The Move To Brand Inde Annuities As Securities

Broker-dealers are very concerned about compliance, and many believe that existing state laws and regulations already are addressing the areas of concern regarding the sale of indexed, or any fixed, annuities, says Carl R. Stern, chairman of Imeriti Inc., a Del Mar, Calif., independent marketing organization that works with several B-Ds.

State insurance regulations do require suitability, he points out. “In addition, most states, especially California, have stringent rules governing selling to seniors ages 60 or 65 and up. There are certain forms to sign and things to do and not to do.”

Also, “the insurance companies will comply with those state laws, even if a rep is selling away,” Stern says, “because the companies know people will sue if they encounter problems with the product.”

Another factor is that some broker-dealers do not have the time, talent or expertise to handle fixed annuities of any kind, say various insurance experts. So, they’re accustomed to seeing the business going through IMOs and insurance brokerages.

Until recently, this was a non-issue where index annuities were concerned, says Stern. That’s because index annuity sales were still very small. But now that sales are up and the NTM has come out, some broker-dealers are deciding they want to bring all that business in-house, while others want to keep things the same as they have been.

Still another factor is that many producers are registered reps who use insurance company broker-dealers, Stern says. However, some of those insurance companies don’t have their own index annuities to sell. “In my opinion, those insurance company B-Ds will have to allow their top reps to sell away, or the rep will go someplace else,” says Stern.

If the SEC comes out with a decision, saying that index annuities are not securities, this will weaken the position taken by the NASD, predicts Ward of Memphis.

Meanwhile, a lot of activity is going on, with B-Ds setting up rules about what is an accepted index annuity and establishing their own approved grids for the products, Ward continues. Once these things are in place, “if a rep in a broker-dealer wants to sell a product that is not on the grid, the rep will need to go to the compliance officer of the broker-dealer to get approval, just as would happen when selling an unapproved mutual fund.”

That “could turn into a tidal wave,” Ward predicts.

Even though the product is not a security, he cautions, “you still have to do compliance on it as if it were a security, and the B-D has to be somewhere in the compensation stream, because compliance costs money.”

All this is complicated by the fact that many B-Ds do not have the wherewithal to handle fixed annuity business, says Ward. “They don’t know how to track a 1035 exchange or to make it happen faster, for example. They don’t know how to pick the right product for the situation.”

Some insurance wholesalers are attempting to turn this lack of knowledge to their advantage, say various sources. They are doing this by offering to provide annuity selection, education, training and various other services to broker-dealers that want to sell index annuities, whether under the terms of the NTM or not.

In such arrangements, “the B-D still can do the compliance, but we could do the product grid, the processing and so on,” says Ward.

What happens to street-level commissions is still in the air.

At NAILBA’s annual meeting in Phoenix last month, several producers told NU they believe these commissions will take a haircut–and eventually more than that–to make up for the compensation they now expect will flow to the B-Ds. Others say distributors are working hard to keep street-level comp the same, at least for the high performers.

Much of what happens next will be influenced by what the SEC does or does not do, say virtually all NTM watchers.

“We know the SEC is taking a serious look at this,” said Alex DelPizzo during public remarks at the NAILBA annual. So, he said, “we should take it seriously.” DelPizzo is the association’s Washington consultant and vice president of Winning Strategies, Washington, D.C.

“It is possible that the SEC might revise the Safe Harbor rule, tighten it up so everyone is happy,” added Leon Huffman during the same session. He is chair of NAILBA’s public affairs committee and president of Huffman & Associates/LifeMark, Orlando, Fla.

The whole issue is actually broader than stopping insurance reps from talking about and selling securities, says Schmitt of Dallas. It also involves what happens when securities licensed reps start talking about and selling life insurance and annuities.

For many, the real questions may come down to this: When a financial product is sold, what channel should it go through? What is best for the customer? And who has the authority to say so?

Those are certainly questions that are on the table at insurance and securities companies as well as distributor and advisory firms.

Regarding the channel question, the philosophy at American National Insurance Company is “it’s all rep-driven,” says George C. Crume, vice president-independent marketing and brokerage sales, Galveston, Texas. “We’ll work with them and accommodate both scenarios [broker-dealer and BGA]. We won’t eliminate anybody.”