Podcast Center
Video Center
Webcasts
Resource Center
Events
September 21, 2008 at 04:00 PM
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.
