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.)

Selling those securities also deprives the broker-dealers of the annual management fees they earn on money they oversee. When a no-risk alternative like an EIA is presented–ironically by their own insurance-licensed registered reps in response to client demands for safer havens for retirement capital–those broker-dealers lose revenue. Not only are they earning less today because the markets are still well below their former highs, they’re earning less because clients have moved hundreds of billions of dollars to safer pastures.

Thus, attempting to regulate–and discourage sales of–a non-security, through indirect means like monitoring the sale as an “outside business activity,” becomes the only way the NASD and its broker-dealers can slow the exodus of money.

Do unsavory sales practices sometimes occur in annuity sales? Of course they do, just as with every other product sale, including that of automobiles, real estate and (more than ever) securities.

Is there a consumer protection venue for victims of annuity sales abuse? Certainly, and it’s no farther away than the local state insurance department. The departments approve the products for sale, under supervision of an insurance commissioner to enforce laws written by the state legislature, and these regulators have the authority to levy steep fines and pull insurance licenses in event of unscrupulous sales practices.

A 344% one-year increase in securities-related fines should be all the proof one needs to know that the NASD has its hands full with real securities violations, without defying the courts to step on the jurisdictional toes of the state regulators charged with vetting and approving each product and regulating those who offer them.

The NASD Web site ominously warns that the person introducing an EIA “may not be registered as a broker with the NASD.” What the site doesn’t say is that this person is not required to be. Fifty insurance commissioners could have told them that.

Thomas K. Brueckner, CSA, CLTC, is a founder and president of Senior Financial Resources, Inc., Nashua, N.H., and a Top-of-the-Table MDRT producer serving retired clients. His e-mail is thom@seniorfr.com.

Why is the NASD trying to raise doubts about a popular no-risk platform like the EIA? It’s about money.