To securitize, or not to securitize: Defending your business from 151A

Let’s talk about it. A Series 7 with a broker-dealer is not the only securities license you can take to utter the word “security.” Most insurance-licensed agents forget the availability of a Series 65 which is held by an investment advisory firm falling under the auspices of the SEC, not FINRA, which regulates the Series 7 with a broker-dealer. So what are the pros and cons of holding a securities license with a broker-dealer vs. with an advisory firm?

FINRA reminds me of the blowfish that puffs itself up to appear larger than it really is. You see that in their advertising guidelines. Once you hold any securities license under FINRA’s jurisdiction, your entire sales communication and your entire pitch to a client falls under FINRA’s jurisdiction. This is regardless of whether you are selling the EIA under your DBA of some insurance company or not.

The reason is complex. While technically the sale of the EIA is made by you as an insurance agent via your insurance agency, because of various FINRA regulations they have let broker- dealers know that they had better be supervising that sale because you are probably selling a security (via the broker-dealer) to pay for the EIA and they need to make certain that the sale of that EIA is suitable. It is really all a mess, because FINRA has in fact been successful in getting EIAs under their jurisdiction even though they are not a security.

Has this driven you crazy yet?
From a practical standpoint this confluence of events will nearly kill you as a salesman. Think about it. FINRA regulations call for all advertising that references EIAs to be submitted to FINRA prior to use and to be “reviewed” by them. You are hearing this from someone who believes in adhering to the regulations and so who counsels FMOs to submit every piece of EIA advertising (whether it be an invitation or a seminar script) to FINRA for advance “review.”

You are also hearing this from someone who has dialogued frequently with FINRA in an attempt to understand just how it is they do not believe it “appropriate” to describe an EIA as a “safe product.” FINRA admits there are only two ways you can lose money with an EIA, and one of those is controlled by the purchaser: Either the product is sold early and a surrender charge is generated (totally within the purchaser’s control), or the entity backing the product does not have “sufficient claims-paying ability and they have gone belly up.” Give me a break. Considering the garbage products out there, how can FINRA claim that it is not “appropriate” to describe an EIA as safe? Seems to me it would be a misrepresentation not to.

But heck, this is the post-Madoff era and FINRA needs to puff themselves up and appear to be bigger and better than they are, saying that, like any other necessary interaction with FINRA, when all is said and done, they are in the “driver’s seat.” Once you drop your license with a broker-dealer you are in the fire and you will not be able to maneuver out of it. Good luck. It is like dealing with a parent who responds to the question of “why” with “because I told you so.”

The real kicker is that there appears to be no specific rule or regulation which supports FINRA’s position on not using “safety” when talking about an EIA, and thus their position is subjective. Take that from someone who got an EIA seminar script reviewed by one advertising staff member using the word “safe” and then had the same review taken back by another staffer. That, in my mind is not a regulation. Regulations are black and white and FINRA is not the legislature. If they don’t like the regulations, they should change them, and we all know that they certainly know how to do that with 151A. But until that time, their leadership in the sale of EIAs by securities-licensed brokers has not been through cooperation but by intimidation.

“So now what do I do?” you are asking yourself. Take your Series 65 securities license with an advisory firm. And pick an advisory that supports you as an annuity salesman, an advisory that is not trying to turn you into a “stock jockey” or the type of salesman that you are not. The good thing about a Series 65 is it permits you to discuss investments and securities, to handle mutual funds and to place your clients’ investment portfolio with a competent money manager. And, you can legally collect a fee for doing this.
You need to remember who you are. Don’t change yourself or your practice based on another’s perception of what you sell. And remember, you deserve a lot of credit for being an entrepreneur, for having the guts to work for yourself. You’re doing a good job. You know what you’re selling. You know the product. Don’t let the securities regulators lead you to believe otherwise.