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January 18, 2009 at 07:00 PM
On its face, the Security and Exchange Commission’s decision on Rule 151A–to regulate index annuities as securities beginning in January 2011–would, if left in place, seem to mean business-as-usual for annuity producers selling these products for the next two years.
But the landscape has changed.
The SEC has said index annuities are securities, but will not treat them as such for a while; however, the SEC has also implied that annuity producers should be securities-regulated because current state insurance regulation is impotent. The impact on annuity producers prior to 2011 depends on how they conduct their business.
Producers without securities registration. For the annuity producer who does not do seminars, and simply explains the features and benefits of the index annuity to annuity prospects, life should not change for 2 years (one year for Florida producers if HB 141 is enacted).
But producers who do conduct seminars, or use ads or mailings to attract prospects, need to be very careful in what they say about not only index annuities but everything else. AARP is encouraging its members to nark about annuity seminars attended and mailings they receive where information is not, in the member’s opinion, balanced. The North American Securities Administrators Association is on the watch for producers providing investment advice without proper registration.
When is an annuity producer giving investment advice?
To try to answer that question, I reviewed the 40 state securities websites that list enforcement actions looking at 2007 and 2008. This research revealed that there were a total of 5 actions that might be considered taken against annuity producers allegedly acting as investment advisors. Four of the 5 had other issues that probably caused the state to act.
There was one standout. This was a case that simply said, “By advising Nebraska residents to liquidate securities held within brokerage accounts, [respondent] is engaging in investment advisory business.” On this point, I have heard a few securities regulators say if an annuity producer suggests to a client that the cleint should move money from a security to an index annuity or talks about the securities world at all, that the producer needs securities registration.
One would hope investment advice is not offered if the consumer decides the index annuity is a better place for the money and the consumer makes his or her own decision to sell the security and buy the annuity.
However, since the securities rep who is losing fees derived from the departing assets under management may complain to securities regulators about even appropriate annuity sales, it would probably help if the producer had a signed statement from the consumer saying the decision to sell the security and buy the annuity was the consumer’s alone and that no investment advice was given by the producer.
Producers with a broker-dealer. Within hours after the SEC ruled, a copy of an email arrived in my office, purportedly sent from a broker-dealer to its reps. The gist of it was that, since the SEC had ruled that index annuities are securities, all annuity business has to be processed through the B-D effective January 2009. It also indicated the commission payout would use the same grid as other securities products. Further, it recalled that, in its Notice 05-50, the Financial Industry Regulatory Authority, Washington, D.C., made it very clear that index annuities should be treated as securities, and they have been so judged.
