Labor (DOL) should not revise current ERISA definitions to make the payment of commissions a prohibited transaction because this would cause undue hardship on over 88 million households. Since the median value of an IRA account is $34,000 and the median value of a 401(k) plan account is $30,000 a fiduciary-only standard for qualified accounts would effectively deny the vast majority of Americans access to professional financial advice.

In a January 2011 report the SEC said it believed that consumers did not understand the difference between a fiduciary standard used by advisors and the suitability standard used by broker/dealers and concluded “therefore, in the interests of increasing investor protection and reducing investor confusion, the Staff recommends that both broker-dealers and investment advisers should be held to a uniform fiduciary standard in providing personalized investment advice about securities to retail customers that is no less stringent than the existing fiduciary standard of investment advisers.”

The argument used by those pushing for an SEC fiduciary-only standard say that this does not mean that commission-based compensation must end, however, when they then define the limitations on what would be considered acceptable commission-based compensation it is immediately apparent that their goal is the end of commissions. The imposition of a fiduciary-only fee-based standard by the SEC would not directly cause the end of fixed annuity commissions because these are regulated by state insurance departments. However, FINRA has been ignoring this distinction for years – as the continued misapplication of NASD Notice to Members 05-50 demonstrates – and there is reason to believe that any fixed annuity agent affiliated with a broker/dealer would be subject to a fiduciary-only fee-based standard on all sales, including those of fixed annuities. In addition, I believe there would be political pressure to “standardize” fixed annuity compensation with other financial products.

The other agency that has pushed for a fiduciary-only fee-based standard is the Department of Labor (DOL). Although the existing definitions used by ERISA have proved more than adequate since they were enacted in the ‘70s, the DOL had proposed rules that would categorically ban the payment of commissions for all ERISA fiduciaries unless special permission is received in the form of a Prohibited Transaction Exemption; a pejorative title if ever there was one. Although this request was withdrawn after receiving fierce opposition it may well be reintroduced later this year.

An SEC fiduciary-only fee-based model could, and the DOL fiduciary-only fee-based model would, mean the end of commission based compensation on fixed annuities. However, in the broader picture, a fiduciary-only fee-based model disenfranchises every consumer except those that are affluent or mass-affluent, and this fee-only approach amounts to sanctioned discrimination against minorities who are the most affected.

Fiduciary-only Standard Creates Discrimination
An SEC fiduciary-only fee-based standard would typically require minimum investable assets of $250,000 before a consumer could receive help from a financial professional. The reason why is more than 80% of fee based advisors define their core market as clients with a minimum of $250,000. However, this fee-based fiduciary-only standard of $250,000 effectively means large numbers of less affluent Americans – especially minority Americans – would not receive any financial assistance from financial professionals.

If the DOL model is enacted it would cause even more problems because the bulk of the middle and mass market financial assets are in qualified accounts where the median value of an IRA account is $34,000 and the median value of a 401(k) plan account is $30,000. This, in and of itself, means nine out of ten African-Americans and Americans of Hispanic origin would have insufficient assets to meet the minimum requirements to receive advice from a fee-based advisor.

The proposed DOL fiduciary-only standard meant commission-based compensation would be banned for all qualified accounts unless special permission was received to do a prohibited transaction. An African-American with an IRA has a mean account value of $39,423; if they participate in a 401(k) or thrift plan the mean value is $45,274. Americans of Hispanic origin participating in a 401(k) have a mean account value of $41,834 and those with IRAs have a $64,978 average value. Even if fee-based advisors were encouraged to drop their minimums and accept consumers with investable assets of $100,000 this would still mean eight out of ten African-Americans and Americans of Hispanic origin would have insufficient assets to meet the minimum requirements and be unable to receive professional financial advice. What the fiduciary-only plan effectively does is create a bar that keeps the majority of minorities from getting professional financial advice.

Not every fee-based fiduciary-only advisor has a minimum account size, but those that do not tend to have minimum fees. Doing a web search for fee-based advisor minimum account size I found minimum annual fees ranging from $1,875 to $6,500. Consider a consumer with only $60,000 of additional financial assets; those first year fees would be equivalent to 3.1% to 10.8% of assets. Even if the consumer decided on a do-it-yourself approach thereafter those are still significant one-time hits.

Fixed Annuity Agents Are Already Acting Under Rigorous Standards
Those pushing for a fiduciary-only standard fail to understand the difference between advisors, stockbrokers and fixed annuity agents. First, neither registered investment advisors nor securities representatives are licensed by the states they do business in, but merely registered with those entities. This allows these securities vendors to collect commission and/or fees on products and services they provide to consumers. By contrast, fixed annuity agents have been licensed by the states they do business in to act as agents for insurance companies and are bound to act in accordance with the common law requirements of agency. These agents do not register with a state, but must pass tests of both competence and character before they are granted a state license.

As an example of this important difference, under Missouri Revised Statutes Chapter 409, the registration of a securities representative or investment advisor may be denied if the individual (d)(3) has been convicted of a felony or misdemeanor involving a security, a commodity future or option contract, or an aspect of a business involving securities, commodities, investments, franchises, insurance, banking, or finance. These are very specific black & white rules relating only to criminal convictions and, more narrowly, criminal convictions of financial crimes, that could bar initial registration.

By contrast, under Missouri Revised Statutes Chapter 375, the insurance department may refuse to issue a license if the individual has been convicted of a crime involving moral turpitude. To become licensed as an insurance agent the person must demonstrate that they have never behaved in a way that “violates the moral standards of the community” or been dishonest in any business dealings even if no formal crime occurred. The bar to become an insurance agent is significantly higher than that to become securities registered.

Even after an insurance agent has been licensed by the state they must find an insurance carrier that will appoint them, supervise them, and permit them to act as their agent. Insurance carriers review each and every application for appointment and this review process occurs every time the agent applies to work for a new carrier. By contrast, I was president of a securities broker/dealer for many years and not once did a securities provider ask to see the credentials of the representatives selling their products.

In the fixed annuity world agents are required to pass a test of both their competence and moral character before they are licensed by the state. And this is only the first step. They then must go through an appointment process with each and every insurance carrier they wish to work with and must be found not wanting. Even after the agents has passed muster for the state and each carrier, they then will have each and every annuity application reviewed for each of 12 points to determine that the sale is suitable for the consumer and to determine the consumer will benefit from the annuity.

 Creating Confusion & Double-Standards
If the DOL proposed standard was adopted and the SEC one was not you could have a situation where the financial professional would be able to apply an annuity solution to the extra $25,000 sitting in a low-yielding savings account, but would not be allowed to discuss annuity solutions for the consumer’s $125,000 IRA that is fully exposed to stock market risk of loss.

The Fiduciary-Only Standard Is Not Only Unnecessary But Harms Consumers
Those that desire a fiduciary-only standard are well-intentioned, but they fail to prove the case that the suitability standard used by broker/dealers and fixed annuity agents is not serving consumers well and this is especially true with fixed annuity agents. Indeed, in 2012-13 consumer complaints involving fixed annuities represented only 1.75% of combined annuity and securities complaints.

If a fiduciary-only fee-based standard is adopted by either the SEC or DOL the effect will be catastrophic on all but the most affluent Americans. The suitability standards currently in place are effective and permit mass and middle market Americans to work with a financial professional, regardless of the modesty of their assets. The adoption of fiduciary-only fee-based standard, especially by the DOL, would effectively bar 80% of African-Americans and Americans of Hispanic origin from receiving professional financial advice. A fiduciary-only standard is not needed and would harm the very people it was designed to protect.

FIO Report (1/14)
Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Federal Insurance Office (FIO) within the U.S. Treasury. One of the early tasks outlined was for FIO to analyze the existing insurance regulatory framework and create a report of their findings. In December a report was released by FIO giving recommendations on improving the regulation of insurance companies and agents.

The insurance industry occupies a unique space in the regulatory galaxy. While securities and banking are regulated by both federal and state government – with federal rule preempting the state law – the insurance industry is not regulated by the federal government, but is regulated by 56 separate entities representing the states, territories, commonwealths and District of Columbia. Thus, today, the FIO does not have enforcement powers. Their job is to "coordinate federal efforts and develop federal policy insurance matters...and consult with States regarding insurance matters of national and...interna- tional importance." They have already been active on the global stage joining the board of the International Association of Insurance Supervisors (IAIS). The role of the IAIS is to create standards that are used by all nations in supervising their insurers to protect their policyholders and remain financially stable.

Even though it does not currently have direct enforcement powers an FIO suggestion carries with it the threat of federal intervention if it is not carried out – and the FIO report clearly lists areas where they say improvement is needed or the regulatory activity will be "federalized":

"It is not enough to say that the U.S. system of insurance regulation should be improved and modernized – this is true in every regulatory framework...The status quo, or a state-only solution, will not resolve the problems of inefficiency, redundancy, or lack of uniformity, or adequately address issues of national interest. This Report describes some of those areas where federal standards and intervention may be most beneficial." p.65

The insurance regulations report contains a number of suggestions. I have listed those I found of particular interest to the fixed annuity world with some of my own comments:

Areas of Near-Term Reform for the States
1) For material solvency oversight decisions of a discretionary nature, states should develop and implement a process that obligates the appropriate state regulator to first obtain the consent of regulators from other states in which the subject insurer operates.

The point made is although risk based capital (RBC) standards were adopted by states many years ago that these standards are not applied consistently. One example they mention is that only 14 states apply RBC standards to fraternal benefit societies. The FIO position is that all insurers (and those providing insurance services such as fraternals) should be treated the same in every state.

10) States should adopt and implement uniform policyholder recovery rules so that policyholders, irrespective of where they reside, receive the same maximum benefits from guaranty funds.

At the end of last summer 38 states provided at least $250,000 of annuity coverage if the carrier failed, but 12 states only provided $100,000. The FIO has made their position very clear that this isn't fair and that coverage should be uniform across the nation.

12) State-based insurance product approval processes should be improved by securing the participation of every state in the Interstate Insurance Product Regulation Commission (IIPRC) and by expanding the products subject to approval by the IIPRC. State regulators should pursue the development of nationally standardized forms and terms, or an interstate compact, to further streamline and improve the regulation of commercial lines.

The point made by FIO is that all states should participate in the IIPRC as should all carrier filings and forms.

13) In order to fairly protect consumers in all parts of the United States, every state should adopt and enforce the National Association of Insurance Commissioners Suitability in Annuities Transactions Model Regulation.

A state adopting the Suitability Model assures that Sec 989(j) of Dodd-Frank will permit index annuities to be treated as fixed annuities and not securities, but the focus of the FIO isn't on index annuities but on enhancing the protection of seniors from misleading and fraudulent sales of financial products. To sweeten the deal the FIO says that federal grants would be available to states that passed the model regulation through the Consumer Financial Protection Bureau. The FIO report further states that "In the event that national uniformity is not achieved in the near term, federal action may become necessary."

In fact, each of the recommendations close with the equivalent of and if you don't do it, we'll make you do it. These previous suggestions are under "near-term reform" areas and imply that the states have a bit of room to decide how they will carry them out. The next batch of suggestions is more explicit.

FINRA - Do BDs Feel Anti-FIA Pressure? (5/13)
In January 2012 FINRA issued Regulatory Notice 12-03 stating that broker/dealers needed to intensify supervision when sales of “complex” products were involved. Although FINRA does not include an index annuity as a “security or
investment strategy with novel, complicated or intricate derivative-like features” on the very first page the rule talks about efforts FINRA has taken to increase investor protections on “equity-indexed annuities, structured products, leveraged and inverse exchange-traded funds, principal protected notes, reverse convertibles and commodity futures-linked securities. FINRA ostensibly issued the notice because of the issue of the risk of loss in complex products. For example, structured products protect only a small portion of the original principal. However, FIAs protect 100% of principal from market loss; doesn’t that mean the notice can’t apply? Maybe not because for FINRA the real issue is defined as complexity.

What is a complex product? FINRA won’t say, but they list 10 features of complex products and, if you stretch a bit, 2 might be thought to apply to FIAs: products in which payment of yield depends upon a reference asset and products with complicated limits or formulas for the calculation of investor gains. Based on applying the remaining definitions it would appear that FIAs really aren’t complex products, but FINRA ends by saying a complex product can be any “structure that produces different performance expectations according to price movements of other financial products or indices, [so] firms should err on the side of applying their procedures for enhanced oversight to the product”.

More Complicated To Make It Less Complex
FINRA suggests that if the product has embedded options the advisor should consider getting the “same strategy through multiple financial instruments...even with any possible advantages of purchasing a single product.” Instead of buying one product with one buying cost and one way to accomplish the client’s goals FINRA is saying that it is better to try to keep track of multiple products with multiple costs and fees even if this costs more and performs worse than the product with embedded derivatives.

What Is Heightened Supervision?
The questions FINRA suggests asking regarding the sale of a “complex product” are the ones you should ask for any purchase, but because they are listed they become a checklist that could be used against the advisor (as in “The rules ask if there is an active secondary market for the product, but this index annuity is not traded, why did you violate the rules”). Effectively this makes it much more of a hassle and liability to sell a complex product, which is the intent of the rule.

Putting The B/D In The Crosshairs
As in typical in these matters FINRA does not actually say FIAs fall under this rule – because that would mean they could be forced into admitting that FINRA has NO jurisdiction over fixed annuities or fixed annuity sales practices – but instead puts the burden on the member firm to determine “which products require enhanced compliance and supervisory procedures.” However, having owned and run a broker/dealer I can say that securities regulators do not like being reminded when they do not have authority over an aspect of the B/D’s business and, in my experience, tend to react negatively.

FIAs Are Not A “Complex Product”?
You can suggest to the B/D that FINRA is not talking about fixed index annuities – because  they can’t have jurisdiction over non-securities – or that FIAs do not meet the definition of complex products. It can be pointed out that the 13 January 2013 FINRA regulatory and examination priorities letter does not mention FIAs as a priority or as an example of a complex product. A  member could formally ask FINRA whether fixed index annuities are under their regulatory supervision (but don’t expect an answer).

When SEC Rule 151A was defeated I said the FIA industry won the battle, but was losing the war because securities regulators would now go after agent sales practices. I wonder if this rule is meant to imply to B/Ds that they may get their hands slapped if they don’t regard FIAs as complex products and make sales to consumers more difficult. Is this another way for FINRA to try to kill the index annuity story?

Illinois Hearing With Questionable Jurisdiction (5/13)
On 15 May a public hearing will be held by the Illinois Securities Department to determine whether to revoke the registration of an investment advisor for selling index annuities (Notice  1100244). On what grounds? Did the agent recommend that securities be sold to buy fixed annuities? No, no securities were ever involved. In fact, we don’t know whether the consumers involved even owned securities. What is alleged is the agent defrauded consumers by exchanging one index annuity for another and in total “for these transactions [he] received $160,937.05 in commissions but his clients lost $263,822.13 in surrender penalties” and that [Paragraph 30 of the Notice] “...Illinois Securities Law...provides: “Effecting...any... purchase or sale which are excessive in size or frequency...on the part of the registered investment advisor” can be considered fraudulent.

Whether the Illinois Securities Department has any jurisdiction here is questionable. The case they are trying to make is that the agent held himself out as an investment advisor by calling himself a “nationally recognized retirement educator” and advertising as a Certified Senior Advisor. In addition, he is a registered investment advisor. Is Illinois saying that if you are an investment advisor that they have jurisdiction over every aspect of your business activities including fixed insurance sales? This interpretation of the law could mean an advisor that was also a property & casualty agent could be found guilty of securities violation if the agent suggested a consumer replace their homeowners or auto insurance and some investigator with an ax to grind at the Illinois Securities Department decided to make this an issue.

The fixed index annuities that are the basis for the hearing are a whole different issue because [18] “Under Illinois law, Index Annuities are securities subject to the Act.” This might be confusing to some people since Federal Law states that index annuities are specifically not securities. In a previous case NAFA forced Illinois to concede that yes, fixed index annuities are not required to be registered as securities, and yes, an agent does not need securities registration to sell them. However, in this case the Illinois Securities Department maintains that index annuities are “still subject to other provisions of the Act” specifically Sections 12. A, F, G, I and J all of which apply to the sale of securities. The Department has apparently taken the position that state laws trump federal laws. The Illinois Securities Department seems to be basing their case on the sale of index annuities being securities transaction, even though Federal Law says this it not so.

If anyone, including the securities department, believes an insurance law has been broken then they should notify the Department of Insurance. Federal law clearly shows securities regulators have no authority over index annuity sales.

Disclosure Forms Cause Less Disclosure (10/12)


  •  To assure that the annuitybuyer receives full disclosure it is far, far, more effective to inform the agent that the carrier will conduct random phone interviews to determine whether the agent has disclosed the key costs and penalties of the annuity rather than requiring the agent to get the annuitybuyer’s signature on a disclosure form.

  • If the annuitybuyer is not knowledgeable about annuities the message of key benefits and costs becomes more and more distorted as the size of the message increases. In other words, for most annuitybuyers the longer the disclosures, the less the understanding.

  • “All these results indicate that in a large set of environments, not requiring disclosure could be a better policy.” “In conclusion, increasing transparency is not necessarily good policy advice.”

[quotes taken from separate studies on disclosure]

Fast food restaurants are being forced to disclose calories in their offerings and annuity carriers typically require a disclosure form to be signed by the buyer at time of sale. Consumer advocates believe written disclosure is a good thing, but they never check to see if it works (that the disclosed information is used or understood by the consumer). There have been a number of recent studies conducted on the issue of disclosure that strongly demonstrate that not only is most disclosure ineffective, but it can often lead to a less informed consumer. Although some studies have been conducted in the financial world, none have been done on the topic of annuity disclosures, this article summarizes the research findings and attempts to apply them to the annuity world. 

Conflicts Of Information
Asymmetric information
means that one party knows more than the other. It is common in economic transactions and can result in deceptive behavior if one party may benefit by withholding or distorting information. Annuity carriers require the use of full disclosure or statement of understanding forms, signed by both agent and annuitybuyer, as evidence that no important
information has been withheld and that the buyer understands what they are buying. Ironically, the use of full disclosure has been found to increase deception and misunderstanding. In addition, although lengthening disclosures is intended to provide better communication it has been found that the longer the disclosure is, the greater the increase in misunderstanding. 

Part of this is due to the low level of consumer financial literacy in general and a lack of understanding of how annuities work in particular. In other words, if the majority of consumers do not understand how compound interest works it may be overly optimistic to believe they’ll understand the ramifications of using a monthly cap crediting method versus an annual point-to-point one by reading a form, or a comparison of the pros and cons of an annuity choice with a non-annuity alternative. This financial illiteracy indicates a need for professional advice to help the consumer understand, but there exists a conflict of interest when a financial professional gets involved.

People often think of deceptive financial behavior in terms of grand schemes to defraud, but deceptive behavior is usually more nuanced because it typically does not involve a conscious effort to deceive. An agent usually receives a commission for selling an annuity. The agent receives zero compensation for not selling an annuity. This creates a conflict of interest that may lead to unintentional deception. In addition, the greatest financial reward to the agent typically results from selling an annuity with the longest surrender period. By contrast, the greatest financial reward for the consumer may well be an annuity with a short surrender period or no annuity purchase at all. 

A fee-based compensation model is often suggested as causing fewer conflicts of interest than to a commission one, but it also poses hazards. An advisor’s fee is usually a percentage of assets under management, but what if the greatest financial reward is for the assets not to be under management. As an example, you can find “no-load” variable annuities which pay no commissions, but what if the greatest financial reward is to simply leave that money in an unmanaged bank account? A fee-based model is still about capturing assets, upon which fees are collected, thus presenting a conflict of interest.

In addition, the motivation to convince a consumer to buy an annuity may not even be a financial one, but simply a basic desire to have another person agree with us. In these instances the conflict is caused by a motivation to simply complete a transaction, and the compensation is largely irrelevant. Unfortunately, we have not yet reached the stage whereby we can probe the recesses of another’s mind to see whether there is a conflict of interest, but there are outward indicators showing whether or not that person will be intentionally deceptive. If an agent or advisor is a member of an organization that embraces professional standards of conduct it is an indication that this person has an psychological need to be open in their behavior and perform in an ethical fashion – their desire to “do the right thing” is not driven by a fear of external punishment but by an internal moral compass. This is not to say if one is not a member of such a group that he will be deceptive, what it says is there is evidence that members of these groups are much less inclined to act deceptively.

The compensation method that presents the lowest conflict of interest barrier is paying the annuity provider a straight salary that is completely unrelated to sales or assets managed, but the hard truth is “it is difficult to change established business models that are generating profits.” The other hard truth is in the financial world there is hard evidence deception occurs due to conflicts of interest. Since conflicts of interest cannot be avoided, ways must be found to lessen any deceptive behavior that might result and that has lead to an emphasis on disclosure.

Every index annuity carrier of which I am aware requires the annuitybuyer to sign a
statement of understanding at time of sale. In addition, buyers are required to be given a “Buyer’s Guide” that also provides disclosure. However, in all of the studies done to date the more disclosure that was required, the greater the deception generated. The reasons are twofold: the “message senders” that were already being deceptive simply ramped up the amount of deception – also called strategic exaggeration - to offset the honest data contained in the disclosure. Second, the disclosure requirement also encouraged some that hadn’t engaged in deception to start.

It’s been suggested that when people engage in ethical behavior in one venue that they are more likely to engage in unethical behavior in another, the rationale being that they have “earned” the right to be a little bad since they had been very good. Being required to provide a written statement of understanding gives the message sender a moral “free pass” to provide less disclosure in their verbal communication with the message receiver. Indeed, full disclosure not only fails to solve the problem, but sometimes even makes matters worse. As one study concluded “disclosure often not only does not alleviate the conflict-of-interest problem, but exacerbates it.”

The Honesty Halo
Even when a conflict of interest is disclosed consumers tend to at least partially ignore the conflict and generally accept the advice given, thus rewarding the sellers for their apparent honesty. I experienced this when I owned a broker/dealer and required our brokers to disclose the fixed annuity commission received, just as they were required to disclose the securities commission. Although there was some initial resistance, the results were annuity sales increased. One of the comments that several brokers reported hearing from annuitybuyers was “I thought the commission was higher” but the strongest reaction appeared to be that the annuitybuyer rewarded the broker for being honest about the commission received. Disclosures of conflict of interest can increase trust and make the annuitybuyer more likely to overlook the conflict.

Don’t Think About The Statue Of Liberty
A final problem is that any new facts presented by the disclosure form that disagree with what the agent already said are often ignored due to
anchoring of the previous information. This is also called the curse of knowledge and means it is very difficult to unlearn something once learned (are you seeing the Statue of Liberty in your mind?). An example might be an agent saying the annuitybuyer can return the policy for a full
refund, but not mentioning this “free-look” period is extremely limited. Even when the buyer reads that the refund period is only for 20 days the idea that the annuity offers a full refund remains a stronger memory than the time limitation. Ironically, it has been discovered that finding discrediting information may increase the effect of remembering the bad information.

Disclosure forms are ineffective when used with unsophisticated buyers (the very people they're supposed to help) 

Naive Annuity Buyers
A fundamental fault in requiring disclosure is the assumption that the annuitybuyer knows what to do with the information that is disclosed. Even if the annuitybuyer is made aware of a conflict of interest they don’t know what to do with the information. They have been told that the agent receives a commission. They may even have been told that the commission is, say, 6%. They have also been assured by the agent that “100 cents on the dollar is working for them.” They probably will not understand how this 6% commission affects the length and size of the surrender penalty as well as the money available to the policy in future years.

For a knowledgeable annuitybuyer disclosure is a good thing because it permits them to more easily determine any conflicts of interest and whether the agent is being accurate. However, the purported reason for requiring statements of understanding was not to help the knowledgeable and sophisticated buyer – who does understand the conflicts – but to help the unsophisticated ones that do not, and in this role disclosures fail. 

The one instance where a disclosure may help is when the message sender believes a naive message receiver is actually knowledgeable. In the studies it was found that if the sender of the message knew the receiver was unsophisticated that they were tempted to exploit this unsophistication. In other words, the more gullible the receiver was believed to be, the more the sender would try to deceive. However, if the seller believes the buyer is knowledgeable about what is being sold the sender’s message will be more factual and they will tend to repeat what is otherwise disclosed in writing.

To sum this up, not only are disclosure forms largely ineffective in reducing the effects of conflicts of interest and misinformation, but they can cause even greater deception and lead some buyers to “put greater weight on biased advice.” These factors resulted in one major study concluding that “in many scenarios nondisclosure allows for higher welfare for both [message senders and receivers]”. If disclosures are so bad, why are they so often used? Because they benefit regulators and those being regulated.

Why Disclosure Forms Exist
Regulators and consumer advocates are big on disclosure. The hoped for message to the public is this shows they are concerned about the welfare of financially unsophisticated investors and that “by creating minimum disclosure requirements the information gap between informed and uninformed is reduced.” In the annuity world the logic is that the agents will be less likely to give biased advice because any deception will be uncovered when the buyer reads the disclosure.

However, another explanation as to why disclosures are usually one of the first regulatory tools accepted relies on the Chicago Theory of Regulation which states that regulations exist not for the benefit of society but the benefit of the regulated. The required use of disclosure forms is viewed as a winner because it requires minimal effort from compliance departments and regulators. After the form is created all that needs to be done is to check whether the annuitybuyer signed the form. To demonstrate greater regulatory piety the compliance department may simply add a few more pages to the disclosure. Another key aspect enjoyed by both carrier and agents is disclosure diminishes both parties’ responsibility for adverse outcomes. By signing the disclosure the annuitybuyer proclaims they are aware of any adverse consequences that the annuity purchase might produce. Succinctly, disclosures are a visible way to show something is being done without actually doing anything.

The Disclosure Alternative
Honesty is not the most favored alternative to deception; for many people it is the threat of possible punishment that reduces deception. There have been several studies done that strongly indicate that the possibility of having deception uncovered after it has been done is more effective than using a disclosure form at time of the sale. There is also evidence in the real financial world that the knowledge that any deception uncovered by conducting random checks of transactions, after the fact, will be treated harshly acts as a deterrent to deception.

This monitoring is already being done in the index annuity world. Carriers are reviewing annuity applications for suitability and talking to annuitybuyers. Sales that are regarded as unsuitable are refused with the money returned to the consumer. Instead of requiring longer disclosures forms it would be more effective if carriers shortened the forms and increased the number of random calls to annuitybuyers to determine whether full disclosure was made.

Hand in hand with random monitoring is making the deception public. Telling that the agent that a) a deceptive act may be caught by random monitoring and b) if the deception is uncovered the identity of the deceiver will be made public has a strong deterrent effect. Carriers should advise agents that they will randomly call annuitybuyers to ensure that fair disclosure is made. Carriers should also state that if a pattern of deception is uncovered that the agent will be terminated and the reason for the termination made public. The carrier needs to create a culture of full disclosure where deception at any level is not tolerated.

There will always be conflicts of interest that can result in deception. Requiring the use of signed disclosure forms is an ineffective way of dealing with this problem. Most agents have always and will continue to provide full disclosure due to their strong moral compass. For those that do not, a better way is let these agents know that the carrier will conduct random calls to see whether all of the key factors were disclosed to the consumer and if a pattern of non-disclosure is revealed that the agent will be terminated.

Behnk, Barreda-Tarrazona & García-Gallego. Reducing deception through subsequent transparency An experimental investigation. 2012-14

Dementia & Financial Abuse On Securities Regulators’ Radar (6/12)
On 22 September 2008 the SEC released a study titled
Protecting senior investors: Compliance, supervisory, and other practices used by financial services firms in serving senior investors. The study was designed to “to identify and publish examples of practices that financial services firms have developed with respect to their interactions with senior investors.” An addendum followed on 12 August 2010. Although the report says contributing broker/dealers and advisory firms were addressing the senior investor it doesn’t say whether this data is from 2 firms or 200, so the extent to which the securities industry is trying to adopt specific senior policies is unclear.

The study says that participating firms were teaching their employees to identify signs of diminished capacity, but the warning signs listed in the report are too general to be of practical use. Saying the financial professional should be aware of memory loss, or when the senior seems unable to appreciate the consequences of decisions, are of limited value. Even worse, if a firm provides a list of identifiers that indicate dementia it might be presumed that the financial professional has the responsibility and ability to identify the impaired and are thus liable if they fail.

The reality is a senior with advanced dementia may be detected with relative ease, but if the senior is in the early stages of cognitive impairment it can be extremely difficult to detect without specific testing. It needs to be made very clear that unless the firm – or the regulators – mandate cognitive testing of senior clients that a financial professional cannot be held liable for not seeing impairment that may only be visible to a physician. It makes more sense to establish procedures that help everyone concerned in case dementia is detected at a future date. The study offers several suggestions that make sense: 

An emergency or alternative contact should be in the senior’s file. The benefits of a power of attorney should be mentioned while the senior is still in good health with the suggestion that an attorney be consulted. It becomes even more important with senior clients to keep extensive notes on any communications and to follow-up, in writing, what was discussed and agreed to (some financial professionals have suggested recording appointments with senior clients although the study did not mention this). The financial professional, advisory firm, broker/dealer or insurance carrier should have procedures in places detailing what should be done when financial abuse or cognitive impairment is suspected.

Abuse – The financial professional as detective
It is possible that a financial professional will uncover details that indicate financial exploitation is happening. Are they legally required to report suspected elder abuse? In almost every state nurses, aides, caregivers or physicians that work on a regular basis with seniors must report suspected abuse to a state agency. It appears that only in Mississippi does their
Vulnerable Adults Act require the senior’s stockbroker, financial or investment advisor, insurance agent, or financial planner to file a report of suspected abuse with the state. Financial abuse may be indicated in several ways.

  • The senior gives a power of attorney to someone that appears inappropriate.

  • The financial professional is unable to speak directly with the senior.

  • There are sudden unusual changes or disbursements in the senior’s investment patterns.

  • Someone new becomes involved in the senior’s financial affairs.

  • There are changes in beneficiaries on plans and insurance.

  • Wire transfers to new places (especially overseas).

The list denotes specific actions that may indicate abuse. Procedures can be established saying if a, b, or c occurs then do x, y, and z. It also illustrates the difficulty in making the financial professional responsible for detecting impairment. Showing a request was made to change a beneficiary is a matter of pulling out the signed form. What do you pull out to show memory loss?

Anti-Annuity Bias
The SEC study also talks about the appropriateness or inappropriateness of certain products, however it picks on annuity products as more likely to be inappropriate devoting almost 5% of the report to discussing variable annuity purchase procedures that firms could implement; most of this apparently based on the mistaken belief that since a deferred annuity has surrender charges that it is illiquid (in contrast, the study is almost mute on how damaging market risk can be to a senior investor). 

This anti-annuity bias by securities regulators is not new. A 1956 academic study on annuities led the author to conclude that the NASD feels that “variable annuities are inherently evil and should be banned”. However, the author came to a more positive conclusion about the need for annuities and stated that all annuities should be regulated by state insurance departments.

Create a plan
Cognitive impairment and financial abuse are legitimate concerns that will increase as the population ages. While no regulator is suggesting that cognitive tests be conducted on seniors, and only Mississippi places the burden of detecting financial abuse on financial professionals, it still makes sense to have procedures in place that say what will be done if dementia or financial abuse are detected. This is an issue that the annuity industry can get in front of, for a change, and help write the rules by working with senior advocates and regulators.

Iowa Bulletins Define What Agents Can Say (7/11)

One state securities division appears to be saying that if securities are sold and these proceeds used to buy a fixed annuity, then the insurance agent offering the annuity is acting as an investment advisor and should be security registered.”  June 2003 Index Compendium

In the past I have expressed a hope that state insurance departments would create annuity safe harbor rules basically defining what a non-securities registered annuity agent could say in an annuity sales presentation and not have some securities department regulator try to label it as investment advice. Iowa has essentially done this with Insurance Bulletin S-14 released 24 June.

Insurance Bulletin S-14 and it’s companion Securities Bulletin 11-S-1 offer guidelines on what non-securities registered agents can say about the investment world and non-insurance licensed securities reps and advisors can say about the annuity world. The Bulletins do an excellent job of applying a commonsense real world approach to advice from both areas, and go a long way towards addressing the source of funds issue that has caused so much confusion over the years.

The commonsense aspect is that agents are allowed to talk in generalities about the investment world. It won’t be considered investment advice if the agent tells a consumer the same facts that appear in the newspaper that, for example, there was a nasty bear market in 2008 and investors lost money (III.2.) or mentions that fixed annuities protect money from market risk (III.5) and the role that fixed annuities may take in balancing risk in a portfolio (III.6). However, it will be considered investment advice if the agent provides advice or recommendations about buying or selling specific securities (IV.1,2,3), recommends how an overall portfolio should be allocated between securities and annuities (IV.4) or calls himself an investment advisor (IV.7).

Let’s focus on what you can talk about as an annuity producer in every state

Guarantees. Every time the “G” word is said it makes a broker/dealer compliance officer turn pale, but fixed annuities have real guarantees. Minimum contract values guaranteed not to lose principal due to market downturns, guaranteed minimum income through annuitization, and if selected, guaranteed lifetime withdrawal benefits that provide not only a guaranteed payout but a guarantee that you have control over your account at all time

Although the term “source of funds” is never used the Bulletin does say the agent may discuss with the consumer the need for principal protection or protection from market risk, and “have general discussions about balancing risk, diversification, etc., that support an insurance position within a consumer’s financial plan”. It also says that agent can’t suggest selling certain securities to fund an annuity purchase.

The Bulletin also describes what a non-insurance licensed securities rep/advisor can and can’t say. A non-licensed rep may talk in generalities about annuities, but they are prohibited from giving the pros and cons – costs and benefits – about a specific annuity, nor may they recommend cashing in an annuity to buy a security, or offer any recommendations or analysis about specific insurance products. The Bulletin does not specify penalties for breaking the rules and should be viewed as guidelines. However, Iowa regulators have said they will pursue individuals that violate the guidelines. Today, these commonsense guidelines only apply to Iowa. I am hopeful that other states will adopt similar guidelines soon.

Illinois Declares FIAs Are Securities In Case #0800064 (6/11)
Susan and Tom Cooper were the Illinois registered investments advisors/insurance agents found “guilty by press” in the January 2011
Money magazine article “The Safety Trap” for their index annuity selling practices. In May, over three years since it all began, the Illinois Department of Securities has finally ruled. The Coopers’ investment advisor registrations are revoked and they are barred from offering securities in the State of Illinois. They also have to pay a $10,000 fine. This is the order from the Illinois Securities Department (#0800064). The Coopers have until the end of June to request a judicial appeal.
The case is important for all of those engaged in the sale of index annuities for reasons I’ll go into below. The case is also personal because I acted as an expert witness for the Coopers – I chose to do it for free after meeting David Finnegan, the attorney for the securities department. The facts and allegations involve these points:

The Trigger: Not Understanding A VA Contract
In 2006 the Coopers suggested to a new client that a partial transfer be made from a variable annuity to an index annuity. The Coopers left $2,000 in the old VA policy telling the client that this would preserve a $31,625.85 death benefit in the old policy. Instead, the VA death benefit dropped to $4,533.42. Based on the loss of roughly $27,000 of death benefit the client filed a complaint with the Illinois Securities Department (the State) in January 2008.

A Fishing Trip
At different times in 2008 the State went to the Coopers’ office and conducted fishing trips looking through over a thousand annuity transactions. They found 12 instances where the Coopers had replaced an existing index annuity they had previously sold the client with a new annuity. The existing annuities all still had surrender charges. The key rationale for the exchanges is the new annuity offered a lifetime benefit rider (GLWB) that was unavailable on the existing policies.

Hanged By Allegedly Misunderstanding Roll-Up Rates
The State said the Coopers told the clients that the new annuity had a 4% guaranteed growth rate on the income account – true. However, the State also said the Coopers said the 4% annual growth guarantee also applied to the annuity cash value – not true, and that this constituted a fraudulent, deceptive or manipulative practice. The State also alleged the Coopers were guilty because they said the new annuity returns would ultimately offset the surrender charges paid and allow for free withdrawals up to 20% a year – which is true for the final point and could be true for the first. 

Illinois Securities Department Appears To Say FIAs Are Securities
File #0800064: Paragraphs 37-40. The first three paragraphs recite the Illinois Securities Code defining what a security is. Even though the word “annuity” is not mentioned, and ignoring that Congress has determined that index annuities were not securities during the period these exchanges took place, the State says “Each of the above referenced investment plans is an investment contract and therefore is a security as that term is defined.” Since Paragraphs 41-47 cite what would be violations of securities law it appears the State is using “investment plans” as a synonym for fixed index annuities, because these are the only financial product referenced above, but unbelievably, does not define what “investment plans” means.

Illinois Securities Department Dismisses GLWBs
File #0800064: Paragraphs 29-33. The State defines how GLWBs work and then says there is a fee for the GLWB – in this case true; the rider limits the withdrawals if taken for a lifetime – also true; but then dismisses them by saying the client could simply take 10% withdrawals each year and avoid the rider fee – however, 10% withdrawals are not guaranteed to last a lifetime. 

File #0800064: Paragraphs 34-35. The State says the exchanges were unsuitable due to the clients’ age (median age 73), no additional tax benefits resulted from the exchanges (but no one claimed there were any), and because there were surrender penalties charged. 


1. The ultimate case and punishment had little to do with the initial complaint. The whole investigation could have been avoided if the Coopers understood how the VA death penalty was affected by partial withdrawals because there wouldn’t have been a complaint. This is often the case. Time and again I’ve seen where an agent/advisor appears on the regulatory radar screen due to a complaint that is often ultimately dismissed, but it brings in the State. The lessons from this are every agent needs to know exactly how the products work, how their actions will affect consumers, and to keep them happy.

2. There was one complaint, but the State used this as an excuse to try to find dirt. Of the over 600 clients the Coopers have, and over a thousand annuity transactions over the years, the State found 12 that they thought they could prosecute best. When the regulators come in they will look at everything in your past to try to hang you. I have seen cases where the regulators couldn’t find evidence to support the complaint so they brought up a small error unearthed from years ago on a Form U-4, or a small misstatement on an ad or mailer and then persecuted the agent/advisor. More than once I have seen cases where an agent/advisor agrees to pay a small fine to “get it over with” – which means the agent/advisor becomes a marked man since there is now a regulatory event in their file.

3. My role as an expert witness in the hearing was limited. The main reason I did it was because no one would appear for the Coopers as soon as they heard the State was involved. What I was able to say and support was that annuity exchanges are commonplace when there are still surrender charges on the existing annuity. I was also able to show that Illinois insurance laws do not bar annuity exchanges when surrender penalties are incurred. I also showed that under Illinois insurance law the insurance carrier accepting the replacing annuities must have a system to determine whether the annuity transactions are suitable and if these replacements were unsuitable it was the responsibility of the accepting carrier to stop them; they didn’t. Finally, I was also able to show three distinct product benefits that the new annuities provided which were unavailable on the old annuities, and to point out under FINRA rules that the addition of even one new benefit can be used to justify exchanging an annuity. Two of my points were added to the State’s Order, but they didn’t change the outcome.

4. I was told that each of the 12 customers involved in these exchanges appeared at the hearing and told the judge that they liked the Coopers, they were happy with the exchanges, and they would do the exchanges again. I have not read the transcripts to see if this was the case.

5. The Coopers have filed an appeal. (*which they ultimately lost - JM)

The Illinois Securities Department was involved in this case because the Coopers are registered investment advisors. The disturbing part is the securities department now appears to have unequivocally stated that index annuities are securities. This follows a trend. In a previous case (#1000097) the Illinois Securities Department said they had authority over an insurance agent with no securities registration because he was selling fixed index annuities. As it stands now if you are an insurance agent in Illinois selling index annuities – even if you have never held securities registration – the securities department says you are under their control and must follow Illinois securities laws in the sale of fixed annuities.

Regulators Biased In Hindsight (5/11)
In a Missouri action against an agent (AP-08-11) the Securities Regulator chastised the agent for moving into fixed annuities and away from the market because the consumer’s securities “gained over 23% in the 2 years prior” and the annuity only paid 7% the first year and then 3.25% the second. The agent’s actions were taking place in 2005 when the S&P 500 was around 1200 and the final regulatory action was dated 21 April 2008 when the index closed at 1388. In hindsight, at that time, it would have been better to leave the client’s money in securities, and the regulator made a point of bringing this up.

One year later the S&P 500 was at 850 – roughly 30% lower than it had been in 2005. And yet, when I rechecked, the regulator did not reopen this case and admit he was wrong in suggesting that the agent had erred by taking the 75 year old client out of the market and into a fixed annuity before the stock market cost him 30% of his cash. Indeed, I reviewed dozens of regulatory actions against agents in 2009 from across the nation. Not one regulator commented on how much money the agent had saved the consumer by suggesting the transfer of funds from securities to fixed annuities. However, there are numerous examples in previous years where regulators made a point of documenting the return on securities when it suited their case.

Hindsight Bias is based on the observation that people are confident they would have made the right decision, but only after they know the results. It’s common, and it’s hard to guard against, and lawyers have been using it for years. The nastiest example was a judge sending a trustee to prison in 1931 (In re Estate of Chamberlain) because everyone knew that...”in early 1929, stock prices were very much inflated and that a crash was almost sure to occur.” Of course, had people known that, prices would not have been inflated and no crash would have happened.

Securities regulators may pull the same thing in an action if the annuity was funded by the sale of  securities and the market is up. Then someone will need to point out to the administrative judge that even lawyers can’t predict the future.

Illinois Securities Department Bars Fixed Annuity Agent For Life (3/11)

No 1000097: The Facts
Over a four-year period the agent sold 5 fixed index annuities to a consumer totaling $113,282 (the original amount mentioned by the State was $59,672.24). Although the agent was never a registered investment advisor he had been FINRA registered until April 2008. A FINRA
Broker Check Report showed the agent had never been subject to a customer complaint, disciplinary
action, or regulatory event in the nine years he was securities registered.

Ignoring a letter from the Securities Regulator leads to a lifetime ban 

The definition of what a security is under Illinois Code Section 2.1 includes many things, but it does not mention fixed index annuities, or annuities at all. The definition of what may be “investment advice” under the Act is very broad, but there is no hint in this case that investment advice was a factor. On 1 June 2010 – two and a half years after the agent had dropped all securities registration of any kind – the Illinois Securities Department sent an inquiry letter regarding these fixed non-securities annuity sales and demanded a response from the agent. Was the inquiry the result of a customer complaint, a competitor with an ax to grind, or a securities investigator with a vendetta? The Securities Department notices don’t say why there was an inquiry. The Securities Department made additional attempts to contact the agent in August and September. The agent appeared to ignore them. In November 2010 the Securities Department entered a Notice of Hearing that prompted the agent to respond in December saying that yes, he sold these fixed non-securities annuities to the consumer.

The Securities Department said the agent was guilty of Section 12 (D) of the Illinois Securities Act which says it is a violation to fail to file a report (a response to their letter) required under the act. Section 11 E(2) says violations may result in a permanent ban in offering or selling any securities. The upshot was that since the agent ultimately allowed the Securities Department to have jurisdiction, and thus since he had ignored inquiries from an agency of which he finally permitted jurisdiction, he was guilty of violating state securities laws. The Consent Decree states, “The Respondent shall be permanently prohibited from offering and/or selling securities in the State of Illinois.” These are the facts. And now I’d like to present a fictional tale that has nothing to do with this case and any resemblance between actual people and actual circumstances is purely coincidental.

And A Tale
Once upon a time there was an agent. He had successfully sold insurance and fixed annuities for years, but his old firm back in the ‘90s went on a variable annuity kick and required everyone to get registered to sell securities so that their agents could hawk their VA products. The agent eventually left that firm for another, but kept the securities registration, and occasionally sold a variable annuity or mutual fund to a consumer. However, almost all of the agent’s business was in fixed annuities.

In 2005 the NASD concocted NTM 05-50, which worked to intimidate many broker/dealers into attempting to supervise the non-securities activities of those registered through them. It didn’t happen for two years, but finally the agent’s broker/dealer told the agent that all fixed annuities would need to run though the B/D beginning in 2008 and that the agent’s commission would be cut and product choices reduced. The agent decided that since securities were a sideline at best, that he would drop his registration and simply sell fixed annuities. And so he did, leaving a clean securities record with no customer dispute, disciplinary action, or regulatory event of any kind reported over his 9-year career.

In the summer of 2010 the agent receives an inquiry from the Illinois Securities Department asking him to respond to questions about sales of fixed annuities to a consumer from 2005 through early 2009. The agent, decides that since 1) he no longer is in the securities business – and hasn’t been for over two years, and 2) none of these sales involves securities, that he doesn’t need to respond. After all, if there is a problem with these fixed annuity sales then he should be hearing from the state insurance and not the securities department. The agent also blows off a follow up letter and a phone call, but the problem doesn’t go away.

By late fall the agent receives notice of a hearing and calls the securities department. They tell him that he will have to pay ten of thousands of dollars in fines, but the department will make all those fines go away if the agent simply says that the securities department does have jurisdiction over these fixed annuity insurance-license-only sales and agrees to not enter the securities business again. The agent, never having talked to an attorney at anytime, decides that since he wasn’t going to sell securities anyway that consenting to this will make everything go away. But he does not live happily ever after.

The agent now has a regulatory event that is public knowledge. Any future employer or customer looking up his name in the Broker Check Report will see he has been banned from selling securities. In addition, while it may be the agent’s intention to never enter the securities arena again, securities regulators have been aggressively adding to their turf. If this agent ever talks to an annuity prospect and makes any comments that might be interpreted as investment advice the securities department can say the agent broke the consent decree. If a customer of this agent ever moves money from a variable annuity or mutual fund into a fixed annuity, the securities department can say the agent was recommending the sales of securities, which is a violation of the consent degree. We don’t know where this fictional agent lives, but violating a securities department consent decree in Illinois is a Class 4 felony with a possible prison term of one to three years and a $25,000 fine. Thus our tale ends.

Source of Finds Facts (9/10) 
The insurance licensed producer makes a balanced presentation on the pros and cons of an index annuity. The consumer weighs the information and decides the annuity will do a better job of meeting his or her needs and sells a mutual fund to get the cash and then buys the annuity. Does the annuity producer need to be securities registered? No! No securities registration is needed by the annuity producer for this sale in any state of the union, including Arkansas.

On 18 September 2009 the Arkansas Insurance Department and the Arkansas Securities Department issued Joint Bulletin No-14-2009 Sales Or Investment Advice Related To Securities Products By Insurance Producers. This bulletin has quickly become perhaps the most noted and misquoted piece of annuity regulation of recent times. What agents tell me it says is that you can’t use the proceeds from a securities sales to buy an annuity unless you are securities registered. The bulletin does not say that. It does not come close to saying that. What is says is this:The recommendation to replace securities such as mutual funds, stocks, bonds and various other investment vehicles defined as securities under the Arkansas Securities Act is the offering of investment advice.  It is unlawful to offer investment advice unless one is registered (licensed) with the Arkansas Securities Department as an investment adviser or investment adviser representative.

One article I read mentioned the same language and then summarized it by saying that some States view it as a violation of law whenever an "insurance-only-producer" replaces ANY security product with an insurance or annuity sale. This view is 100% wrong because..

  • It is not just some states; the laws of EVERY STATE say you must be securities registered to recommend selling securities. 

  • NO STATE says a securities license is required if the consumer decides to liquidate  securities and use the proceeds to buy an annuity from a non-securities registered agent. 

I felt in every case the non-securities registered agent was offering investment advice 

I have reviewed the securities laws of every state and every state regulatory action against an annuity producer that I could find relating to source of funds. In my non-legal opinion there was clear evidence the non-securities registered annuity producer was giving securities advice in every situation and that is why the state took action. Taking a look at why Arkansas may have issued the bulletin, we have a case (S-08-029) where the non-securities registered annuity producer not only recommended closing out securities accounts with B/Ds but filled out the forms for the consumer. In another case (S-08-074) the non-securities registered annuity producer put it in writing saying things like “If my calculations are correct (the securities account) is 80% at risk” and “We would suggest that you retain your GM stock and your (Bank) Stock.” In both cases the non-securities registered annuity producer suggested selling securities and using these proceeds to buy index annuities.  

Most of the other cases I looked at also clearly showed the non-securities registered insurance agent telling a consumer to sell a security. In a few cases the agent may not have recommended the sale of specific securities, but they presented themselves as experts in investments and investment advice. In several instances the agent helped the prosecution by telling the investigator that they normally advised consumers on how the stock market worked and why stocks were bad. This usually led to the investigator asking whether the agent had any training in investments or securities registration and the answer was always no.

 Assuming the agent does not put the recommendation to sell in writing, it could come down to a consumer saying there was a recommendation to sell with the agent denying this. Although I have never seen this addressed anywhere, nor it should it be taken as legal advice, I wonder whether it would behoove the non-investment registered insurance agent to get a form signed by the consumer stating that in cases where securities proceeds were used to fund a fixed annuity that no recommendation was made by the agent to sell or replace securities such as mutual funds, stocks, bonds and various other investment vehicles defined as securities under state law in the purchase of the fixed annuity?

It can be expensive if a state decides you are a non-investment registered insurance agent that recommended selling securities to fund an annuity. In Arkansas the agent may be fined the greater of $10,000 or the commission earned for each violation ($20,000 or double the commission earned if the consumer is age 65 or older). However, if a consumer looks at their personal situation and makes their own decision to sell securities and use the proceeds to buy an annuity, then no violation has occurred. Even Arkansas alludes to this in that previous case (S-08-029) where the state says the reason for the Consent Order is because the agent didn’t merely recommend an annuity but instead provided advice on securities matters.

I have found state regulators tend to look at several things to determine whether an insurance agent is acting as an advisor. One is a pattern of fixed annuity sales whereby the money came from the sales of securities. Another is the language used by the agent. Does the agent take about repositioning funds, allocating assets or advising the consumer? Still another red flag is if the agent helped the consumer complete the securities transfer or sales forms. It might be helpful for the agent to have a letter signed by the consumer saying the agent did not suggest selling securities as a source of funds for the fixed annuity. However, there are no absolute guaranteed ways to avoid an accusation by the state that an agent is offering investment advice in a fixed annuity sale.

SEC 151A - We Won! (9/10)
When 151A came to the foreground in June 2008 my suggestion was to fight it on the economic impact. I said “A losing strategy is to say ‘index annuities are not securities or the stock market is risky’. The SEC has already covered those points under the halo of protecting consumers and no politician will try to argue against protecting consumers. However, politicians can argue the proposal costs jobs without improving consumer protection and therefore is not needed.” Ultimately both Congress and the courts decided the SEC couldn’t mess with index annuities. And now we need to protect the victory.

Congress Was A Long Shot 

To give an idea of what the agents, MOs and carriers accomplished with their phone calls, visits and money to Senators and Representatives that resulted in FIAs being declared non-securities...
There were over 1000 bills introduced in Congress in the last session, over 300 were sitting in the House Committee of Financial Services last fall. Only 6 had made it out of committee (and 3 of these were to give gold medals to Apollo 11 astronauts, Women World War II pilots, and Arnold Palmer). 33 bills had more sponsors and never made it out of committee. And yet thanks to their efforts the industry will survive. 

The defeat of 151A showed how important it is to be involved in the political process, and the next battles will be at the state level. You may be aware that Florida and Texas became “10/10” states, but you may not see the battle for regulatory turf that state securities departments are waging. The summer Advantage Compendium examined the anti-annuity- agent forces that are pushing on the state level and illustrates why annuity producers and carriers need to remain vigilant.  After the celebrating ends we need to remember why there was even a battle. The main reason 151A passed was because the index annuity industry let securities' interests control the message.

SEC 151A - Let's Not Lost The Media Battle Again (8/10)
My belief is the reason 151A happened at all was because the annuity industry let the securities world control the media story. For several years the securities regulators and securities factions had been showcasing a few bad practices and bad agents, and saying this is representative of the industry. Most of the time there was no response from anyone contesting these slams, but even worse, when responses were made they denied there were any problems, even though the reality is there were and are problems with unsuitable sales and bad agents. Unfortunately, it often appears we didn’t learn anything because this pattern of extremism and denial continues, meaning the actual annuity story gets ignored and the securities folks continue in control.

As an example, in July a national columnist wrote an article that was, I felt, biased against index annuities, but her main concerns had legitimacy. However, none of the comments from people apparently from the industry responding to her article admitted that anything she reported might contain a grain of truth. Indeed, several of the responses contained many more distortions about index annuities than the article they attacked. I’ve never heard a person accused of being stupid respond with “Gee, you’re right, I am stupid, thank you for pointing that out” and yet most industry voices make personal attacks that are not only ineffective but will cause the person to harden their original belief. I’ve found it gets much better results to say “Although I agree with your first point I am concerned you may have missed this fact” or “Your report seems to only reflect one view; did you consider that annuities have positive points 1, 2 and 3.” Most reporters, and some financial columnists, try to achieve balance in their articles. If you can show in a civil manner why their reporting is unbalanced they will often correct it.

Ranting only makes the ranter feel better, and it only strengthens the media’s negative views

Winning Is Not About Scoring Debate Points
Getting a favorable annuity story from the media does not result from treating an article as a debate whereby if you rank up more points you win. Ranting that every negative point written about annuities is wrong may make the ranter feel better, but it is only effective with similar ranters. The reality is if you only present one side of a story the reporter ignores you, feeling that you proved their point. And even if you can prove in public you are right the reporter may feel they will look foolish for having been incorrect and so decline to change their point of view. I experienced this a few years ago when I discretely wrote a financial columnist and was able to support facts to counter several mistakes he’d written about annuities. He wrote back and told me I was right, but that he couldn’t admit it because then his readers would know he’d been wrong (however this columnist seldom now writes about index annuities). Your goal is to get the media to present your story and you won’t do this by publicly ranting or making the reporter “lose”

Dealing With The Media

1. Don’t make personal attacks

2. Don’t rant

3. Admit any valid points they raised, while showing points they missed

4. Engage financial reporters and columnists before they write about index annuities

5. Teach the media about annuities

And You Will Get Some Results
I have been talking with reporters about index annuities for years. I often talk to them before they’ve even written about index annuities so that I can build a relationship where the reporter views me as a source that is, if not unbiased, at least one that discloses my biases, and this means reporters often call me to check the facts of an article before it runs, and this means many index annuity slams never make it into print. Some reporters will never change their anti-annuity bias and so I don’t talk to them, but I have had a positive impact on the way many others talk about the product. Occasionally, I have converted a reporter to a pro-annuity stance, but most of my victories are getting them to at least acknowledge in future articles that index annuities aren’t all bad and have some good points. The national columnist and I exchanged a few polite emails on her July article, and while I don’t believe she’ll be extolling their virtues anytime soon, she did admit that I raised many positive index annuity points she wasn’t familiar with; hopefully her next article will be less negative.

Quietly talking to reporters won’t make you famous because your goal shouldn’t be self-promotion but education. By reaching out in a reasonable and civil way you generate a positive effect on the way the media writes about annuities and ultimately this makes politicians and consumers feel good about annuities too.

Repeal FINRA Notice to Members 05-50 (8/10)
On 15 July I sent a letter to Richard Ketchum, the FINRA CEO, and asked, “Since 151A has been vacated and Congress says index annuities are exempt, when will FINRA be rescinding Notice to Members 05-50? Richard hasn’t got back to me yet.
Five years ago this month NASD NTM 05-50 Equity-Indexed Annuities: Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities was released. The justification for attempting to assume regulatory jurisdiction for a non-security is found in section 2 “The Uncertain Status of Unregistered Equity-Indexed Annuities” where FINRA says you can never be sure when an index annuity is a security, and this stance is pursued in Section 3 “Supervision under Rule 3030 and Rule 3040” where it says if an index annuity is ever found to have been a security then FINRA will then have jurisdiction, followed by Section 4 “Supervision” where it essentially says that due to this uncertainty B/Ds had better treat index annuities as securities if they know what is good for them. Although Article 1, Section 9 of the Constitution bans Congress from passing ex post facto laws permitting prosecution for a previously legal act if it was subsequently declared illegal, FINRA appeared to be saying the Constitution does not apply to them.

3030. Outside Business Activities of an Associated Person

No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement.

The justification for 05-50 was that index annuities might someday become securities and thus Rule 3040 would apply. Congress removed this justification by saying fixed index annuities are not securities 


3040. Private Securities Transactions of an Associated Person

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule. 


For the last five years FINRA has effectively required B/Ds to supervise index annuity sales because they “might” become securities. Congress and the courts have removed this uncertainty. Rule 3040 cannot be applicable anymore because you can’t have a private securities transaction if the transaction involves a product that the law says is not a security. All that is required under Rule 3030 – as it is written – is for the B/D to be notified of an outside business activity, but the rules do not appear to contain any explicit requirement that the B/D supervise these outside activities nor do they seem to give the B/D the authority to deny or terminate a representative’s affiliation if the representative refuses to allow the B/D to supervise their outside business activities.  

What Will Happen?
My guess is if a B/D is already using this rule as a reason to place restrictions on the index annuities sold, or requiring affiliated agents to run their annuity sales through the B/D, that the B/D will continue to do so. I’m also guessing this issue will come to a head when a B/D decides they don’t want to supervise index annuity sales because they are not securities sales according to Congress and the courts, and FINRA then jumps on the B/D for failure to supervise.  

In this country an individual has the constitutional right to challenge bad regulatory rules in the courts if they disagree with the SEC or a state regulator. Unfortunately, the courts have ruled that FINRA decisions cannot be challenged because members give up their rights when they join FINRA. Whether or not FINRA changes their treatment of index annuities in recognition that the questions raised by NASD 05-50 have now been answered is up to FINRA.

Florida “Safeguard Our Seniors” Act Passes (6/10)
For the last three years Florida CFO Alex Sink has tried to get a “Safeguard Our Seniors” bill enacted that would affect annuity sales. Her past attempts died in committee, as did this year’s version – HB 825 died in Insurance, Business & Financial Affairs Policy Committee on the last day of the session. However, shortly before the final day of the 2010 legislative session had ended the “Safeguard Our Seniors” language was thrown onto the end of a puny little bill (SB 2186) covering workers compensation claims for off-duty deputy sheriffs. The amended bill was quickly presented for a vote, it passed, and was signed by the governor. It becomes effective 1 January 2011. Major points:

Florida’s a “10/10 State" An annuity sold to an age 65+ buyer is limited to a 10 year surrender period and a 10% maximum surrender charge.  

Increases what an agent could pay in damages There already was a potential $40,000 fine for churning policies and this act increases it to $75,000 for each violation. However, in any annuity sale the act says the agent can be made to pay for any actual cash damages suffered by the annuity buyer.  

Rotten apples are out If you’ve had a securities or insurance license suspended or revoked the regulators may deny you a Florida insurance license. If your insurance license was revoked due to a problem with an age 65+ annuity buyer you will never get a Florida insurance license.  

Puts MOs on the hook If a third party marketer aids and abets a violating agent they fall under Florida authority relating to monetary damages and loss of license.  

The “free look” period increases to 21 days – Up from 14. Also, another disclosure sheet on the “free look” period is required and the ability of agents to name themselves as a beneficiary on policies sold is limited.

My feeling is this Act gives Florida the authority to truly go after annuity agents and is the beginning and not the end of the story.

If the regulators drop by, call an attorney! (3/10)
I’ve noticed quite a bit of state securities regulator action where insurance agents have been found guilty of violating the law against being stupid. Here’s the scene that apparently happens when the securities regulator walks into the agent’s office:

REGULATOR: We saw a seminar mailer you sent out that included the line “earn a tax-deferred return” is that true?”

AGENT: Yes, not only that but at my seminar I tell consumers all about how the stock market really works against them, advise them to sell their securities and buy fixed annuities, and tell them only negative facts about banks and investments and only positive things about annuities.

REGULATOR: Do you have any securities registrations or investment training?


REGULATOR: Now we’d like to paw through all of your fixed annuity files, seminar slides and marketing correspondence and go on a fishing trip to see if we can find anything incriminating that we can use against you, okay?

AGENT: That would be great, and here’s something you might have missed showing where I did an exchange from the policy I sold the consumer last year to a new annuity this year with an even higher surrender charge and commission.

Unfortunately, sometimes my script isn’t much of an exaggeration. In going through many of the pleadings and actions by securities regulators I find agents voluntarily admitting multiple violations of securities laws and freely giving materials that can be used against them. Even when the regulators bring formal charges against the agent the agent often shows up for the hearing alone, without an attorney, confident that they will be able to “explain it” to the regulators and the problem will go away. Often only after the agent has signed a guilty plea and realizes the consequences of their actions do they finally call a lawyer. Of course, by then it’s too late.

Yes, attorneys are expensive, but so is paying thousands of dollars in fines or having your ability to make a living taken away. So remember, if the securities regulator walks in and says “good morning” the agent’s response should be “I’m afraid I can’t comment on the quality of this time period without my attorney present, let me get her over here to talk for me.”

Agents Acting As Advisors (12/09)
At the federal level you have FINRA trying to make the case that they should regulate registered investment advisors too – and spending a million dollars to buy the votes to get the power (see box), and the SEC is questioning whether registered reps should be held to the same fiduciary standards as RIAs. On the state level, securities regulators continue to go after annuity producers they feel are acting as unregistered advisors. Here are some notable cases from 2009.

Alabama CD-2009-0021 
A Cease & Desist Order was issued because the non-RIA agent’s website said he “specializes in providing planning and guidance for those who are seeking a better lifestyle in retirement” and that he “can help you deploy your retirement money properly” when it comes to risk and liquidity. The order also noted the web site offered a “Safe Money Advisory” newsletter “written for investors or savers who want to learn how can earn the maximum amount of interest without being exposed to the risk of loss.” The website further states these were educated opinions and to contact an advisor. The Alabama Securities Commission unilaterally decided that this web site language described a financial planner and therefore the agent was an unregistered advisor.

Arkansas Case NO S-08-074
A Cease & Desist Order was issued because the non-RIA agent wrote several letters saying things like “I would suggest moving your funds from [your VA] where they are vulnerable to market conditions” To another consumer was written “your IRA dollars...are vulnerable to market and or creditor losses”. and to a third letter said, “retain your GM stock” and as with all the other letters suggested selling securities and buying an index annuity. The securities regulators said that recommending the sale of securities was providing investment advice.
I don’t know how to define “investment advice” but for that matter nobody else does either, which is why you have the ongoing NASAA turkey shoot against annuity producers. 

From a common sense point of view I would think “retain your GM stock” sounds like investment advice and “earn the maximum amount of interest” does not. Many annuity producers have become RIAs largely because they believe this will help avoid the “investment advice” problem with securities regulators, but what if the regulator simply hates annuities?      

Anti-Annuity Bias  Being registered in the securities world does not protect you if the regulator has anti-annuity bias.

Illinois Case No. 0700485
The agent/RIA exchanged the age 75 consumer’s existing out-of-penalty annuities for a bonus annuity with a 15 year accumulation period. The state securities regulator said it was not disclosed “that Investor would have to annuitize the product...for the bonus to apply” therefore this “resulted in financial hardship for Investor and Investor’s spouse while providing [agent] with an excessive commission; the only reason [agent] recommended the product to Investor”. 

What caught regulator attention in the first place? The agent was advertising free dinner seminars using phrases such as “How to design your portfolio so you can maximize income for life” and “Why you should fire your broker.”

Missouri Case No. AP-08-22
The allegation is one of unsuitable securities transactions, but the language used by the regulators is against an entire class of investments. The consent order points out FINRA has often written about the potential unsuitability of variable
annuities, and using as unimpeachable sources the fact that both USAToday and CNNMoney had questioned the suitability of variable annuities

However, the fact that almost all of the losses in this case were from junk bond mutual funds did not cause the regulator to disparage this investment category too. In the consent degree the agent agreed to not sell variable annuities to consumers over age 65 for five years and not to sell index annuities to anyone. However, index annuities were never mentioned in the case. 

Missouri Case No AP-09-35
The allegations are varied, but the rep is ordered to cease and desist selling variable annuities to consumers over age 65 for five years and not to sell index annuities to anyone
. Once again, index annuities were never mentioned in the case and were not part of any complaint. 

The Illinois case could simply be a matter of the regulator objecting to the specific annuity product selected and not annuities in general, but the Missouri cases ban the use of index annuities even though index annuities were never involved and are not currently subject to securities department regulation. The agent could fight back! The problem is the state securities regulator acts as judge and jury and the deal presented to the agent is often “either agree to be regulated by us and accept any sanctions we make up or we will make your life a living hell, and we have so many resources that you will wish your name was Alfred Dreyfus because he got a fairer shake”. 

One reason regulators create so many rules is because it makes it easier to say more than one rule has been broken. In the Illinois case the initial notice also mentioned the regulators had discovered the agent had made a mistake on his Form U-4 thereby adding, “making a false statement” to the original allegation. The initial notice of hearing asked for $280,000 in fines and demanded the agent be barred from the investment industry for life. Giving up the right to a fair and impartial trial the agent instead consented to rescinding the sale, paying a $500 fine and being unable to register as an advisor for 6 months.  

What Is The Solution?
I believe one reason for the negative regulator attention is because securities firms compete with annuities, and so when RIAs and B/Ds lose business to agents they complain to the regulators; I’ve noticed in many cases that regulator interest in an agent’s actions did not result from a consumer complaint. I also believe these securities firms will be selling an increasing number of annuities in years to come because annuities are often an essential part of the retirement solution. When securities firms and advisors begin making  money from annuities regulator bias against annuities may largely go away.   

Regulators banned agents from selling index annuities, even tho FIAs were never involved

Another reason for the problem is annuity producers often do act as unregistered financial advisors and then overuse annuities. If you are telling someone how to structure their financial affairs or handle their stock portfolio you have gone beyond the authority granted by an insurance agent license; if most of the consumer’s assets are placed in an annuity that may well result in surrender charges paid in the future then too much money is in the annuity. The problem can be minimized by educating consumers on how annuities really work and then letting the consumer decide how big a check to write. And if the agent wishes to act as an advisor they should get the training and mindset to act as one.

Little FINRA FIA Action In 2009 
FINRA did find an agent/rep that forged a customer name on a fixed annuity app, and another that was making himself the beneficiary of several policies, but only one case resulted from
index annuity activity. An agent/rep was fined $5,000 and suspended for 6 months for engaging in outside business activities without prompt written notice to his member firm, and earning$11,925.66 in index annuity commissions.FINRA Case #2007009359601

Reverse Mortgages/Annuities (9/09)
The Government Accountability Office issued a report on 29 June 2009 to the Senate’s Special Committee on Aging on the topic of reverse mortgages (GAO-09-812T, GAO-09-606). The GAO report surveyed complaints to regulators, reviews of marketing materials and even conducted undercover investigations into reverse mortgage counseling sessions, and did not find a smoking gun regarding the cross-selling of annuities with reverse mortgages. They concluded that there is a potential for abuse, but
actual instances of abuse were limited.

  • Altho every state was asked to report inappropriate annuity sales made in connection with a reverse mortgage only 8 states could find even 1 case going back to 2005 (and only 4 cases resulted in action taken against the insurer).

  • Of over 4 million complaints made to federal regulators from 2005 through 2008 only 50 involved reverse mortgages and none of these involved the purchase of an annuity.

  • “federal agencies reported few marketing complaints” and “few, if any, enforcement a result of”

The report’s attitude towards using reverse mortgage proceeds to purchase an immediate annuity was positive saying “certain annuity products may be suitable for some borrowers, such as those who wish to receive payments for life regardless of where they live,” but regarding deferred annuities it also said “there is concern that elderly reverse mortgage borrowers may be sold deferred annuities, where payments may not begin for many years and high fees may be charged for early access to the money.” However, it was silent on whether guaranteed lifetime income payouts on deferred annuities would be viewed as also suitable. The only apparent red flags are implying that an annuity/insurance product must be purchased to get the reverse mortgage, selling the consumer a deferred annuity with high surrender charges, and/or selling an annuity that would require a long delay before annuitization is permitted.

State Mandated Annuity Discrimination: Asymmetric Paternalism (5/09)
We give government the power to protect citizens that are deemed incapable of making good decisions. In the 19
th century these protected groups were "idiots, minors or married women." In the 21st century government still protects those legally regarded as minors or non compos mentis from themselves, but the classification of an idiot waxes and wanes based on prevailing politics. Today, people that don’t mind being around cigarette smokers, and California residents that want to buy emergency response units because they have “fallen and can’t get up” are viewed by their government as idiots and “helped” with their
decisions. A term used to describe this use of governmental power to override individual decisions is asymmetric paternalism.

Asymmetric paternalism is demonstrated by government establishment of default choices, state mandated disclosures, decision framing, cooling off periods and limits on customer choice1. The problem is this government help is biased towards one solution over another – hence the asymmetric tag, and as legally responsible adults it is questionable whether we need the state to act as our parent instead of allowing us to exercise freedom of choice. Over the last few years several state governments have passed or considered legislation treating everyone over age 65, or anyone that is thinking of buying an annuity, or is over age 65 and wants to buy an annuity, as an idiot. Essentially these states are saying that when you reach age 65, or if you want to buy an annuity, that you are incapable of making a good decision. However, this state paternalism appears to be mainly motivated by politics and not altruism.

Default Choice – Texas proposal SB961 would mandate that an annuity purchased during a consumer’s working life would have to be paid out when the consumer turns age 70, making the default choice either receiving an income that may not be needed, or being taxed on many years of tax-deferred interest in a single year when the income may not be wanted. The bill’s sponsor earns his living as a partner in a financial services firm that does not sell annuities.

Framing – New York passed a law saying index annuities must disclose what the reinvested dividends on the associated index would have been, but refused to require index funds to show that they would have performed worse than the typical index annuity half of the time. New York collects considerably more revenues from the securities industries than from index annuity carriers.

Disclosure – The same states that will not disclose that winning their lottery is less likely than pulling out the winning golf ball from an Olympic sized pool of balls are requiring carriers to expand already adequate disclosure language.

Cooling Off Periods – Several states are attempting to increase the free-look period in which a consumer may return an annuity. However, if a consumer changes their mind after buying a mutual fund they are fully exposed to any possible loss. Altho politicians seem to like do-overs, unless they involve elections, one study says “Cooling-off periods appear more intrusive...and should thus be implemented with much greater reticence and only after careful analysis” 1.

Limits On Choice – The most visible sign was the 10/10 surrender period phenomena wherein some states determined that their residents were unable to count past ten, but I have not seen any empirical research concluding that surrender charges impose a greater economic harm than the risks of other financial vehicles. 

There are two problems in fighting this. One is that annuity carriers don’t have the lobbying bucks and media power to fight this discrimination by the politicians that cater to the securities and banking industries. Politicians respond to dollars and headlines, and annuity carriers either don’t make an impact, or also play in the other industries and will let annuities suffer to keep their other interests safe. The second problem is a societal prejudice against old people. We tend to treat seniors as relapsed children and try to protect them because this let us both marginalize them and rationalize the guilt we feel in doing so. The discrimination against both annuities and seniors is not going away.

An Alternative To FINRA Regulation Of Annuity Producers (2/09)  
Thirty years ago the banker, stockbroker and insurance agent offered distinctly different products to consumers and were regulated by separate regulators that were built to regulate the distinct products. Over the years the stockbroker morphed into an investment products generalist, the bank started selling mutual funds and annuities alongside checking accounts, and many insurance agents went from offering risk transfer products to selling wealth creation ones. The result was a shadowy product wall replaced the distinct one and regulations designed for one world were forced to try to cover several.
Securities regulators reacted by expanding turf. Banks generally went along with all of this because their trust functions were protected from securities regulation encroachment and the federal banking regulators fought to ensure bank could still offer bank products under banking regulators.  

Meanwhile, many agents were entering the insurance business and would never sell insurance. Instead they were selling interest yielding fixed annuities that were alternatives to the stock market or the bank. The problem was the insurance regulatory model was still based on an agent, directly trained and supervised by a general agent or broker, selling a relatively simple life insurance or annuity product. The reality was these new agents were selling increasingly complex financial instruments without adequate training or supervision because the insurance industry distribution system had changed to independent agents appointed to carriers thru marketing organizations. The agents received some training on how to get prospects and how to sell products, but there was little attention paid to when the products were suitable and even less to supervising the sale.  

The securities regulators are saying these annuity agents are acting as securities salespeople because they are advising people on wealth creation instead of only risk transfer, and should be securities regulated, but the FINRA model is the wrong one for many annuity agents because the agents don’t want to sell investments; they only want to sell annuities. The agents want to work in a corner of the financial store selling no-market-risk-to-principal annuities and no-market-risk-to-income retirement solutions. 

The FINRA model is too broad. Altho a basic understanding of how stocks, bonds and mutual funds work is needed so the annuity agent can fairly compare investments with fixed annuities, it doesn’t make sense for someone that will never sell mutual funds to remember breakpoints, or be able to explain a butterfly straddle when they will never sell an option. Last year FINRA published 3,928 pages of rule changes and only 2 pages remotely applied to fixed annuities. FINRA poorly manages the security world and does not understand the annuity one. Insurance regulators are unwilling to admit their model is broken due to changed distribution and products, and their plate may be too full ensuring carriers remain solvent to do the necessary agent enforcement. Frankly, the best regulator for annuity agents might be NASAA based. 

Why should state securities departments regulate fixed annuity agents? My main reason is in many states the securities and insurance department already work closely together. The insurance department would ensure the annuity company is financially strong, and the securities department would provide regulatory enforcement on the distribution side. Altho some state securities regulators have told me they simply don’t like annuities, the insurance regulators could provide balance by getting NASAA members to admit it really isn’t the product they dislike, but their current impotency in being able to go after the “bad agents”. Having joint NAIC/NASAA supervision of annuity agents and carriers would preserve the local regulatory feel and hopefully permit greater participation by agents in the process. It is worth looking into, because the alternative is a world where everyone is regulated by FINRA.

Do Securities Regulators Want To Control Deferred Annuities Or End Them? (1/09)
Both FINRA and NASAA maintained that index annuities needed securities regulation to provide better supervision of sales practices, and both have repeatedly justified securities regulation of annuities by spinning stories of widespread abuses in the fixed annuity world and then providing a handful of abuse examples picked for maximum dramatic effect. In spite of overwhelming evidence that fixed annuity abuses were far fewer than for many other financial areas, FINRA and NASAA won the index annuity battle, and persuaded SEC to call index annuities securities by saying they would do a better job of determining when an index annuity sale is suitable. However, instead of setting suitability guidelines for index annuity sales NASAA, in a 17 December press release said, "Equity-indexed annuities...have taken an especially heavy toll on our...senior citizens for whom they are clearly unsuitable.” According to NASAA an index annuity sale is NEVER suitable.

Alabama’s Joe Borg has been quoted as saying index annuities are unsuitable because you have to annuitize the contract to get your money out. When I interviewed him I said that forced annuitization applied to less than 2% of the index annuities on the market and that his comment didn’t represent the truth of the marketplace. He acknowledged he knew this and was really only talking about Allianz Masterdex 10. His next comment to me was “I don’t like annuities.” In March 2005 Massachusetts Secretary William Francis Galvin spent taxpayer money to tell resident that deferred annuities are “almost always not a good investment for older people.  If you are over 65 years old, annuities are probably NOT for you” (his capitals, not mine). Why not? Because they “rob [senior residents] of needed access to their money” due to surrender charges.

In a Massachusetts securities case (E-2007-0026) the Regulator jumped on the fact that one of the annuities replacing equities had a ten year “lock-up” and another had a five year “lock-up” – a pejorative synonym for surrender period. A Missouri case (AP-08-11) implied a 12 year surrender charge was too long because the consumer life expectancy was 10.6 years (perhaps not understanding what life expectancy means). The sound-bites from securities folks and regulators on why deferred annuities are bad often settle on surrender charges. The whipping boy used a few years ago was the mythical index annuity product with a 20 year period/25% surrender charge that never existed, but it appears it isn’t the length or severity of the surrender charge that truly is the talking point, but merely the fact that there is a penalty period. Disturbing is the observation that the Massachusetts Regulator negatively commented on a no-market-risk annuity with a 5-year penalty period, but failed to comment on the fact that 90% of the age 82 consumer’s assets were in the stock market before moving some of them to fixed annuities. The Missouri Regulator pointed out that two of the consumer’s new annuities were currently then paying 3.25% interest, and that the existing equity accounts had “gained over twenty-three percent (23%) in the two (2) years prior to their liquidation.” The regulator fails to point out whether the accounts had lost value in the bear market preceding those two years, or whether the 2008 stock market would hold any risks for the 75 year old consumer.

The securities industry business model is selling stocks, bonds and their derivatives; fixed deferred annuities do not fit the model and are competition for investment money. It is a time-honored strategy to try to use politicians and friendly media to maintain an existing marketplace threatened by competition, and this is what the securities industry appears to be doing to battle the message of deferred annuities. I have tried to battle the discrimination against fixed deferred annuities through education, but not only is there a lack of annuity product understanding amongst securities regulators, but a seemingly almost willful desire to remain ignorant. This is coupled with the reality that the annuity industry has many toxic annuity product designs built to maximize commissions and not consumer returns, and carriers that do not – with very few exceptions – provide transparent performance results. It is too easy for those against deferred annuities to find darkness.

One positive deferred annuity message can be built around multi-year rate guaranteed annuities. As I write this several deferred annuity are guaranteeing 10-year returns that are more than double the yield on 10 year Treasuries, and there are 2 and 3 year MYGs with rates significantly above similar termed CD rates. I have sent letters to media financial writers that recently have had articles mentioning the safety of bonds asking them to talk about multi-year rate fixed annuities and explaining how they work, and I will continue to do so. MYGs feel like CDs, which makes them easy for annuity neophytes to understand, and MYGs avoid the high penalty-high commission stigma. My hope if I can get the media to write that at least some deferred annuities are good that it will become difficult for securities folks to kill off an entire industry.

151A (1/09)
I have not seen the Final Rule for the December SEC decision concerning File No. S7-14-08 (
Indexed Annuities and Certain Other Insurance Contracts) that effectively ruled all index annuities are securities and must be treated as such beginning 12 January 2011, but I don’t believe the Federal Register version will overturn this point. I do believe SEC will lose the coming court fight that will repeal the rule because their decision was based much more on Dateline than it was on case law. In the meantime, the fixed annuity industry will spend the next two years selling a security as a fixed insurance product. 

On its face, the SEC decision on 151A to regulate index annuities as securities beginning in January 2011, if left in place, would seem to mean business-as-usual for annuity producers selling these products for the next two years, but the landscape has changed. The SEC has said index annuities ARE securities, but will not treat them as such for awhile; however, the SEC has also implied that annuity producers should be securities regulated because current state insurance regulation is impotent. The impact on annuity producers prior to 2011 depends on how they conduct their business.

Producer – No Securities Registration
For the annuity producer that does not do seminars, and simply explains the features and benefits of the index annuity to annuity prospects, life should not change for two years (one year for Florida producers if HB 141 is enacted). If the producer does seminars, or uses ads or mailings to attract prospects, or the index annuity premium comes from some stockbroker’s client, they need to be very careful what they say about not only index annuities but everything else. AARP is encouraging its members to nark about annuity seminars attended and mailings they receive where information is not, in the member’s opinion, balanced. NASAA is on the watch for producers providing investment advice without proper registration. One would think investment advice was not offered if the consumer decided the index annuity was a better place for their money, and the consumer made their own decision to sell the security and buy the annuity. Since the stockbroker/advisor losing fees off of the departing assets under management may complain to securities regulators about even appropriate annuity sales it would probably help if the producer had a signed statement from the consumer saying the decision to sell the security and buy the annuity was the consumer’s alone and that no investment advice was given by the producer.

Producer with a Broker/Dealer
Within hours after the SEC ruled I received a copy of an email, purportedly sent from a B/D to its reps, saying since the SEC had ruled index annuities were securities all annuity business had to be processed through the B/D effective 1 January 2009 and the commission payout would use the same grid as other securities products. In 05-50 FINRA made it very clear that index annuities should be treated by broker/dealers as securities, and they have been so ruled.
Annuity producers already had to send written notice telling their B/D they were selling fixed annuities as an outside business activity. I anticipate more B/Ds will require all fixed annuity and insurance activity to flow through them, from approving annuity letters to clients to determining individual sales suitability, and the B/D will be compensated for the extra work. Only the producer can determine whether a B/D relationship is worth it, but there are a lot more rules to follow. In 2008 alone FINRA issued 65 rule filings and 82 regulatory notices totaling 3,928 pages of new rules all defining how registered people do their job. It is worth stating that a Series 6 or 7 securities registration can hang inactive for up to 2 years – which coincidently is smack on the proposed start date for FIAs becoming EIAs (and perhaps long enough for a court case to be decided). 

Producer – Investment Advisor Registration
Becoming a registered investment advisor means the annuity producer acts as a fiduciary, subjecting them to a higher level of liability and professional standards. An advisor must provide fair balance and not bias in recommendations, but it is the securities regulators that determine what is fair.
As a registered advisor an annuity producer is being overseen by an entity that may have little understanding of fixed annuities and even hold a bias against them.

I have only talked about the effect on producers. Marketing companies will be forced to decide whether to maintain their current model and pray the court sides in their favor, or create a new model wherein they take on the responsibility of acting as regulatory supervisor – for a B/D or as an advisory firm – or recast themselves as fixed annuity wholesalers to B/Ds and advisory firms for much lower overrides. Carriers need to decide what turning index annuities into securities will mean for their company. My prediction has been index annuity sales –  as the products are presently structured and marketed – will drop to $10 billion a year. That’s a nice piece of change if you are one of a few players, but a disaster if market shares remain the same.

GLWBs: The New Compliance Problem (11/08)

“I am 69 years old. I recently lost $150,000 in the stock market, and I have about $150,000 dollars left to invest in something safe. I have been talking to a representative about XYZ annuities. They guarantee that the account value will always grow at X% every year. This sounds too good to be true. Is it?”

I received this email and wrote back saying, “Yes, it is too good to be true” and tried to explain what she had really been presented.

I get a couple emails a week from consumers telling me how they have purchased this wonderful annuity that either “guarantees my investment will double in value in 10 years” or “guarantees I earn at least a 7%, 8%, 12% return every year.” And they write to me because after the euphoria fades the consumers begin to wonder how the insurance company can make such a bold guarantee on their variable or index annuity cash when the stock market is falling and the bank is paying 3%. I break their bubble and tell them they do not own what they think they do and to contact the carrier for a full explanation. I also get calls from representatives telling me the same stories, except there is no wonderment about how the insurer can offer these impossible guarantees. Occasionally I will ask the representative which annuity prospects are they selling the Guaranteed Lifetime Withdrawal Benefit rider to. The answer I get is “all of them.”

Due largely to inadequate disclosure, poor training, and ignorant or lazy salespeople, the GLWB story is quickly changing from one of a wonderful benefit that solves two of retirement’s greatest problems, to the annuity world’s newest consumer fraud. The reason is the consumer too often walks away believing the guaranteed growth rate or bonus used to calculate a possible future payout on the lifetime income account is instead a guarantee that is readily accessible and applies to their cash account.

The Consumer Does Not Receive The “Income Yield”
A consumer buys an annuity for $100,000 at age 60. Say the actual cash value account value at age 70 is $153,817. Almost every GLWB would promise a lifetime payout of 6% meaning the consumer would be guaranteed to receive $9,229 every year for as long as they live, protecting the annuityowner against the possibility of outliving their money AND giving the annuityowner the flexibility to access the cash value if desired.

In the last two years index and variable annuity carriers have enhanced the potential payout by guaranteeing minimum growth of the income factor that the payout is based on. Altho the actual cash value of the annuity might be $153,817 the payout would be based on the principal growing at, say, 7.2% a year (a common variable annuity guarantee). After 10 years the 6% payout would be based on a $200,000 income factor and the lifetime payout would be $12,000. The payout has increased by 30% from what it would have been. The consumer will receive $12,000 instead of $9,229 This is a wonderful benefit! But does the consumer have $200,000 in cash that many think they are guaranteed? No, they have $153,817. And what is the real return of this 7.2% income account guarantee if the annuityowner dies at age 75, 80, or 85? Almost certainly zero.

How GLWB Growth Really Works
The first money received back is the annuityowner’s actual cash, which is based on actual net interest credited. Any income account “bonus” or “guarantee” only produces a real hard dollar return after the annuityowners money is used up, which will take years.
If the annuity continues to earn a net return after rider fees, of 4.4% the yield used to produce the $153,817 – and pays out $12,000 a year the money lasts for 20 years. In this case what this means is if the consumer dies before age 91 they have received zero yield benefit from the 7.2% income guarantee because their money at the $12,000 payout lasted thru age 90 anyway. How long would you have to live to realize the 7.2% income guarantee as a true return? If the real cash value yield was 4.4% you’d have to reach age 101 to truly have earned 7.2%! What this means if a producer tells a consumer they are “getting a 7.2% return on their income account” they must end with “if you live to be a hundred.”

Most Consumers Will Never See Any Benefit From Income Growth Guarantees
In general, consumers need to exceed life expectancy table odds and be winners in the longevity lottery to truly benefit from any GLWB. More specifically,
the consumer receives no benefit from the GLWB unless they take maximum lifetime withdrawals. Unless the consumer intends to use the benefit they are paying for something they do not need.

What Affects The Income Account Return
A higher guaranteed income growth rate decreases the years needed to see the income benefit – an 8% income account growth rate would pay off quicker than a 6% rate because the payout is bigger. And if the annuity cash value return stinks the income guaranteed return becomes quickly meaningful – earning 3% means a $12,000 payout at age 70 starts using the insurer’s money by age 84 instead of 91. On the other hand if the annuity earns 6%, 7% or 8% the consumer never needed the GLWB protection in the first place (but the same thing could be said about fire insurance if you didn’t have a fire, a GLWB is amply justified as longevity insurance, but not as a way to get high returns).

Part Of The Problem Is Consumer Assumption 
Even if the disclosure is adequate, and the representative fully explains how it all works, the consumer will still have a tough time understanding what they are getting. We are used to earning cash on cash, and a yield or bonus that affects only the payout and not the cash account balance is a new concept. The other problem is consumers are used to receiving a return
on money; not a return of money. A 6% payout is not a 6% return, yield or interest rate. One will only know the true yield on the account when the annuityowner dies because the money coming back is both interest and principal (unless the actual dollar yield exceeds the payout). It was difficult enough to try to explain that a 6% payout was not a 6% return before, and now the consumer also needs to understand that the 6%, 7%, 12% income account return is also “funny math” and is not a real number. The problem with consumers not understanding return of money resulted in many lawsuits 20 years ago when Ginnie Mae mortgage bonds were all the rage and the same disclosure problem exists with GLWBs today, except the confusion is compounded by income account guarantees that are not true yields. A final problem is the consumer only benefits from a GLWB if they receive a payout for life. There is zero benefit if the consumer does not intend to take a lifetime payout.

There Are Solutions 
Due to perception it is difficult for consumers to understand that a 9% income account growth yield is not the same thing as a 9% cash value account yield, and cannot even be translated into an income payout yield. Consumer brains are not wired to think this abstractly. There are a couple viable solutions: one solution is to cease offering any type of percentage-based income growth account guaranteed rates. Both Lincoln Benefit Life and Lincoln Financial Group offer annuities with GLWB payouts that increase the longer the annuity remains in-force, but their guaranteed growth directly applies only to the payout and is reflected as such. Using my $100,000 at age example, both Lincolns would guarantee a payout in excess of $12,000 but no consumer would be confused about what their real cash value was. 

Another solution is requiring agents to use sales materials that clearly show what the income payout growth results really means. As an example, American Equity provides a sliding card matrix that specifically translates the growth rate into the payout that would be received, making it apparent that 8% growth after 5 years means a $9,257 payout and not a higher cash value.

The Sales Story That Could Kill A Good Benefit 
With some representatives touting variable annuities that guarantee to double your money or promising impossibly high guaranteed returns on index annuities many consumers are buying something they will never get, and if nothing is done I foresee a regulatory backlash that will result in restrictions and tight controls placed on all annuity products and the people offering them. GLWBs are the most exciting development to hit the annuity world in years. Finally, annuities have a viable alternative to the uncertain Wall Street retirement solution that is more flexible and attractive than the annuitization answer of the old annuity world. It would be a shame if the industry screws it up. 

Industry Designations Under Growing Scrutiny (12/07)
Our research indicates that regulator concern over possible abuse and consumer misunderstanding of some of the designations that annuity producers use in marketing to seniors is growing. At the national level the SEC has issued an advisory on what investors need to know about Senior Advisor designations, and FINRA has produced a webcast reminding members that not only may the use of professional designations be misleading but the use of materials such as ghost written books may lead to the impression, or cause a producer to rise to the level of an investment adviser. Although the issue gained national attention with the U.S. Senate Special Committee on Aging hearing last September state insurance and security regulators had already been active. 

One of the first states to address this area was Tennessee, who in 2005 issued a notice concerning the use of Senior Specialist credentials. They were followed by the Nebraska Department of Insurance that issued a Special Notice in 2006 relating to the use of various designations in sales to senior citizens. Kentucky reminded producers that the State has a policy in place which prohibits the use of names, titles or degrees which imply or purport to convey that such person possesses a greater skill, knowledge, experience or qualification than is actually a fact. Last summerthe Washington Securities Division issued a statement of inquiry that indicates that rule-making is necessary to clarify that use of some designations and other conduct may necessitate registration as an investment adviser. In September Iowa issued a memo listing 10 designations which the Iowa Insurance Department deemed relevant and said it will review designations and titles in the future to determine whether or not use of such would be a misrepresentation. Maine has proposed legislation that would clarify that it is dishonest or unethical for an agent or investment adviser to use a title or designation implying special expertise or training in providing services except as allowed by rule. In a lengthy memo issued by the Massachusetts Securities Division it bluntly stated that many of these designations allow an agent to “masquerade as an unbiased advisor to seniors”.

California, Idaho, and Oregon have planned or introduced strategies and workshops designed to protect seniors from predatory insurance schemes. Last August Wisconsin announced the creation of a special committee to analyze the annuity sales marketplace in Wisconsin. What will be the effect on producers? If an annuity producer displays or uses any designation implying expertise with retirees they may find the regulators at their door.

 A Target On Your Back (11/07)
If you look at FINRA Disciplinary Actions for the last two years you can find two instances where a registered representative was sanctioned for failing to provide prompt written notice to his B/D for his outside business activity of selling a fixed annuity. One can also find one sanction specifically mentioning equity index annuities, but the situation is one where the customer was said to have been magically transported to a state to sign the application where the annuity was approved, and away from the customer’s home state where the annuity was not approved.
I reviewed the web sites of the SEC and all the state security departments looking at news releases and enforcement actions for instances where index annuities were alleged to have been used incorrectly or where an insurance agent was alleged to have acted as an unregistered investment advisor. I found one Missouri case where a registered representative and insurance agent was said to have acted as unregistered investment advisor. I found another where a complaint against a Hawaii advisor alleges that unauthorized sales of securities were used to purchase indexed annuities. And I found two Washington cases where agents were sanctioned for advising the selling of securities to purchase fixed annuities.

After reviewing over 2000 sanctions and complaints at both state and federal security department levels these are all the index annuity related cases I could find. And yet, I have also been contacted by agents in Alaska, Mississippi, Missouri and Oregon telling me they have been sanctioned by their state security department for giving index annuity seminars where the state said they were offering investment advice without being registered as advisors. In addition, NASAA President and Alabama Securities Commission Director Joseph Borg says there are over two dozen cases in his state where, based on index annuity customer complaints, the carriers have given back the annuity premium plus interest to the complaining consumer, and former NASAA President Patricia Struck reported last year that complaints involving index and variable annuities were sharply up in some states. 

Why is there such a difference between actual enforcement and visibility of enforcement actions? In my interview with Director Borg he said one reason is every single insurance company involved with one of these complaints in his state in the last few years has quickly offered to pay back the money if a public enforcement order could be avoided. Director Borg says it comes down to a choice of getting the customer’s money back, or going publicly after the agent and carrier, and deciding it is best to protect the customer. Some agents I have spoken with that were alleged to have acted as advisors say the state securities department quietly told them pay a few thousand dollar fine, become a registered investment advisor, and the agent’s life could go on.

Security regulators have stepped up enforcement. Regulators sent operatives to luncheon seminars in 2006 and 2007 in Alabama, Arizona, California, Florida, North Carolina, South Carolina and Texas to report on what was said. It appears some security industry representatives have been turning in advertisements and sales materials from annuity producers to regulators that they feel are suspect, as well as advising regulators when they feel an agent may be acting as unregistered advisor – as when a mutual fund is replaced with a fixed annuity. Regulators are also reacting to lawsuits filed against insurers and producers, and investigating whether there is a security law violation. Index annuity producers can come under scrutiny even if they are doing everything right. However, it is my opinion that doing certain activities puts a target on the producer’s back and encourages scrutiny.

Using Any Senior Designation
The U.S. Senate hearing brought this to the forefront and regulators are on the lookout. If you still display or use any designation implying expertise with retirees you may get nailed.

Not Keeping Your B/D Informed
If you are associated with a broker/dealer assume that your broker/dealer needs to see and approve every insurance company product you use and every scrap of material you present to the public. 

Becoming A RIA For The Wrong Reason
I have had several producers tell me they are becoming registered investment advisors to avoid needing B/D approve on what they sell and to lessen compliance hassles. A RIA is subject to not only meeting all security regulations, just like a registered representative, but they are also held to fiduciary standards. What’s the difference? A registered representative or annuity producer probably won’t go to prison for financially damaging a consumer with an unsuitable product, a RIA could.

Selling Allianz Index Annuities, Particularly MasterDex 10
When I talk to security regulators, financial reporters and trial lawyers and ask them why they badmouth index annuities more than a couple have told me it is because index annuities require you to annuitize to get your money, and then mention Allianz. I realize that three carriers offer two-tier annuities, but Allianz has 99.9% of these sales and Allianz is the name I hear most often from these people. During my interview with Director Borg I asked if he thought a lot of index annuity problems would be eliminated if you got rid of products that did not require annuitization and also paid full account value at death. He responded, “I think that’s correct. I’m not against index annuities, I think they could be improved, but MasterDex 10 is one of the worse ones”.

Holding Seminars
If you hold a seminar there could be a spy in the audience. What the spy is looking for is unsupported annuity return claims, unsupported “facts” that slam banks and investments, and advice that one should move from securities to fixed annuities. The last one will get you in trouble if you are not a RIA, the first two will get you in trouble even if you are.

The attention from security regulators will not go away because there are repeated instances of annuity producers misrepresenting both their qualifications, and the features and limitations of the fixed annuity sold. I am not saying it is bad to have designations, do seminars, sell Allianz, or become a RIA. I am saying it appears a producer enhances scrutiny by doing certain activities that regulators seem to have aimed at.

The Washington Senior Series (10/07)  
On 5 September the
U.S. Senate Special Committee on Aging held a hearing regarding “Advising Seniors About Their Money: Who Is Qualified - and Who Is Not?” Although the intent was to see whether some financial industry designations might be confusing to seniors, the attack was strongly against Allianz, and to a lesser extent against annuity agents, and the Certified Senior Advisor designation (Senator Gordon Smith of the committee said his staffer reviewed the CSA course materials in an hour, finished the 3 hour test in an hour and a half, and received a passing score of 82%, and still was not competent to advise seniors).On 10 September the second annual SEC Senior Summit was held with the purpose of protecting older Americans from abusive sales practices and investment fraud. The participants included several SEC officials, five state security regulators, five FINRA folks, five AARP marketers, and not one insurance commissioner.
The following are some observations about the two events.

Senate Hearing
It appeared Massachusetts Secretary Galvin’s comments were largely directed against insurance agents that gave the perception that they were qualified investment advisors, when in Galvin’s opinion they were not. He also picked on the National Ethics Bureau as being essentially a meaningless marketing gimmick. Nicolas Nicolette, President of the Financial Planning Association seemed to say that unless you were a CFP you were unqualified to offer any type of advice on anything.
NASAA President Joe Borg pointedly said “Often, the salesman recommends liquidating securities positions and using the proceeds to purchase indexed or variable annuity products that the specialist offers.” “If the salesman is not properly licensed, then he or she is offering investment advice as an unregistered investment adviser, which is yet another violation of state securities law.” He then talked of the evils of gourmet free-lunches, and cited cases of senior fraud from other states (none involved annuities). Minnesota Attorney General Lori Swanson opened with a misquote about “robbing banks because that’s where the money is” and then repeated the five year old Wall Street Journal story on the Annuity University sales teachings. She cited several recent cases whereby seniors had been convinced to place most of their net worth into long surrender period annuities. NAIC President-elect Sandy Praeger said NAIC was concerned about seniors, which is why they passed the Suitability Model Act a few years ago.

Allianz president and CEO, Gary Bhojwani, said they were concerned about seniors and were doing three things:

1. Developing a list of approved designations agents may use.

2. Their Home Office is now calling all purchasers over age 75 to see if they understand the product purchased, and if not Allianz will provide refunds.

3. Allianz will appoint a Chief Suitability Officer

Borg engaged in a bit of hyperbole saying “half of the time the agents don’t understand the product”, but accurately, and devastatingly, described how Allianz MasterDex 10 worked. Swanson bluntly said Allianz misrepresented the product. My take on the hearing is:

  • NAIC looked ineffective, the SEC doesn’t really have a position, but state security departments will step up their effort to go after agents that advocate selling securities to buy fixed annuities, especially if the agent is damning securities in a public forum.

  • The CSA designation is dead (as well as any other designation with “senior” in its name). 

Senior Summit
For the 2007 Senior Summit the SEC generated a 46 page report on prospecting for retirees using investment lunches (with quotations around “free lunch” in the report title).
In a 14 month period operatives from SEC, FINRA, and state security offices went to 110 lunch seminars. Their findings that hit me hardest were:

  • 57% of the presentations contained information that they believed was misleading, exaggerated, or included unwarranted claims.

  • 13% contained serious misrepresentations including the sale of fictitious securities (altho only one seminar presenter really said fixed annuities were guaranteed by the federal government).

  • Only 4% of all seminars appeared to be fully compliant (it does appear that 22% of the B/D firms involved were not reprimanded).

It should be pointed out that the products or services offered in these lunch talks are varied and include variable annuities, mutual funds, municipal bonds, reverse mortgages, limited partnerships, REITs, and index annuities. I personally thought some of the report was a little shrill. It says most of the lunches target seniors, okay, but it highlights the fact that mailers featured photographs of “happy and attractive seniors”. And I wasn’t as concerned as the report writers seem to be that some seniors may not realize that the seminars are designed to sell something. Indeed, three of the five mailers that appeared to be talking about index annuities specifically say the presentation will talk about annuities, and I have yet to talk with a seminar goer that didn’t expect some type of sales pitch to be made in payment for the free lunch.

The report made a point of saying “In one examination, an investment adviser had recommended that senior investors obtain mortgages or refinance their order to purchase equity-indexed universal life insurance (EIUL) policies. This investment strategy speculated that the rate of return earned on the EIUL policy would exceed the cost of the new mortgage on the client’s home. Dozens of senior investors followed this advice and effectively mortgaged 100% of the value of their homes. This type of investment strategy may not have been suitable... because if the market index failed to perform, the policy provided a low return, and the client remained responsible for the annual mortgage cost and insurance premiums .”

Why should an insurance agent care about what security regulators say?

If an agent only holds an insurance license and only does fixed annuity seminars should they be concerned about this new scrutiny? After all, the regulators state that only firms and representatives selling or advising the purchase or sale of securities are affected by their actions. The answer is probably no if all the agent is talking about are the benefits of owning a fixed annuity. However, if the agent is suggesting that a senior might want to replace a security with a fixed annuity the regulators have been arguing that this is investment advice and falls under their jurisdiction. Other opinions:

If you are with a B/D the B/D will want to approve both your fixed annuity seminar mailers and seminar scripts.

  • Keep the “senior, elder, oldster” designations confined to your den.

  • Always suspect that your next luncheon seminar will include a spy and act accordingly. 

Crossing The Line (10/07)
Many years ago when I first entered the financial business there were a group of stockbrokers that wanted to do more than simply sell stocks, bonds, and mutual funds to their customers, and instead wanted to help them plan their financial future. The financial planning concept began to take root because many people wanted someone to advise them on putting the financial pieces together. To handle the additional responsibility of acting as an advisor, and not merely a salesperson, these planners took additional training and testing, and their client base grew. My fellow stockbrokers noticed that planners were making money and would discuss the merits of acting like financial advisors instead of brokers. I would bring up the point that the advisor angle had a downside and that was one would be held to a higher standard.

Security Salespeople
As stockbrokers we were primarily considered salespeople by regulators, meaning a suitable investment was defined as one where the customer’s check cleared. Now, you couldn’t outright lie, and you’d get in trouble if you starting selling gold mine stocks to widows, but the attitude was that consumers should accept a bit of “lily gilding” by stockbrokers because, after all, they are salespeople.

The attraction of greater commissions caused a bunch of stockbrokers to hold themselves out as financial planners, but they were still acting, trained and selling as stockbrokers. Unfortunately, consumers couldn’t always tell the difference between legitimate and illegitimate advisors and many suffered for it. The result was security regulators did two things: they raised the standards for stockbrokers requiring greater disclosure, more training, and put the onus on the broker/dealer to ensure all investments were suitable. Second, the regulators said if you were going to hold yourself out as a general financial expert you needed the training and regulatory credentials to act as one. These two steps didn’t eliminate the problem, but it did result in more bad apples being punished for pretending to be investment advisors.

Annuity Salespeople
It seems that many consumers have a misperception about what a fixed annuity does; many appear to assume that an annuity can only be used to produce an income for life with the consumer losing all access to their principal.
Although a fixed annuity may be used in a number of ways this narrow perception of what an annuity is limits the number of consumers that think they may benefit from one. So, when the agent is perceived as being an annuity salesperson the consumer often tunes out.

There were a couple of ways to deal with this misperception. The first would have been for the industry to educate consumers on what a fixed annuity could do for them, the benefits it would provide, and therefore change the perception of the consumer so that when they heard the phrase “annuity agent” they would think “flexible safe money instrument offered by an annuity professional” instead of the old narrow misperception. The second way to get thru to the consumer would be to disguise the fact that annuities were being sold. The industry chose the second way.

Euphemisms are an accepted part of our world. We don’t say that Uncle Fred dropped dead; we say he passed away or crossed over. In real estate a “sunny homestead” is a nicer way of saying there are no shade trees on the lawn. And I talk about fixed annuities as being a safe money place. Regulators I have talked with did not seem to have a problem with agents saying they offered tax-advantaged interest earning financial vehicles that are protected from market loss, and even permitted some puffery, because, after all, annuity producers are agents for the insurance company that pays them a commission on the sale of the annuity, and are not expected to act as impartial fiduciaries. But then a line was crossed.

To enhance their understanding of seniors some agents took courses that gave them a better understanding of the needs of seniors, and usually the course provided some designation showing completion. However, some agents represented the designation as proof that they were qualified to solve all of a retiree’s financial problems, even tho the agents were still licensed and acting as annuity salespeople. Some agents honestly dislike the risk of stock market investments and some agents honestly believe that fixed annuities are a better place than banks for a retiree’s money. However, instead of presenting these opinions as opinions to consumers the agents instead represented themselves as impartial trained financial advisors, even tho the agents were still licensed and acting as annuity salespeople.

Once again regulators are faced with a situation wherein consumers can not tell which one is the legitimate trained advisor and which is the salesperson, and so the regulators are attempting to punish those that pretend to be investment advisors. There is a problem and it is currently causing a great deal of finger-pointing and yelling on all sides that really is not accomplishing anything. But I believe some things can be done to help consumers, regulators and annuity producers address the issues.

Define & Defend Fixed Annuities – The industry needs to broaden the consumer perception of what a fixed annuity is and what it can do. This means courting the various financial writers that are getting all of their annuity education from stockbrokers and telling the annuity industry side. This means creating consumer educational resources on fixed annuities (look at the Investor Education Resources section of the Investment Company Institute web site for inspiration). It also means insurance regulators need to speak up when a security regulator says something inaccurate and to correct their counterpart’s views.

Create A Safe Harbor For Annuity Advice – The agent can hold seminars on the good points of annuities, buy seniors lunch and thrill them with the magic of tax deferral, and all of this falls under the auspices of the insurance license. Security regulators are prosecuting annuity producers for stepping over the line and acting as investment advisors, but the regulators will not tell the producers where the line is. The security and insurance regulators need to define when the line is crossed. When does fixed annuity advice and free speech become investment advice?

Get Rid Of Bad Apples – I have read far too many regulatory complaints and lawsuits where the agent involved was convicted of other bad behavior in the past, and yet the agent still has an insurance license, still found a marketing company to work with, and still found an insurance carrier to secure an appointment. Whenever I bring this up the parties involved point their fingers at the others for not acting; however, there is nothing to stop a marketing company or carrier from refusing to work with an agent. Bad agents are not a protected class.

The lines between financial professionals will continue to be redrawn and the bar in the insurance industry for getting and keeping an insurance license will be raised, just as both stockbrokers and advisors are held to higher standards than they were in the past. The bottom line is the consumer will be aided by more experienced and better trained professionals and all will benefit.

Bushwhacked By The Commonwealth Cowboy (1/07)
Before we even get started it needs to be made very clear that Massachusetts Secretary William Galvin appears to have a personal problem with fixed annuities. In March of 2005 he released a 4 page missive targeted against banks that sold annuities that stated “If you are over age 65 annuities are probably not for you”.
In November 2005 Galvin filed a complaint against Investors Capital Corporation ostensively for acting as unregistered investment advisors, but the real target appears to be providers of fixed indexed annuities.ICC accepted a consent decree in December 2006 in which they agreed to pay a $500,000 fine and provide a refund of principal plus 3% interest to all customers over age 75 that had purchased index annuities in 2004 and 2005. Does the decree mean ICC registered representatives were guilty of acting as unregistered investment advisors and selling unsuitable index annuities to Massachusetts residents? Perhaps not.

A Fishing Trip
Galvin did identify a handful of registered representatives that he alleges acted as unregistered investment advisors when they were selling index annuities. Did Massachusetts find evidence that the index annuities purchased were in any way unsuitable for the customers? It does not appear so. However, the decree does state that  “over the course of [this] proceeding...the Division became aware of document retention failures”. Is it possible that Massachusetts used the complaint to go on a fishing trip hoping to find unconnected security-related issues that would force ICC to consent and thus further any departmental agenda of attacking fixed annuity providers? Remember that Martha Stewart didn’t go to prison for insider trading.

It also needs to be clear that even though the consent decree requires ICC to refund premium plus interest to index annuity buyers over age 75 it does not say that any customers were damaged by the index annuities – the insurance companies were not required to make this offer, only ICC, nor does it at anytime say index annuities are anything but fixed annuities. The alleged violations are all about bad supervision of security firm people, books and records; the authority for the consent decree is derived by saying some representatives acted as unregistered investment advisors, not that fixed index annuities are not fixed annuities. 

What does this mean? If you sell fixed annuities in Massachusetts you might want to consider relocating. If you are using professional designations in Massachusetts – and you are not a Registered Investment Advisor – you have a target on your back. If Galvin got his victory not because he was able to support his original allegations but because his department found unrelated dirt that could be used to browbeat the victim into submission, then anyone selling fixed annuities in the Commonwealth could find their lives open to the same scrutiny as ICC.

It’s Not About Investment Advice
If the context of all this had to do with what constitutes investment advice then it could serve to open a dialogue about what is advice. SEC does not precisely define what constitutes investment advice and this is a question that needs clarification. However, in this case it looks like Galvin is simply continuing his attack on fixed annuities. In the Massachusetts Press Release he says, “these products (fixed annuities) carry a substantial risk of loss if customers access their funds during the surrender period, something an older investor is quite likely to do”. However, he gives no support for any of his conclusions, and in fact general annuity realities contradict him. The most unfortunate result of all this is that the securities people and reporters that already hate index annuities will not read the consent decree and may simply spread Galvin’s slander without taking the time to understand that index annuities were not found to be in the wrong nor were they in any way found to be securities.

Investment Advice, Advisors & Agent Attacks
I’ve reviewed the security statutes of several states and many specifically state that a "Security" does not include any annuity contract under which an insurance company promises to pay a fixed or variable sum of money, or both, either in a lump sum or periodically for life or some other specified period. This should make it quite clear that annuity sales do not fall under securities jurisdiction. The issue being forced is in how the sale was obtained. I am hearing a few state security departments are going after index annuity producers by using the “unregistered investment advisor” backdoor approach.

The general understanding for years has been that an investment advisor was a person that received fees for advice. Indeed, the usual regulatory rule states an investment advisor receives compensation for advising others of the "advisability of investing in, purchasing or selling securities". But today it appears that some security minions are going after fixed annuity agents by saying if they mention securities during their fixed annuity presentation that the agents are talking about "advisability" and since the fixed annuity pays a commission that the agent is being compensated.

Unfortunately, most state regulations are very vague in defining investment advice and what is an investment advisor, probably because the SEC has not well defined it. A strong argument could be made that telling a consumer that you can handle their investment needs, analyze their portfolio, and then select the appropriate mutual funds, bonds and stocks, all for a 2% asset-based fee, is acting as an investment advisor. However, if a consumer buys an insurance agent a cup of coffee and says "The stock market sure looks uncertain today" and the agent nods yes or no, an aggressive security department could say the insurance agent was providing investment advice for compensation.

I am talking to insurance regulators because this issue is not going away, but the problem is the security departments are not saying index annuities are securities and they should regulate them instead of the insurance departments, they are saying the agents are not acting like agents but like investment advisors, which falls upon security turf. The only permanent solution is for the SEC to redefine what investment advice is, or for a federal court to uphold the right of free speech for agents. In the meantime producers need to watch what they say and provide balance in their fixed annuity presentations.

Insurance Regulatory History (10/06)
Once again in Congress there is movement to add a federal aspect to insurance regulation. Last summer
John Sununu (R-N.H.) and Timothy Johnson (D-S.D.) returned attention to the possibility of a federal charter for insurance carriers. The major reasons stated for wanting to change the current regulatory model are that there is too much regulatory duplication on the state side
resulting in millions of wasted dollars and man-hours for carriers – money that could be returned to consumers, and too often the state insurance department is used for personal political agendas; views that are strongly contested by the states. Since the banking and securities industries are substantially controlled by the Feds, how did the states manage to retain control of the third leg of the triumvirate?

Massachusetts had the 1st Insurance Dept 

The first state laws designed to regulate insurance were passed by Massachusetts in 1799, and in 1852 Massachusetts created the first insurance department. Due to a history of insurance company failures during the various panics of the early 19th century there was a call for federal regulation of insurance, but Congress failed to act. The issue was forced in an 1868 case, Paul v Virginia, in which Paul argued that insurance was interstate commerce and fell under the commerce clause of the Constitution. However, the Supreme Court disagreed and left insurance regulation at the state level 

The states realized that coordination between the states was needed, and so on 24 May 1871 the first meeting of the National Convention of Insurance Commissioners was held. In 1936 the name was changed to the National Association of Insurance Commissioners (NAIC).
The Depression resulted in increased federal oversight of financial markets. The FDIC was formed, the Securities & Exchange Commission was created, and many other rules were imposed adding a distinct federal nature to the economy.

In 1944 the Supreme Court once again heard a case, U.S. v South-Eastern Underwriters Association, asking for federal oversight of insurance, and this time the court agreed saying insurance regulation was a federal matter. However, before the decision could be implemented Congress passed the McCarran-Ferguson Act – in one of the last hurrahs for state’s rights – that left insurance regulation in the hands of the states, and this is where it sits today. The voluntary nature of the NAIC changed. The first paid NAIC staff members were hired in 1947 and given an annual budget of $25,000. Offices moved from Raleigh to Chicago to Milwaukee, until finally moving to Kansas City in 1984.

Solvency & Rates
An ongoing state concern was carrier solvency. Thirty (primarily) property & casualty carriers went out of business in the mid 1800s usually due to simple incompetence and theft. But the industry’s tone didn’t improve even though they told the states they were getting better. A broad look by the Armstrong Committee in 1905 found an industry rife with misconduct, kickbacks, high officer salaries, and collusion on setting premium rates. The result was a focus by state regulators on both the finances of carriers and an attempt to determine that the rates charged were “fair”.

In 1941 NY created the first life insurance guarantee association; no one followed for 30 years. Why was there state opposition to guaranty plans? Some felt a guarantee plan rewarded incompetent management – well-run carriers would pay for the mistakes of the bad ones. Others felt regulators would be less thorough in examining the books of carriers if they knew policyholders would always be protected. By 1983 only 35 states had life/health guaranty funds. Then came the failure of Ballwin-United putting 300,000 policyholders at risk, and when it became apparent Executive Life was going to crash California finally created their own guaranty fund in 1990. By 1992 all states had guaranty funds.

In 1983 the state guaranty associations founded the National Organization of Life and Health Insurance Guaranty Associations . If the insolvency affects three or more states NOHLGA coordinates the development of a plan to protect policyholders. NOHLGA states "every holder of a covered life insurance, annuity, or non-cancelable health insurance policy who has made the required premium payments has been given the opportunity to have the policy assumed by another healthy carrier or had the covered portions of their policies fulfilled by their guaranty association itself" 

Market Conduct
A rapidly changing economic picture and the introduction of new life and annuity products created problems. A switch in the ‘80s from traditional cash value life policies to ones with vanishing premiums led to many claims of misrepresentation and the beginning of market conduct examinations. Viatical sale abuses led to action by both security and insurance regulators. Concerns over sales practices to retirees prompted the NAIC to draft Senior Suitability Model regulations.

Both state and federal advocates agree that the current regulatory model needs to change. Insurers need to be able to price based on policy economics and unhindered by price controls, but regulators need to determine that all consumers are treated fairly. Needless duplication of forms, filings, materials and inspections must end. Disclosure, supervision of agents, training all need to be stepped up to cope with the ever-increasing tempo of new products and new solutions. The states are making progress, but only time will tell whether this progress is sufficient to avoid a federal takeover. 

Baranoff & Baranoff (2003), Trends in insurance regulation, Review of Business, Fall, 24, 3; pg 11

Kimball & Parrett (2000), Creation of the guaranty association system, Journal of Insurance Regulation, Winter, 19, 2; pg. 259-272

Eric C. Nordman (2000), The Early History of the NAIC, Journal of Insurance Regulation, Winter, 19, 2; pg. 164-178

MOs Are Feeling Effects Of NASD 05-50 (10/06)
Last November I wrote “Marketing Organizations (MOs) deriving a significant portion of their revenues from index annuity sales could conceivable see their revenues fall by a third to half”. A short-term reason for my dire prediction was that CD rates were rising and fixed annuity sales suffer when CD rates get to the 5% range, but the major reason for my gloom was the two-headed regulatory environment advance.

There was a small but growing trend for state insurance departments to adopt a desk-drawer rule calling for fixed annuity surrender charges to have a maximum length of 10 years and a maximum first year surrender charge of 10%. Although commissions were not specifically addressed a carrier would be hard pressed to pay out a 12% commission when the maximum that could be recaptured from a surrendered policy would be 10%. The net effect of “10-10” was to drop agent commissions and the overrides paid to MOs in the affected states.

The other head of this Hydra was the NASD Notice 05-50. Ignoring the legal and ethical issues of the notice the NASD action affected the 55% of producers selling index annuities that were affiliated with broker/dealers (percentage according to an Advantage Compendium survey) because it interjected a third party, the B/D, into the MO-producer relationship.When I spoke of all this to MOs last year many were dismissive. The “10-10” states were then few in number. And they felt either that their producers were not affiliated with B/Ds or that the producer’s loyalty to the MO would prevail. In any event, I was often told the carrier would protect the producer-MO relationship and that the carrier would not jump ship to sail off with the B/D, leaving the MO marooned. 

When Notice 05-50 was proclaimed some MOs were very proactive and began talking to B/Ds about being approved to provide support for index annuity producers, these MOs struck up relationships that sometimes resulted in their being the exclusive MO permitted between the producer and the carrier. Some broker/dealers told carriers they did not want a MO between their B/D and the producer. And some B/Ds decided not to allow index annuities sales, which meant reps with occasional index annuity sales simply quit selling them. 

An After 05-50 MO List

  1.  Find out which of your top 100 producers are securities registered  and for the ones that are, get the name of their B/D.

  2.  Determine whether your producers use certain B/Ds more than others and try to build a relationship with those B/Ds.

  3.  Remember the major concern of the B/D is not commissions and it’s not training, it is compliance. You need to show that your involvement reduces market conduct concerns.

  4.  Reduce expenses. Overrides are not going to be going up.


What is the result? MOs have lost producers – and their override – to the producer’s B/D or the B/D’s chosen MO. And on top of losing producers, several B/Ds I’ve spoken with have made the state 10-10 guidelines a part of their index annuity approval process. So, even when an MO preserves a B/D relationship the producer may be limited to lower commission products with lower overrides. The problem will not go away. Unless the SEC specifically says all index annuities are not securities the B/Ds can still use NASD 05-50 to justify their role with the producer, and it will be the B/D that chooses the marketing company the producer uses. In addition, the general product trend is toward shorter surrender periods with lower commissions. The business model for MOs has irrevocably changed.

NASAA “Trash Talk” (9/06)   
On 17 July Patricia D. Struck, President of the North American Securities Administrators Assoc. (NASAA) said at the SEC Seniors Summit  “Cases involving variable or equity-indexed annuities represented an estimated 65 percent of the caseload in Massachusetts, and 60 percent of the caseload in Hawaii and Mississippi.”
This statement sounds like there is an avalanche of index annuity complaints. However, according to the NAIC database for 2005, there were a total of 8 closed index annuity complaints in Hawaii and 14 in Massachusetts. Mississippi had a significant 39 complaints, but 17 of these were from one company going through reorganization and did not appear to be sales conduct related (I also asked the state security departments and NASAA for data supporting their statement, but my requests went unanswered). 

Including index annuities in her statement appears designed to cause guilt by association and is intellectually dishonest. To use an example, it would be like saying “90% of association members have been convicted of drunk driving or parking violations”. Now my hypothetical data may show that only one member ever had a DWI and all the rest were merely ticketed for lapsed parking meters, but the inference is obvious. Struck also appears to have cherry-picked her examples. The reality is the NAIC shows there were 104 total closed index annuity complaints in 2005 for the whole country, if you subtract complaints for Massachusetts, Mississippi and Hawaii that works out to a little over 1 complaint each for the rest of the states. 

Struck goes onto say “Con artists use the promise of high commissions to lure brokers, insurance agents, ...some of them not licensed to sell securities, into offering investments they may know little about, such as variable or equity-indexed annuities, bogus limited partnerships or promissory notes.” This is an interesting attack on many levels. First is the suggestion that you need a security license to sell an index annuity, even though the federal courts ruled that index annuities are not securities. Second, she implies high commissions even though the average agent commission paid on the universe of index annuity products is 7%. Third, she again attempts to create guilt by association by lumping annuities in with “bogus limited partnerships”. Finally, who offers these products? Her answer is “con artists”. Since the only entities authorized to issue annuities are state regulated insurance companies, it becomes very obvious that she is saying all employees of insurance companies are con artists.

Her partisanship is appalling. Should retirees work with bankers, insurance agents, attorneys or accountants? Apparently not, Struck says “senior investors should make sure they deal only with individuals, licensed by state securities regulator.” What if a fixed annuity is all the retiree wants? Struck admits annuities are legitimate for some, “but they are unsuitable for many retirees”. However, she does nor support this contention in any fashion. Struck does say “Let me be clear. Our concerns with variable and equity index annuities are not about the products.” However, when you have spent an entire speech saying annuities are sold by bad people and are unsuitable for many consumers, you are trash talking the products.

There is a problem. There are many slime-balls out there preying on retirees. However, the answer is not to strongly imply that everyone selling an annuity is one. I occasionally get emails and calls from fixed annuity consumers that feel they have been wronged, and my answer is always to contact the carrier and their state insurance department and complain. State insurance departments regulate fixed annuities and they go after violators of state rules. The solution is for states and carriers to work together in getting the bad apples out the orchard, it is not to chop down all the trees or try to move the trees to a different orchard.

NASD Intensifies Power Grab (6/06)
Chairman Robert Glauber has the NASD Spin & Distortion Machine in high gear as he continues his crusade to have NASD regulate all insurance products. At the Florida NASD Spring Conference on 19 May Chairman Glauber compared fixed index annuities to structured debt instruments and implied index annuities were “a Rube Goldberg device.

The Minnesota Department of Commerce asked NASD to be part of a roundtable held in DC on 5 May to talk about index annuities. Although the people I spoke with felt the message that index annuities were fixed annuities and should continue to be regulated by state insurance departments came across loud and clear, Chairman Glauber spun it this way, “I think I can safely say that every one of them [roundtable participants] agreed that the regulatory schemes for the “three” annuity types ought to be distilled down to one.” Glauber didn’t say which “one” should end up with all the regulatory turf. The real problem is not NASD taking authority away from the state insurance commissions all financial products need to be regulated by someone  the problem is NASD uses a broken regulatory model that does nothing to protect the public, but simply feeds the power needs of its administrators.  

NASD Fixed Annuity Regulatory Power Grab Based On One Case
An Advantage Compendium review of the 1,415 cases listing
individuals fined, barred or suspended from the NASD in 2004 and 2005 Notices to Members, as well as an analysis of the 214 NASD initiated complaints for the same period, found only one case alleging inappropriate suitability wherein a fixed annuity was recommended to replace a security (NASD Case #C11040048). It appears that NASD concerns of possible sales practice abuses in the use of index annuities are not supported by their own records, and NASD public comments that they need to regulate all fixed annuity sales to protect consumers have no basis in fact. It should be noted the NASD did manage to collect $12,500 in fines from representatives that were selling fixed annuities and had not given their B/D written notice of their activity.

Annuity Regulatory Changes In The Wind (4/06)
he meeting on 5 March in Orlando began with NAIC Life Insurance and Annuities “A” Committee dropping the word “senior” from The Senior Protection in Annuity Transactions Model Regulation. The new
Suitability in Annuity Transactions Model Regulation is designed to cover all annuity consumers and not just those over age 65. The session went on to include a presentation from the Iowa Insurance Division stating that NAIC must act now on a number of annuity issues including requiring additional index annuity training, more accountability on what constitutes a suitable replacement, tighter advertising guidelines, and greater oversight of index annuities. Who is behind this push for greater regulation? The major index annuity carriers are the ones asking the states for more rules.

Much Smoke, Little Fire
The desire for greater state insurance department index annuity regulation is not due to a flood of consumer complaints. I have tracked index annuity complaints in the NAIC database and there are far fewer complaints, by any measure you wish to use, than for other annuity and insurance products. And although there were a number of lawsuits filed in the last eighteen months that mentioned index annuities, not one of the suits allege that the index annuity did not perform as expected or that the concept is bad for the consumer. The push behind greater state insurance regulation is to deter the power grab for regulatory turf by NASD.

NASD Turf War
NASD does little to disguise their goal of becoming the one regulatory authority for all financial products. Although out of one side of their mouth NASD will say they have no desire to regulate fixed products, as recently as 23 March NASD Chairman Glauber said, “The three annuity types [meaning VA, index and fixed] are really three versions of the same product” and went on to imply NASD regulated disclosure and protection were better for consumers. Glauber deliberately ignored the fact that there are only two types of annuities – fixed and variable – and that index annuities materials provide significant disclosure to consumers as well as greater protection than NASD regulated investments. Continuing with the pattern of doubletalk, in a speech only six days later to the Senate Committee on Aging NASD Executive Vice President Elisse Walter told the committee NASD is urging broker/dealers to treat fixed
insurance products as security products.

“The three annuity types are really three versions of the same product” - NASD Chairman Glauber

NASD responded to a Minnesota Department initiative and will hold an annuity roundtable on 5 May in Washington to discuss suitability and regulatory concerns. However, the participants in the roundtable appear to be strongly tilted towards variable annuity, investment firms and security regulators, all of whom may feel they have lost revenues due to index annuity sales and may not provide an unbiased perspective. I am afraid the roundtable may reenact a version of the Revolutionary Tribunal with only the guillotine missing for those supporting index annuities.

NASD Continues Fixed Annuity Attacks
On 29 March before the Senate Committee on Aging Elisse Walter, NASD Executive Vice President testified “NASD is particularly concerned about possible sales practice abuses in the distribution [of] equity indexed annuities.” NASD has toned down past rhetoric alleging most index annuities are securities. Indeed, Walter said “most sales of [indexed annuities] are treated as insurance sales”, but she then goes on to add that they are urging B/Ds to treat fixed insurance products as security products, even though NASD admits that neither NASD nor the broker/dealers have authority to do so. 

In an attempt to justify this intrusion into a regulatory world in which they have no authority, Walter said NASD “recently commenced a sweep focusing on the suitability of recommendations to exchange, withdraw funds or take other distributions from variable insurance products in order to fund investments in equity indexed annuities.” It would appear NASD is doing all it can to gain complete regulatory control of fixed annuities by saying if the consumer decides a fixed annuity better suits them than an investment already owned, that the producer must show the consumer had the right to not choose an NASD regulated product.

Iowa Leads The Way
The Iowa Insurance Division is leading the movement to improve the index annuity world, and it begins with the name. Iowa would drop the term "equity-indexed annuity" and require the phrase "fixed index annuity" to be used in all advertising and marketing materials. In addition, four hours of index annuity specific training will be required before a producer may begin, or continue to sell, index annuities. Iowa is also working to establish a regulator education program to train state departments on the workings of the products, and is working with IMSA to explore developing sales and marketing standards for index products.
A specific area of concern is index annuity exchanges. NASD recently commenced a dragnet focusing on cases in which a variable annuity was exchanged for an index annuity, and then deciding whether the decision to use an index annuity was suitable. I am also hearing state regulators question whether it is in the consumer’s best interest to exchange one annuity for another annuity paying a premium bonus, if the first annuity still has surrender charges. Both producers and carriers will need to go to greater lengths to prove suitability and adequate disclosure when transfers are involved. The regulatory world for the annuity producer will change in the near future with greater required training, more disclosure, agent fingerprints on file, and more rascals will be thrown out for good. The only real question is whether it will be an insurance department or NASD world.

A Series 6 Does Not Qualify You To Sell Index Annuities (2/06)
here are those folks that have said one should have Series 6 securities registration before you can sell index annuities. They say the Series 6 prepares producers with education on suitability, financial theory and how the indices work. But what does passing a Series 6 exam really teach you? I reviewed four different training manuals designed to teach one how to pass the Series 6 exam. Here’s what I found.

On providing a broad overview on the economic factors affecting all investing, the typical course had two paragraphs on what the Gross Domestic Product is, 12 lines describing the business cycles that create bull and bear markets, and 115 words on inflation. All told, a one-page article on economics in any issue of Business Week probably provides more depth than all of the economic knowledge needed to pass the Series 6. 

What about providing a foundation for understanding the indices linked to the index annuity? In the main text there were only 11 words, “a S&P 500 index fund’s performance tracks the underlying index’s performance”. However, if you went to the Glossary in the back of the study materials you find a more in-depth explanation:

Index – A comparison of current prices to some baseline, such as prices on a particular date. Indexes are frequently used in technical analysis.  

By contrast, there was more teaching on the topic of suitability, the average training text devoted six pages to the topic. However, there was a bit of a bias on what was defined as “suitable”. I looked at three different practice final tests designed to prepare the student for what they will find on the actual Series 6 exam. The first practice test had 6 questions out of a hundred on the topic of suitability, the second had 9 questions, and the third again had 6 questions out of a hundred that related to suitability. However, in anywhere from a third to half of these questions that asked what was suitable, the only available answers were mutual funds.  

The only mention of fixed annuities in any of the study books was “annuities and bank CDs are considered illiquid”. What is suitable if a client’s objective is preservation of capital and safety? The books say to buy government securities and Ginnie Mae backed investments. The training manuals do discuss asking about a customer’s age, employment and risk tolerance – but they never suggest to ask whether the customer has adequate life, health or disability insurance. The bottom line is passing a Series 6 test in no way, shape, or form prepares you to sell index annuities. But neither does passing a state life insurance exam.

I also reviewed two training manuals designed to help you pass your life insurance/annuity state examination. I believe I counted two questions on each courses’ sample tests that related to index annuities. A life insurance license does not qualify you to sell index annuities either. In point of fact, the passing of mandated testing in any area does not create immediate competence. A newly licensed doctor, lawyer or insurance agent may have met the minimal requirements to practice, but I would not want my gallbladder removed, to be defended in court, or have a buy-sell agreement funded by any of these neophytes. The difference in any profession between proficient and barely competent is additional training. Instead of requiring the passage of a specific state test on index annuities before folks can sell the products, state insurance departments should mandate that producers must demonstrate adequate knowledge of  fixed index products before they may sell a carrier’s products. This “attainment of adequacy” could be accomplished by ensuring producers take additional coursework or classes in index annuities and the burden will be placed on the carrier to ensure that producers have successfully completed the training.

A Series 6 does not qualify you to present index annuities, but neither does a life license. Training, not exams, creates proficiency.

A Broken Model: Regulating Annuity Producers (1/06)
Up until roughly a quarter century ago most annuity distribution by insurance companies was a more supervised process. The producer was recruited and trained by the insurance company, or by a local general agency, and the branch manager or general agent worked directly with the producer teaching not only how the annuity products worked and how to sell them, but imparting the culture of the insurance company and the consumer-oriented values of the insurance industry. The available annuity products were all essentially the same and were all designed to meet the same consumer goal – to provide a long-term saving vehicle that could be converted into a guaranteed income. It was a stable and supervised environment.  

However, paying for offices and overhead was expensive. Insurance companies and the general agencies began cutting loose these more tightly supervised agents and gave them more money and more freedom, but less structure. A new type of industry structure arose to provide the training and support no longer offered by the carrier, and this was the marketing company. Marketing Companies act as a “super-sized agency” with thousands of agents and are between the insurer and agent in the supervisory chain. They, at least in theory, provide training and supervision with the authority to hire and fire agents for the insurer (but a fired agent may usually go down the street to another marketing company and often get reappointed with the same insurer). Marketing Companies became the producers’ manager. However, whereas the insurance company branch manager is a product of the culture of the insurer and has a vested interest in the long-term performance and stability of a company for future paychecks and promotions, the Marketing Company is only loyal to the insurance company as long as the insurer continues to produce annuity products that can be sold today. In addition, there is very little loyalty between the Marketing Company and the agent. My surveys indicate a typical agent is affiliated with three to four marketing companies at all times. What this has resulted in is a system whereby the producer is not exposed to the culture of the insurer and the reinforcement of insurer values does not happen.

The producer has complete control and decides how to do their job. This producer power isn’t necessarily a bad thing. After all, physicians and attorneys also have a great deal of freedom in the way they work with consumers. Indeed, physicians, attorneys and insurance agents all possess a certain standardization of skills and knowledge because they each need to pass state testing and all must receive continuing education to remain in the business. However, this is not the perfect system. Henry Mintzberg, an organizational guru, says this type of system  “cannot easily deal with professionals who are either incompetent or unconscientious”. 

The legal and medical professions have worked hard to address concerns relating to the incompetent or unconscientious. The barrier to entry for these jobs is stiff with advanced education and passage of difficult examinations required. In addition, there are review systems designed to keep out the ethically impaired. By contrast, the bar for entry into the annuity producer world is low. In the state of Missouri not even a high school diploma or GED is required to become an insurance agent, and you are not automatically disqualified from obtaining a license if you have a criminal record. After you are in your profession the medical community uses the system of peer review to keep standards high, and every state has an active attorney bar association to discipline the most egregious offenders. By contrast, about the only way an incompetent or morally impaired producer can lose their insurance license is by being caught in the act of stealing money. 

Under the current annuity distribution model there were roughly two-dozen lawsuits filed against index annuity producers last year alleging inappropriate sales practices. In 2004 there were 895 closed complaints filed against fixed annuity carriers. The NASD, a security regulator, has gone so far as to ask the Securities and Exchange Commission to make some of the fixed annuities unavailable to the average producer unless additional testing and training is completed. 

How do you solve the problem? The wrong approach is to use the broken model of the NASD. Every time an ethically-impaired stockbroker finds a new way to cheat the consumer the NASD writes a new rule to cover that particular situation. This has resulted in a regulatory body with thousands of rules and a regulatory body that defines how well it does its job by how many violations of the rules it finds and the amount of fines it collects, rather than whether the consumer is protected, which was the original purpose for the NASD. 

The NASD overburdens the honest 99% without stopping the bad 1% of reps

Instead of protecting the public, the NASD exists to satisfy their own rules. Unfortunately, most organizational academics would acknowledge that you cannot impose this type of system on a professional organization model because the writing of rules does not improve bad behavior, but simply transfers responsibility to the organization. All the NASD model does is burden the 99% of representatives that act correctly without dissuading the bad 1%. The NASD model has failed, and should not be used by the insurance industry.

I believe the main problem with the insurance model is primarily a cultural one. Under the old branch manager and general agency system producers learned the insurer’s value system and required behavior. Under the marketing company system the agent is not indoctrinated with the general concepts of acting as an agent and fiduciary, and the training focuses on selling skills. The culture the agent comes in contact with is a model that rewards short-term commission revenues and not long-term relationships.

Mintzberg says the only long-term solutions to the problems I mention are improving the professionals involved by tightening entrance requirements, and improving training both before they enter the field and on a continuing basis thereafter. I believe it will be a long, long time before states impose barriers to dissuade the incompetent or ethically impaired from remaining in the industry; however, the failure of the state to act should not preclude action by the insurer. I also believe the correct solution is raising the producer bar, but I am concerned that state regulators may not be satisfied with the slow progress of this solution and impose, in effect, the incorrect NASD style solution. Therefore the insurers need to take immediate action with a faster approach.

The insurer should establish minimal standards for accepting agents. This could include producer requirements showing evidence of additional initial and ongoing annuity training received that is conducted by a third party approved by the insurer, or the insurer could do its own training in an attempt to impart a cultural message. In addition, minimal standards of conduct would be required. Perhaps insurers could state that no felons will be accepted, or agents with more than three consumer complaints will not be appointed. 

The power of carrier compliance departments needs to increase. The compliance department would have formal power to approve all sales and public consumer materials related to annuities – even if their particular product is not named but might be used with a consumer as a result of the materials. Compliance also needs to investigate consumer complaints and recommend solutions, refuse new business if it may be of questionable quality – perhaps something similar to my “red flag” approach, and would have the authority to veto new agent appointments and terminate agents, subject to general managerial review and oversight.  

1. Higher Minimal Agent Hiring Standards

2. Greater Compliance Department Power

3. Peer Review Mechanism 

The industry needs to establish a peer review mechanism to weed out both bad producer and bad carriers; perhaps IMSA could be modified to become an effective part of this process. The choice is clear. Either the insurance industry begins today to steadily improve the professionalism of the producers, or it waits until the backlash from the actions of those few bad producers causes state insurance departments to impose a more draconion, bureaucratic, NASD-style solution.

Not Losing The Lawsuit (12/05)  
From my scratching around it appears roughly two dozen lawsuits involving index annuities have been filed against agents, marketing companies and carriers in the last year. However, none of these suits alleges that index annuities have failed to do their job, which is to protect principal and credited interest from market risk, and provide the potential for higher interest than you might get from the bank. I’ve been reading the suits. Not one has said “Because the plaintiff moved into this index annuity in 2000 and out of the mutual fund she was in, she avoided losing 65% of her money in 2001”. And I’ve not heard anyone complain that, “The plaintiff earned 24% in interest in the index annuity instead of the 9% he would have earned in the bank”. The real allegations are about abusive sales practices and all the talk about evil index annuities is just a smoke screen, but because lawsuits are generally not concerned with right or wrong or what is legal or illegal, but simply how much money you can get, it is useful to determine what might help you not lose a suit or avoid one in the first place. I will share some of the things I have learned from talking with attorneys on both sides.

Age Exceptions Always Lose
One Texas attorney told me whenever he has a client that was allowed to buy the annuity, and was over the carrier’s maximum issue age, he wins. The reason is the sale is automatically inappropriate by the carrier’s own rules. He says he has never lost an age exception case.

All Hypothetical Illustrations Are Dangerous
Another plaintiff’s attorney said he loves hypothetical illustrations for a lot of reason. One is they make the index annuity sound like a security and not a fixed annuity. Another is they usually are based on the rates in effect when the policy was sold and do a poor job of explaining that the hypothetical illustration is, at best, misleading because rates and caps and such and change dramatically. The plaintiff’s attorney encourages all producers to use hypothetical illustrations with their clients to make his job easier.

An attorney representing insurance carriers offered several specific positive suggestions:

(1) An insurer who markets FIAs should include in product brochures and field bulletins general cautionary language about the potential pitfalls of selling to seniors and the importance of strict compliance with applicable "senior protection" statutes in the various states.

(2) An insurer also should include in sales seminar presentations admonitions against "trust mill" sales tactics and any other sales techniques which might be viewed by regulators and plaintiffs' lawyers as "bait and switch" tactics. Producers who intend to recommend an annuity to a client must be "up front" and candid about their intentions.

(3) Sellers of FIAs should encourage seniors to consult with an accountant, tax advisor, attorney and/or family member prior to making the final decision to purchase an FIA. This encouragement should be documented and can be used to refute later allegations of duress or improper pressure at the point of sale.

(4) Marketers of FIAs should monitor the business and sales practices of the brokers and agents who are selling high volumes of product in the seniors market and should take aggressive action where abuses or improper sales practices are detected.

Another lawyer says he recommends that carriers do the following:  Require ongoing agent training; Avoid investment comparisons; Develop robust training guides; Use point of sales disclosures, And after the sale have someone from the carrier’s home office call to ask if the consumer understands the product. The legal climate will be getting even uglier next year with more lawsuits filed. One cannot avoid getting sued, but one can build a strong defense.

NASD Notice 05-50 (9/05)  
NASD Notice to Members 05-50 released in August is designed to provide guidance to member firms on supervising unregistered (“unregistered” is the NASD spin word for state insurance department regulated) index annuities. NASD does not have authority to say index annuities must be treated as securities and so this suggestion is not a mandate.
Indeed they state, “NASD is not taking a position on whether a particular EIA is a security, nor are we attempting to describe the circumstances in which an EIA would be deemed a security.” However, Notice 05-50 is a slap in the face to every state insurance commissioner, and the SEC, and a blatant attempt to grab regulatory turf.

Who Is and Is Not Affected?
If a producer sells index annuities and is not affiliated with an NASD broker/dealer – if the producer does not have series 6 or 7 registration or it is inactive because it is not “hanging” with a B/D – the notice has no effect.
If a producer is securities registered and sells index annuities though their broker/dealer, and the broker/dealer already takes supervisory responsibility for the index annuity sale, life will not really change because the B/D is essentially doing what the Notice prescribes. However, if the producer is the one out of every two producers that sell index annuities as a “Rule 3030 outside business activity” and is affiliated with a B/D, their future course of selling index annuities is in the hands of their B/D.Notice 05-50 suggests a couple of ways for a B/D to handle index annuity sales:

“Firms should consider maintaining a list of acceptable unregistered EIAs and prohibiting their associated persons from selling any other unregistered EIA, unless the associated person notifies the firm in writing that he intends to recommend an unregistered EIA that is not on the firm’s list, and receives the firm’s written confirmation that the sale of the unregistered EIA is acceptable.”

The first suggestion seems to say that a B/D should make the final determination on the fixed annuities sold by an affiliated rep, even if those fixed annuities are not sold through the B/D, but the sale won’t have to physically be sent to the B/D. The second suggestion is more exacting.

“Firms are encouraged to consider whether other supervisory procedures also might help protect the firm’s customers. For example, a firm could require that all sales of unregistered EIAs occur through the firm. If an associated person is selling the unregistered EIA through the firm, the firm must supervise the marketing material, suitability analysis, and other sales practices associated with the recommendation of unregistered EIAs in the same manner that it supervises the sale of securities.”

“Encouraged” seems like such a nice word. However, it’s like being on the NASD boat in the middle of the ocean and being encouraged to row – the alternative being thrown overboard to drown. The second suggestion essentially tells B/D to treat all index annuities as securities. Since the index annuity language in 50-05 are not mandates, but simply “suggestions” and “encouragement”, a broker/dealer could technically ignore much of it. However, NASD also adds these words “a firm might incorrectly treat the EIA transaction as an outside business activity under Rule 3030 rather than a private securities transaction under Rule 3040 and thereby fail to supervise sales of the product as required by NASD rules.”

NASD is standing over B/Ds holding an ax raised to strike telling B/Ds they of course may treat fixed index annuities as fixed annuities (because legally that’s what they are). However, if the law ever changes and SEC says even ONE of these index annuity products you didn’t supervise is really a security – even though 232 were not found to be securities – we will chop off your head for failure to supervise. I don’t blame B/Ds for being cautious in this matter.

What this mean for B/D affiliated producers?
At the very least it means an expanded interpretation of NASD Rule 3030. For many years reps have needed to inform their B/Ds – in writing – of any outside business activity. In the past it has been acceptable practice to simply inform the B/D you also sell fixed annuities as an outside business activity without going into specifics. The Notice ramps this up by almost saying you need to give your B/D a list of each and every index annuity product you sell and get approval on individual products.
The arrogance of NASD in expanding the definition of Rule 3030 is beyond belief. What they are saying is the B/D has the authority to approve the day-to-day activities in each and every non-security business a rep has. Most of the Notice, and especially this part, is a slap in the face by the NASD to the insurance commissioners because what NASD is saying is if an insurance agent also has a series 6 or 7 that the agent’s non-securities insurance activities are subject to NASD jurisdiction. The B/D is on the hot seat. If the B/D does nothing, and the index annuity is later found to be a security, NASD will gut the B/D for failure to supervise. If the money for a non-security index annuity comes from a security then the B/D has to determine if the sale of the security was suitable.As of this writing I have heard from seven broker/dealers that are now requiring all index annuity sales to be transacted through the B/D, two B/Ds that are creating approved index annuity lists, and others that have not yet decided what to do.

Why Is The NASD Doing This?
The Notice says, “NASD is concerned about the manner in which associated persons are marketing and selling unregistered EIAs, and the absence of adequate supervision of these sales practices” Again, another slap in the face by the NASD to all state insurance departments by implying they cannot supervise what they regulate.
NASD sounds like they’re trying to protect the public good. Does NASD offer any proof that consumers are being harmed by index annuities not being regulated as securities? No.

My company did research earlier this year examining the entire NAIC database on consumer complaints. I found that in 2004 nationwide, there were 895 closed consumer complaints against traditional fixed rate annuities, 181 against the top 25 variable annuities and 38 against the entire world of index annuities – this works out to ONE index annuity customer complaint for every $614 million of index annuities sold. There does not appear to be grounds that the fixed nature of index annuities is hurting consumers. So, might there be another reason for why NASD wants to control index annuities? I’ll leave that for the reader to decide, but I will mention NASD does not currently collect fees on the sales of index annuities.

In the original draft of the notice the NASD was more forceful in stating index annuities were securities. The final notice is more timid. It appears someone reminded NASD that SEC had not abdicated and named NASD the new king. The notice does not strengthen the contention that index annuities are, in general, securities. The arguments used by NASD are identical to the ones used in 1997. However, it places greater pressure on the SEC to reexamine the question.

What Can The Producer Do?
If the producer is affiliated with a B/D he will need to find out how his B/D will react to Notice 05-50. The least onerous approach might be to help the B/D put together a list of acceptable index annuities.

  * Help Your B/D Cope With Notice 05-50

  * Contact Your Insurance Commissioner

  * Sell Fixed Index Annuities Properly

  * Don’t Overreact 

The industry group NAFA is fighting against security regulation of fixed annuities and they are the only industry group I have heard from that is working to keep index annuities as fixed products. Producers should contact their state insurance commissioners and ask what is being done to counteract this infringement by the NASD on their jurisdiction. Don’t give the hangman the rope. If any marketing material or ads in the least way imply that index annuities are investments instead of long term savings instrument, they should be thrown away and not used. But don’t jump off any cliffs. I’ve already had producers tell me they will give up their security license rather than put up with all of this. However, if NASD loses, then the gesture of giving up a securities license may be an overreaction. The final court on this issue is SEC, not NASD, and it is up to fixed index annuity producers and providers to prove their case.

The Devil’s In The (Lack of) Details (8/05)  
I’ll begin by saying I am not a lawyer, and although I used to own a broker/dealer (B/D) with offices in several states I currently hold no licenses or registrations, nor is any of the following intended to be legal, investment or regulatory advice, but is provided solely for educational purposes. Now that I have declaimed, the intent of this article is to talk about why the question of whether or not index annuities are securities came up in the first place and what the issues are.

Why Is There Even A Question?
Based on my research I do not believe index annuities are securities. However, neither my opinion, nor the opinion of other pundits, or even the NASD matters because it is the SEC and the courts that determine security questions. As of this writing the courts (Malone v. Addison et al) have ruled index annuities are not securities and SEC has not ruled they are. The current turmoil lies with the last part of the previous sentence.

Eight years ago, the SEC asked for comments on whether or not index annuities should be securities, received many comments, and then did nothing. The closest thing to an official position I could find from the SEC was under the Investor Information part of their website. In response to the question “Are equity-indexed annuities registered with the Securities and Exchange Commission?” The SEC answers, "Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Depending on the mix of features, an equity-indexed annuity may or may not be a security." The typical equity-indexed annuity is not registered with the SEC. So, although the courts have ruled index annuities are not securities, the official word from the SEC on the index annuity securities question is “although most aren’t maybe some are”. Regulations are often written with a bit of ambiguity so the lines get colored in by future developments, and this creates a cottage industry for attorneys. The current problem really stems from an undefined part of some annuity safe harbor rules written back in the 1986.

Rule 151
In 1986 the SEC said if an annuity met three safe harbor guidelines under Rule 151 it would not be a security. The first two guidelines relate to regulatory oversight and risk, and are pretty straightforward. The third requirement is that the annuity is “not marketed primarily as an investment”. What does that mean? Nobody knows, and this uncertainty has contributed to the current predicament with index carriers saying the annuities are not being marketed as investments and therefore meet all of the safe harbors of Rule 151, and some in the security industry saying they are
being marketed as investments and thus fail the third test. A contributing factor responsible for questioning the fixed nature of index annuities is one of who is supervising the producer.

Thirty years ago banks received savings and made loans, insurance agents sold insurance and the very infrequent annuity, and stockbrokers sold stocks, bonds and funds. Confusion was minimal and regulatory jurisdiction was easy. Today it is all a jumble.
Banks have a large amount of their regulatory turf specified by the Securities Exchange Act of 1934. In addition, banks have FDIC, OCC and Federal Reserve in their DC corner vigilantly protecting their part in the financial framework. Regulation of insurance companies and insurance agents was pretty much left up to the states and loosely defined; there has never been a federal level insurance department counterweight to the SEC. This left the insurance industry to deal with a patchwork of state laws and local peculiarities, and no regulatory counterpart to NASD, thus leaving hazy lines of ultimate regulatory supervision of the producer. Into this haze steps NASD.

NASD is not a federal agency. It is a self regulatory organization (SRO) authorized under the Securities Exchange Act of 1934. A self-regulatory organization is a member organization that creates and enforces rules for its members based on the federal securities laws. NASD pays certain fees and assessments to the SEC.
As stated in their 2004 Annual Financial Report,  “NASD is the leading private-sector provider of financial regulatory services.” It is a tax-exempt company that collected $114.4 million in fines against its members in 2004, up from $33.3 million in 2003. NASD also received $222.8 million in transaction-based trading activity fees, as well as assessments based on member firm gross securities income. Last year was a good year for NASD with reported net income of $66.5 million. It should be noted that NASD does not currently collect fees on the sales of index annuities.

NASD has aggressively sought regulatory authority when there are hazy lines. NASD challenged state insurance departments on whether NASD should at least share jurisdiction (and regulatory revenues) on variable annuities, and NASD won. They also stepped into the void and became essentially the deciding word in regulating the sale of promissory notes, viatical agreements and brokered CDs. Now they are going after index annuities, and since SEC has not ruled NASD has authority over index annuities NASD appears to be going about this by putting pressure on their broker/dealer members.

NASD Rule 3040. Private Securities Transactions “Selling Away” of an Associated Person 

(b) Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction.  (c)(1) In the case of a transaction in which an associated person has received...selling compensation, a member which has received notice pursuant...shall advise the associated person in writing stating whether the member...approves...or disapproves the person's participation in the proposed transaction. (e)(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member.



On 25 May Mary Schapiro, NASD Vice Chairman, gave a speech at their spring conference in Chicago and raised the “selling away” issue regarding index annuities. Rule 3040 says a representative must have permission from their B/D to participate in a private securities transaction. If the representative does not get permission the representative cannot sell securities away from the B/D.  

What is a private securities transaction? In the past, NASD has raised the “selling away” red flag to B/Ds on investment advisory fees, short-term promissory notes and viaticals (Notice to Members 91-32, 94-44, 96-33). While NASD decided Investment Advisers may fall on either side of “selling away” depending upon what they do and provided quite a bit of guidance on the investment adviser question, with both notes and viaticals NASD made the B/D responsible for determining whether the product offered was or was not a security.

 3030. Outside Business Activities of an Associated Person

No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member.



If the B/D says a product is a security the firm assumes certain regulatory responsibilities that go with selling securities to customers, including appropriate supervision over the associated person in order to prevent violations of the securities laws. If the B/D says it isn’t a security and it later is determined it is, the B/D could be cited for “failure to supervise” and be in trouble with NASD. Five years ago NASD brought more than 100 formal disciplinary actions involving violations of NASD Rule 3040 in the marketing of promissory notes (Notice 01-79).  

Does this mean a representative needs permission under Rule 3040 to sell fixed indexed annuities? A fixed index annuity filed with the state insurance department is not a security, therefore by NASD definition a producer selling state filed fixed rate or fixed index annuities is not violating Rule 3040 and not engaged in selling away, and thus no B/D permission is required.

In my last newsletter I mentioned that only three of the 130 index annuities were registered as securities. A half dozen B/Ds called me to get the names of the three registered products. I sensed they felt that as long as they might have to treat them as securities they might as well start with a security version of index annuities, which I believe is precisely the action NASD was hoping for. Even though state insurance department filed index annuities are not “private securities”, a representative must provide prompt written notice to their B/D of all outside business activities, and this would include offering fixed rate and fixed index annuities. The B/D has the right to ensure the outside business activity does not create the impression that the B/D had approved the product or service. How far can the B/D go in interfering with the reps non-B/D business? Mrs. Schapiro urges B/Ds to consider whether reps should be selling any index annuity without being fully supervised by the B/D. This could mean B/Ds requiring producers to complete the same B/D new account forms, arbitration agreements and disclosures for fixed index annuity sales; filing for approval all annuity ads, seminar scripts and mailers with the B/D’s compliance department; prohibiting any type of hypothetical illustrations and submitting insurer produced fixed annuity consumer materials to NASD District Offices for review.

Is the “whether or not” question driven by concern for the consumer or the securities industry’s desire for more revenue?

One point is clear. If a producer has not notified their B/D – in writing – of every outside activity they use to make a dollar they could be hanged. Even if the producer’s index annuity business is clean and disclosed to the B/D, the producer could be fined and suspended for not mentioning that he operates a lemonade stand on weekends if NASD wants to make an example of him.

And Then There’s The Lost Revenue
The reasons given for registering index annuities sound well intentioned. The proponents of registration say consumers may be confused about how an index annuity works – though I fail to see how registration would lessen the confusion. They talk about the need for disclosure – though almost every carrier requires quite comprehensive disclosures to be signed at time of purchase. And they complain about long surrender periods – although I cannot even comprehend what this has to do with the securities question.
Frankly, I find all of this recent concern rather suspect. The final and possibly primary reason why the question of whether or not index annuities are securities is now being raised relates to revenues the securities industry feels they are losing.

Index annuities have been around for ten years. During the millennium bear market when customers of NASD member firms lost billions of dollars, index annuity owners didn’t lose a dime of principal or credited interest due to the bear market. And yet, not one voice was raised back then about the dangers of non-securities registered index annuities. It wasn’t until 2004 when index annuity sales rose over $23 billion – more than doubling in two years – that the securities industry began squawking that index annuities should be registered. Let’s face it, $23 billion placed in funds or variable annuities could mean a billion dollars in commissions to B/Ds and several million dollars to NASD in new fees.

What Will Happen?
There are many possible outcomes. The SEC could rule that certain types of index annuities are securities, or that certain types of marketing cross the “marketed as investment” line and need to be curtailed. SEC could rewrite the safe harbor guidelines that insurers would need to meet to avoid having products called securities. SEC could say that current index annuities are not securities. Or SEC could do nothing. If nothing is done NASD can continue their policy of intimidating B/Ds into treating a non-security product as a security.

If no SEC decision is made the 60% of index annuity producers that I estimate are associated with a B/D will need to wait and see what their B/D does and how they’ll be affected. Our last survey showed a small percentage of producers have already given up their securities registration to avoid the hassles, perhaps a non-decision would induce more producers to drop their securities affiliation and join the 40% of index annuity providers that are unaffected by NASD because they only sell fixed products. 


Copyright 1998-2016 Jack Marrion, Advantage Compendium Ltd., McKinney TX (314) 255-6531.  All information is for illustrative purposes only, does not provide investment or tax advice. No index sponsors, promotes, or makes any representation regarding any index product. Information is from sources believed accurate but is not warranted. Advantage Compendium neither markets nor endorses any financial product.