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Regulation and Compliance > Federal Regulation > SEC

Loophole in financial reform could hurt seniors, mainstream media suggests

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After a series of behind-the-scenes efforts resulted in what looks like a substantial victory for foes of the SEC 151A proposal, the non-financial industry media media has painted a more sinister view of what actually occurred this week in Washington.

Advisors interested in keeping up on both sides of the issue may be interested to read a post by Huffington Post blogger Shahien Nasiripour, who notes that the last-minute wrangling to overturn the efforts to securitize fixed index annuities might not present the best bargain for seniors

House Democrats provided the key votes to help adopt a measure that critics argue will hurt senior citizens by inadequately regulating financial products long associated with deception and predation, overturning court rulings and federal regulators in the process.

The measure, unrelated to the pending financial reform bill, was introduced by Rep. Gregory W. Meeks, a New York Democrat long known for his friendly relations with banking and corporate interests. It’s the House version of a provision introduced earlier this week by Sen. Tom Harkin, a Democrat from Iowa.

The provision prevents the Securities and Exchange Commission from regulating equity-indexed annuities, financial products that promise guaranteed returns and other similar products by designating them as exempt from securities regulation — even though they act like securities. It overturns court rulings and an SEC rule that determined these products were indeed securities, and thus should be regulated as such.

Consumer and investor advocates argue that the measure, which was adopted by House conferees by a 12-4 vote during Thursday’s conference to reconcile the House and Senate versions of financial reform legislation, undercuts basic protections for investors and seniors, who often are tricked into purchasing these products under false pretenses.

In a 2008 speech on equity-indexed annuities, former SEC Chairman Christopher Cox referred to the “abusive sales practices often used to promote” them to seniors, and quoted a former head of the North American Securities Administrations Association who said her association’s survey of the products revealed a “landscape littered with slick schemes and broken dreams” that had been “devastating” to victims and their families.

Last year the SEC ruled that these products were securities, rather than insurance, and hence subject to SEC regulation.

The amendment introduced by Harkin, and then by Meeks, undercuts federal regulators to ensure these products remain the province of state insurance regulators.

Supporters of the provision argued during the public negotiation over the measure that state regulators are equipped to adequately regulate these products, adding that sellers would be held to a “suitability” standard. Such a standard requires that sellers determine that the products are “suitable” for the buyers. There’s no requirement that sellers of these securities-like products act in the best interests of the buyers, though. Investment advisers, for example, are held to such a standard. The suitability standard is widely considered to be weaker than the best interests standard, also known as a fiduciary duty.

A request to Meeks’s office for comment was not immediately returned in time for publication.

There was nothing in either the Senate’s or the House’s financial reform bill that addressed equity-indexed annuities, yet somehow they were adopted by both chambers during the “conference committee” to reconcile the two competing versions of the legislation.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, voted against the proposal. He was joined by fellow Democrats Maxine Waters of California, Carolyn Maloney of New York, and Luis Gutierrez of Illinois.

Joining the Republicans to vote for the measure, who were unanimous in their support, were Democrats Paul Kanjorski of Pennsylvania, Mel Watt of North Carolina, and Mary Jo Kilroy of Ohio. Fellow Democrats Meeks of New York, Dennis Moore of Kansas, and Gary Peters of Michigan, who are part of the New Democrat Coalition, a group known for its Wall Street-friendly stances, also joined Republicans in support of the provision.

Investor advocates were outraged.

“Ignoring a court decision that these are securities as well overwhelming evidence that costs are excessive and sales abuses are rampant, the conference committee has agreed to prevent securities regulators from protecting investors in these and future hybrid products that combine insurance and securities,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “Apparently it is far easier to find a bipartisan majority to weaken investor protections than to strengthen them.”

But, she added, “there is a bigger issue at play here as well.” Congress is sending a message that it won’t tolerate regulators who crack down on abusive financial products, she argues.

“Every aspect of this bill requires regulators to do well what they have done poorly in the years leading up to this crisis,” Roper said. “But in the very bill that is supposed to strengthen investor protections, the Congress has overturned efforts by the SEC to protect investors on two high-profile issues — protections from accounting fraud and from abusively sold equity-indexed annuities.

“That suggests that, should regulators attempt to take a tough line in years to come, Congress is likely to prevent them from doing so.”

The Certified Financial Planner Board of Standards sent in the following statement:

“We are extremely disappointed with this outcome. Stripping the SEC of its powers to regulate equity index annuities undermines the intent of financial reform legislation, which was to protect the average American investor. In our surveys of CFP certificants, the number one complaint they cite is fraud among the elderly in the marketing and selling of equity index annuities, which tie up people’s money for many years and are not appropriate for those who need quick access to their investments. Now, the elderly and vulnerable will have fewer protections than they deserve.

“The SEC adopted the regulations (known as Rule 151A) in response to numerous complaints about deceptive sales practices involving equity indexed annuities. These sales practices have been the focus of numerous lawsuits, regulatory enforcement actions and news articles.

“The Harkin amendment is contrary to the goals of strengthening investor confidence in American financial markets and enhancing investor protection that are the foundation of the Restoring American Financial Stability Act of 2010. There is no question the best way to ensure adequate investor protections in the sale of equity indexed annuities is to allow the SEC to exercise its appropriate authority over these products. Registration of these products with the SEC will increase disclosure to investors regarding their terms, risks, and costs; deter abusive sales practices; and provide victims with more effective remedies.”


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