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Regulation and Compliance > Federal Regulation > FINRA

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

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Interested in taking the plunge and becoming securities licensed? Those who’ve chosen to take a proactive stance in light of SEC 151A may profit from earning their Series 65, but as an industry lawyer suggests in the following opinion piece, make sure you make the decision for the right reason.

Those who know me know that I usually am fairly supportive of regulators. My attitude has always been “the facts are what they are” and “the regulations are what they are,” and no amount of arguing or pounding on the table will change either. But those who know me also know that one thing I do not countenance is those in a position of authority using their “office” in subjective, punitive ways. As was once quoted, “Leadership is based on inspiration, not domination; cooperation, not intimidation.” FINRA has somehow forgotten this.

Let’s begin our conversation addressing what is out there, palatable and painful–the free-floating anxiety that sales agents of equity indexed annuities are feeling, in part because of SEC 151A bringing the topic of “regulation” of an insurance product to the forefront.

Insurance-licensed agents are divisible into two groups–those with a securities license and those without. Those with a securities license are governed by the regulations of FINRA and/or the SEC. While those with no securities license may avoid the jurisdiction of FINRA, they still fall under the auspices of the state regulators. This is actually a simple concept to understand: You need a securities license to discuss securities. If you have a securities license FINRA or the SEC will police you in this regard, and if you don’t, the states will be watching to make sure you don’t mention securities. Therefore, not having a securities license does not “save” you from being under a regulators’ scrutiny. It just puts you in a different regulator’s queue.

What’s best for you?
As an insurance-licensed agent, in order to maneuver through the decision matrix of what is “best for you,” the first thing to think about is not what the regulators want but what you need to grow your business, to sell your annuity. The question that you need to answer honestly is whether as an EIA salesman you necessarily need to be able to discuss “securities” or “investments.” Think about it. In my mind, it is na?ve to think that a prospective client is not going to want to discuss the relative safety of the EIA vis-a-vis where their money may now be. What are you to do? When a client asks if you think their money would be safer in an EIA or the stock market, it is absurd to think you can say, “Oh, sorry. I can’t talk about that,” and still make a sale.

So probably, you need a license. Not because of 151A but because it is more advantageous to be able to discuss securities, regardless of whether the EIA becomes redefined as a security. You need to discuss securities and investments now.

The next thought that most insurance-licensed agents have, erroneous though it is, is that the only way to accomplish this goal is to take their Series 7 and drop their securities license with a broker-dealer. While that event will negate the risk of uttering the word “securities” without the necessary license, it throws you under the intense scrutiny of the very regulators who want to regulate an insurance product as if it were a security.

Don’t let 151A twist your arm
Please do not think with 151A looming out there, that you have no choice or that if 151A passes you will not have sufficient notice for what you may need to do. There is no reasonable basis for either of these thoughts.

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.


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