The United Kingdom’s Financial Services Authority refers to investment-related life policies and pure protection (i.e., term) policies rather than the terminology of term and permanent life insurance used in the United States.

The U.S. should adopt this terminology and regulate all investment-related products under one license. This includes annuities (variable, fixed, indexed), and cash-value building life policies (variable, universal, whole, indexed, return-of-premium term).

State insurance licenses would empower advisors who are so licensed to sell pure protection products only, such as auto, homeowners and simple term life insurance. They could not sell investment-related products which would be subject to licensing by the 2 federal entities, the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

The topic comes up in response to the SEC’s proposal to issue Rule 151A, which calls for regulating indexed annuities as securities, not insurance products as they are today.

The SEC knows indexed products currently are regulated by the states and are not regulated as an investment yet they are sold, in competition with other investments, by many people who hold only a state insurance license. These sales people are not trained to differentiate between fixed and variable products nor are they trained to clearly convey such information so that the customer can make an informed investment decision regarding the recommendation.

FINRA, formerly the NASD, has itself said that, under current regulations, for those sales people who hold only a state insurance license, “there are no specific disclosures required for indexed annuities or equity indexed annuities; however, any communication with the public used by an NASD member firm must comply with NASD Conduct Rule 2210. Rule 2210 requires all member communications to be fair, balanced, and not misleading.”

In the current market, however, those with the limited license and no FINRA affiliation are not constrained by FINRA’s instructions designed to protect the public.

My suggestion, to regulate all investment-related products as securities, raises 2 key questions: What is an investment? And what is a security?

A dictionary definition of investment is: an asset or item purchased with the hope it will generate income or appreciate in the future. In an economic sense, it is the purchase of goods not consumed today but to be used in the future to create wealth. In finance, it is a monetary asset purchased with expectation that it will provide income in the future or appreciate and be sold at a higher price.

A dictionary definition of a security is: an instrument representing ownership (stocks), a debt agreement (bonds), or the rights to ownership (derivatives); a contract that can be assigned a value and traded. Examples include a note, stock, preferred share, bond, debenture, option, future, swap, right, warrant, etc.

As those definitions make clear, a consumer can identify an investment and a security. The consumer does not need to pay any heed to the SEC’s micromanagement of the definition to exclude investment-related products that pay interest and provide some guarantees with significant contractual constraints to maintain those guarantees.

Hence, my view is that all investment-related products that compete with other investments/securities for the consumer’s money should be included within one regulatory web. No more excuses for giving the consumer partial information as enabled by someone who holds only a state insurance license.

To reiterate the earlier point, investment-related products should include all kinds of annuities (indexed, fixed and variable) and investment-related life insurance (including return-of-premium term contracts, whole life, universal and variable universal of all types).

This is the only path that will, in my opinion, allow a properly licensed individual to clearly convey information to the customer so that the customer can make an informed investment decision regarding the recommendation.

FINRA’s predecessor, the NASD, came out with Notice 00-44 in the year 2000. This Notice instructed its member broker-dealers that disciplinary action will be taken when: a member’s procedures fail to adequately differentiate between fixed and variable life insurance products, or a member has violated NASD Rule 2110 (Standards of Commercial Honor and Principles of Trade) for engaging in material misrepresentations and omissions.

Note well the difference that exists between what is required of reps and insurance agents. To wit: registered reps have a duty to differentiate between fixed and variable life insurance products, whereas those with insurance licenses only cannot even talk about variable products.

Also included in NASD Notice to Members 00-44 is the admonition that: registered reps should be able to clearly convey information to the customer “so that the customer can make an informed investment decision regarding the recommendation.”

Note in particular the admonition about ensuring that the customer can make an informed investment decision. There is no such admonition to the state insurance-only licensed individual. In fact, even though indexed products typically rely on additional interest being paid based upon an equity index, almost half the people who sell this type of product have no authority to talk about equities or, when they do, they risk the wrath of FINRA because they are playing in FINRA’s sandbox and do not have the license to do so.

In conclusion, the insurance industry and the indexed product sales industry are in denial because they want to be able to sell investment-related fixed products through agents who have a limited license.

Many of these sales people call themselves advisors, despite the fact that they do not have the credentials to advise. They are selling, not advising.

Many state regulators have imposed suitability standards on those with only insurance licenses. This apparently “papers-over” the problem, except for the fact that that is not possible. Those who hold only an insurance license cannot determine suitability because they cannot deal in the world of compared to what.

The solution has to be one license for all those providing investment-related products to the public.

There must be a broader definition under SEC proposed rule 151A to include all investment-related products (including index products) that invite the consumer to place capital into a product in hopes of earning a return, regardless of whether it is an interest or equity return, and regardless of any ancillary benefits offered by the contract, such as insurance.