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August 10, 2005 at 08:00 PM
Securities broker-dealers are losing revenue in the outflow of funds to EIAs
If ever there were an industry whose very name is the antithesis of the products it sells, surely it is the “securities” industry.
Ask pre-retirees how “secure” they felt watching their pending retirement slip through their fingers–amid stern warnings from their registered representatives not to redeem mutual fund or stock shares–during 2000, 2001 and 2002.
Be prepared for an earful. During that period, the S&P 500 Index “corrected” by 51%, and the NASDAQ suffered an excruciating 63% devaluation. Then came near-weekly news of corporate accounting scandals, millions in punitive fines on many major investment firms and a myriad of class-action lawsuits that are still in the courts.
Now, the National Association of Securities Dealers is trying to change the subject. In a recent Notice to Members, it raised a warning flag over “possible” and “potential” violations concerning equity index annuities. These possible violations are not of laws passed by elected legislatures but of obscure investment industry rules against “selling away”–in this case, to an EIA, a product the courts already have said is not a security, and that therefore does not fall under the NASD’s jurisdiction.
Let’s examine this turn of events. The NASD is a self-regulatory member organization, not a federal agency. It is also a tax-exempt corporation that collected over $114 million in fines against its own members in 2004, an incredible 344% increase over the $33.3 million it levied in 2003, according to its own “2004 Annual Report.” Note that those fines were levied for real securities violations emanating from unsuitable stock and/or mutual fund sales, not EIAs. A threefold increase in such disciplinary levies makes it obvious that securities regulators have their hands full just keeping their own house in order–related to securities, not EIAs.
Why, then, is the NASD trying to raise doubts about a popular no-risk platform like the EIA?
It’s about money. EIAs have rescued nearly $125 billion from volatile markets since their inception in 1994, with the groundswell of this exodus beginning during the market decline of March 24, 2000, through October 9, 2002, primarily among older investors.
During that period, nearly every broker-dealer in the U.S. held dozens of mandatory, tension-filled meetings with their registered reps, meetings in which the reps were encouraged to remind their clients that they were invested “for the long term”–and thus not to sell. (While this is suitable advice for 18- to 50-year-olds, retirees who are living off a nest egg they took over 40 working years to build are hardly “long term” investors anymore.)
