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November 04, 2007 at 02:00 PM
Producers in the fixed index annuity market face many questions: Should I become a registered investment advisor (RIA)? Will the Securities and Exchange Commission take over regulation of fixed index annuities (FIAs)? If I am an investment adviser representative (IAR), am I protected when a client uses funds from a security to buy a FIA? What does the future hold in 2008?
To sort it out, let’s begin with what is known. It is true that FINRA (Financial Industry Regulatory Authority, formerly the NASD or National Association of Security Dealers), does not have the authority to regulate FIA products. The McCarran-Ferguson Act of 1945 says the states retain legal authority over insurance products and producers.
Authority to classify FIAs as securities rests with the SEC. To date, SEC’s last overt action regarding FIAs was to create Safe Harbor Rule 151–which excludes from SEC regulation the index annuities that meet the Safe Harbor criteria. In addition to Rule 151, and the Securities Act of 1933 (which exempts annuities from the definition of securities), there are several Supreme Court and federal district court decisions which refuse to classify index annuities as securities.
With the front door to the FIA house shut and locked, why then are insurance producers inundated with messages about becoming an RIA, an IAR, Series 6 or Series 7 licensed? If FIAs are not securities, why would FIA producers explore securities licensure? This is because FINRA is knocking at the back door. Remember, the SEC regulates security products and FINRA regulates the people who engage in securities transactions.
Think back to the August 2005 NASD Notice to Members 05-50. It was a warning to member broker-dealers that close supervision of representatives may be warranted for FIA sales in order to prevent the FIAs from being sold as investments.
This warning highlighted a specific criterion contained in Safe Harbor Rule 151, prohibiting FIAs from being marketed as “investments.” As a result of 05-50, some broker-dealers now require their registered representatives, who also sell FIAs, to run FIA sales through the B-D’s supervisory and compensation chain. Many B-Ds also supply an approved FIA list.
This summer, the NASD changed its name to FINRA, following NASD’s consolidation with the NYSE (New York Stock Exchange) Member Regulation. The new name seems fitting if FINRA seeks to regulate all financial products. Eliminating ‘securities dealers’ from the name seemingly opens the potential sphere of its regulation. Thus, a natural question to ask is: Are FIAs on the road to being considered “financial” products subject to FINRA regulation? Knowing how critical FINRA has been of FIAs and certain sales practices, it is not a stretch to surmise that FINRA may be looking for another back door to FIA regulation.
