From the December 2008 Issue of Senior Market Advisor Magazine

In this special section, we’ll examine the development and the repercussions of the SEC’s divisive proposal, Rule 151A, and speak with those on both sides of the issue. We will also offer you some concrete steps to make sure your voice is heard and that you are taking steps to prepare yourself for the outcome of the proposal, whatever happens.

It doesn’t take much of a conspiracy theorist to suggest that what itself might have been, in a normal year, the low point for the financial services industry–the much-ballyhooed “Dateline NBC” program and its “sting” on insurance agents–in some way helped set the stage for this summer and fall’s controversial dealings with Securities and Exchange Commission Ruling 151A.

Long before the crisis on Wall Street and the overnight insolvency of some of America’s largest financial and insurance institutions, April’s “Dateline” program apparently gave extra ammunition to one individual, SEC Chairman Christopher Cox.

In the process of unveiling the proposed 151A ruling on June 25 (which would seek to turn indexed annuity products into securities instead of insurance products, requiring a major retooling of the way that much of the industry works), Cox even played an excerpt from the program, describing the indexed annuity world as an unregulated Wild West filled with unscrupulous, predatory salesmen.

The SEC’s resulting proposal has, not so unexpectedly, polarized the industry, with the unlicensed fearful of losing access to a powerful and profitable tool, and those on the securities side, in many cases, suggesting that Rule 151A might not be such a bad idea.

The most interesting side effect is the way that the proposed legislation has pushed untold numbers of agents, FMOs and carriers into political action, writing letters, visiting their elected officials and, unfortunately, now contemplating a protracted legal response if the proposal is passed. 151A has also fanned the long-smoldering fires of jurisdictional dispute between state regulators and the federal government, as each side seeks to assert its control over the scope of the insurance universe. All this in the middle of election season, just for added color.

A recent poll conducted online at www.SeniorMarketAdvisor.com found that 63 percent of those responding now believe it will take more than one year for a decision to be made on the issue. The final fate of SEC Rule 151A will depend on a wide variety of factors, not the least of which being last month’s presidential election and the objectives of a new Democratic president. Since this fall’s near-cataclysmic economic crisis, Rule 151A has also become, admittedly, less of a priority for legislators; those close to the issue say that while the spotlight has been taken away from the proposal, there’s little chance that it will be entirely swept under the rug by the new administration.

“Chairman Cox has said publically that he’s leaving the SEC after the election, and that indicates that this is probably not going to get done under his watch,” says Sean Dilweg, commissioner of insurance for the State of Wisconsin. “Under a Democratic government, you’re going to find more consumer-friendly measures. But I don’t think that 151A is something that’s just going to disappear.”

“Times have certainly changed since this all started, and at worst, if it still goes through, I suspect that we’ll see a lawsuit,” says Jim Mumford, first deputy commissioner of the Iowa Insurance Division. “But I believe (the SEC) didn’t think it all through when they proposed it … I don’t think (Cox) knew whose ire he would raise. I also fault the securities regulators for admitting that they really didn’t have jurisdiction to do this in the first place.”

After announcing the proposal, the SEC welcomed commentary from the public. And after eliciting more than 2,600 responses during a first round, the comment period was again reopened until Nov. 17; those many thousands of responses can be read online at www.sec.gov. Many were penned at the urging of a number of industry leaders who immediately rallied together to protest the implications of securitization for the many unlicensed advisors working in the business. Despite being stripped of identifying details, the comments speak volumes on advisors’ feelings on the issue.

“Since indexed annuity sales are regulated more than adequately by the state insurance commissions, the SEC’s proposal merely adds to governmental bureaucracy without providing consumers with additional protection,” one wrote. “Since dispute resolutions within the securities industry take much longer, are more complex and are much more costly for the consumer than those overseen by my Department of Insurance, what is proposed will substantially hurt consumers rather than help them. It also will have a negative impact upon me and upon my business.”

Others echoed their concerns about the financial implications of the move. “I have built an insurance business over many years and fixed indexed products have been an important part of my business success,” one agent said. “I have played by the rules and have tried to provide my clients with quality products and outstanding service. And suddenly, along comes the SEC with this proposal that endangers my business, my livelihood, and my client’s interests–it’s preposterous.”

In September, a group of representatives organized by insurance carriers who offer FIAs went directly to Washington, D.C. to state their case. Over the course of one day, 110 members of the house and senate received visits. Representatives say the warmest response to their pleas came from Congressman Gregory Meeks (D-NY), Congressman Thomas Price (R-GA) and Congresswoman Deborah Pryce (R-OH), who they hope will have a more impactful influence on the SEC’s appointees.

“I was pleased with the receptive attitude lawmakers showed to us,” says Andrew Unkefer, president and CEO of Unkefer and Associates. “They understood what was at stake and could see the value of keeping a viable savings product in the market. If everything becomes a security, the savers will have no place to go to safely protect their assets.”

Understandably vocal throughout the entire process has been Kim O’Brien, executive director for the National Association for Fixed Annuities, who says she too believes that 151A will not just simply disappear. She suggests that those on both sides of the issue remain vigilant, as an outcome on either side of the coin will probably lead to more scrutiny on the industry as a whole.

“I think there’s a good chance that the issue will move into political hiatus, but it’s also equally likely that Cox is so fed up by the whole thing, he will use this as his ‘flag waver’ move,” O’Brien says. “If he’s annoyed or politically (upset) enough, it will pass. And in that event, it will probably move into lengthy litigation. He’s not going to let it go, though … 2 percent of all sales of a product that makes $25 billion a year would go to FINRA, and that’s a lot of money.”

O’Brien and her organization continue to strategize on the proposal. In the meantime, she says that the strong showing of many fixed annuities during even the worst of the recent financial roller coaster ride indicates that the product carries plenty of weight, and agents shouldn’t suddenly change course.

“Whatever the case, as we’ve seen in the past few months, people who believe in this product should still be selling it, now–it’s turned out to be a great investment during turbulent times,” she says. “As for agents asking themselves if they should suddenly go out and get licensed, that’s something you need to do a little soul-searching about. Don’t do it for protection, but do get it if it’s part of your own business plan.”

Cox’s proposal also elicited the response of a number of state insurance regulators, who have been working to develop their own best practices regarding indexed annuity sales. Susan Voss, commissioner with the Iowa Insurance Division, met with Cox in late July to discuss the extent of product and sale regulation and oversight that already exists in Iowa and several other states.

“We agree that there have been terrible abuses in the sale of indexed products,” she said. “Some of these transactions clearly were not in the best interest of the consumer. (But) we believe we have addressed those problems with our revisions … we’re pleased to note that insurers are stepping up to police their own operations as well as to prevent abuses.”

Voss, however, remained adamant that the SEC seemed to be overstepping its boundaries by pushing the proposal in the first place. “We also know for a certainty that these are insurance products and not securities products. Securities products put the risk on the purchaser, indexed annuities put the risk on the insurance company to provide a guarantee for the consumer.”

On the other side of the coin, Joe Borg, commissioner of the Alabama securities agency, has long been one of 151A’s strongest proponents. He says that the legislation might not go far enough to address what he sees as critical issues in the sales of annuities.

“If 40 percent of the complaints that are coming into my office from seniors are about equity indexed annuities, then tell me that there’s not a problem,” Borg says. “I think in the long run, this legislation will help the industry itself … we all want a fair, balanced system. This will help us all have a cleaner industry, and one that’s more profitable for those who abide by the rules and laws.”

While it’s true all parties want a cleaner industry, Borg’s “complaint” numbers don’t add up, according to Sheryl J. Moore president and CEO of Pleasant Hill, Iowa-based AnnuitySpecs.com. “I’ve seen (Borg’s) presentation and he is adding in both indexed annuities and variable annuities.” Moore says by adding those together it skews the data Borg presents.

Others in the securities end of the pool say that the proposed ruling may help set better standards for the sales of indexed products, but say that the SEC’s methodology in doing so seems more than a little heavy handed.
“As a securities guy, I think this is going to thin out the field of people who are just pushing product–we didn’t like getting a bad reputation as a result of that,” says Chris Hobart, with Charlotte, N.C.-based Hobart Financial Group. “But it seems obvious to me that the SEC didn’t have their expertise lined up as smooth as possible. And realistically, you never want to see the SEC jumping into your back yard and messing things up.”

In one of 151A’s more positive spinoffs, Dilweg and the National Association of Insurance Commissioners have been energized through their working groups to increase the emphasis on suitability, supervision and disclosure in annuity sales.

“We’d like all of the regulations to be additive, not to create an antagonistic system … how can we benefit the consumer, overall?” he says. “Still, we don’t want to stifle product innovation, either.”

Mumford says he believes the vocal debate surrounding Rule 151A also points to a much bigger issue, one which might be a consideration during a new administration: “Should there just simply be federal regulation of all insurance products?”

ANDY STONEHOUSE IS MANAGING EDITOR OF SENIOR MARKET ADVISOR. FOR COMMENTS ON THIS PIECE, PLEASE CONTACT FEEDBACK@SENIORMARKETADVISOR.COM.

Three things you can do to make a difference

With the exact fate of SEC’s proposed Rule 151A now somewhat uncertain in these post-electoral days — and the re-opened comment period now closed for a second time — producers who wonder about their next move have a few options.

1. Stay informed
Periodicals such as Senior Market Advisor can provide a snapshot image of the 151A debate, but the Web has become one of the most important resources for news, opinion and action items on the SEC’s controversial proposal. Our own Web site, www.SeniorMarketAdvisor.com, features near-daily updates on new developments and an active comment board; an omnibus source for information on the annuity industry’s response and ongoing action can be found at www.SEC151A.com. NAFA’s own Web site, www.nafa.us, also includes recent information, forums and contacts for taking action. Finally, the SEC itself provides updated information, full text of citizen and industry comments and detailed text on Rule 151A, available at www.sec.gov.

2. Get active
While the official comment period is now closed, anyone affected by Rule 151A (in either a positive, negative or impartial way) has the opportunity to contact their congressional representatives to voice their opinion. In late October, an industry advocacy group also got the bipartisan support of Congressmen Gregory Meeks (D-NY), Thomas Price (R-GA) and Deborah Pryce (R-OH), who signed letters to the SEC opposing the adoption of the ruling. Visit www.house.gov for easy methods of contacting your rep and voicing your opinion.

3. Consider your business
151A has caused a lot of soul-searching, but the introspection may not be such a bad thing. Regardless of the outcome of this particular issue, the decision to obtain securities licensing is one that faces most advisors at some point in their careers; perhaps this is a time to examine your long-term sales objectives, the types of products you plan to continue to sell and whether or not real specialization is in your best interest.