Producers in the fixed index annuity (FIA) market are increasingly asking: Should I become a Registered Investment Advisor? Will the Securities and Exchange Commission start regulating FIAs? If I am an Investment Advisor Representative, am I protected when a client uses funds from a security to buy an FIA?
Some even question their future in the business, and thus how much time to devote to training and education in 2008.
Let’s review the landscape. It is true that the Financial Industry Regulatory Authority (formerly the National Association of Security Dealers, or NASD) does not have the authority to regulate FIAs. Going back to the McCarran-Ferguson Act (1945), states retain legal authority over insurance products and producers.
Authority to classify FIAs as a security rests with the SEC. To date, the last overt action of the SEC regarding FIAs was to create a Safe Harbor Rule 151, which excludes index annuities that meet the Safe Harbor criteria. In addition to Rule 151, and the Securities Act of 1933 (exempting annuities from the definition of ‘securities’), several Supreme Court and federal district court decisions have refused to classify index annuities as securities.
With the front door to the FIA house locked, why are insurance producers being inundated with calls to become an RIA, IAR, or Series 6 or Series 7 licensed? If FIAs are not securities, why explore securities licensure at all?
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 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 them from being sold as “investments.” This warning highlights one specific criterion contained in Safe Harbor Rule 151–a prohibition against marketing FIAs as “investments.” As a result of 05-50, some broker-dealers now require their registered representatives, who also sell FIAs, to run their FIA sales through the broker-dealer’s supervisory and compensation chain. Many broker-dealers also supply an approved FIA list.
Readers will recall that, in the summer of 2007, the NASD changed its name to FINRA–a result of 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; with ‘securities dealers’ gone from the name, its potential sphere of regulation may open up.
So, producers are wondering if FIAs are on the road to being considered “financial” products, subject to FINRA regulation. Knowing how critical FINRA has been of index annuities and certain sales practices, it is not a stretch to think FINRA may be looking for another back door to FIA regulation.
Is it possible that FIAs will become dual-regulated, as are variable annuities? The legal trail for the SEC and courts to take, in order to make such a determination, would be long and mostly uphill, so it is hard to predict that right now.
Could FINRA get in the back door to FIA regulation through another means? One answer may be found in the September 2007 report from the SEC, FINRA and North American Securities Administrators Association. This report cautioned against use of “free lunch” seminars, and its Appendix A provides examples of seminar invitations actually mailed to consumers. While the report barely mentions FIAs, it is no secret that producers market FIAs though seminars. The report makes clear that registered representatives engaged in any seminar marketing will need to carefully examine their materials, regardless of the product being offered.
What is most evident is that scrutiny of FIA sales involving movement of securities funds will become increasingly intense.
If an insurance producer discusses a security, such as a mutual fund or variable annuity, and is not appropriately licensed, the transaction may be tainted. The difficult question is determining where the line is between selling an insurance product and rendering investment advice without a license.
Producers exploring RIA, IAR, and Series 6 or Series 7 securities licenses believe that these credentials will protect them in every situation. However, one license may not cover all transactions.
All of this is really quite amazing. FIAs are not securities products, yet currently insurance producers are contemplating voluntarily subjecting themselves to securities regulation to protect their FIA sales. And while FINRA can not directly regulate FIAs, many registered representatives selling FIAs are running their FIA business through their broker-dealers. Even though the product itself does not require the agent to have a securities license to sell it, in the end, the front door is locked and the back door has a greeter.
Danette Kennedy is president of Gorilla Insurance Marketing, Inc. Waukee, Iowa. Her e-mail address is firstname.lastname@example.org.