WASHINGTON BUREAU — The Illinois Securities Department has issued an order that treats indexed annuities as securities.
Illinois Secretary of State Jesse White, who oversees the department, recently entered the order in connection with In the Matter of: Senior Financial Strategies Inc., d/b/a Pinnacle Investment Advisers, Thomas N. Cooper and Susan B. Cooper (File Number 0800064).
The respondents today filed an appeal of the order with an Illinois state court in Springfield, Ill.
The Illinois Securities Department order “is an arbitrary characterization of an equity indexed annuity as a security,” says Tom Kelty, the lawyer representing Senior Financial Strategies Inc., Champaign, Ill., and Thomas and Susan Cooper.
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If the order stands, “it establishes law that excludes any insurance agent in Illinois from writing any state-regulated annuity, because it will now be classified as a security, and an insurance agent is not allowed to sell a security,” Kelty says.
The Order and the Appeal
An indexed annuity is a product that offers a guaranteed minimum rate of return along with the potential for the holder to get a higher rate of return if a stock index or other investment index performs well.
Senior Financial Strategies, a registered investment advisor, and the Coopers, who have been investment advisor representatives at the firm, helped an Illinois couple shift assets into an indexed annuity, from a variable annuity, in 2006. The couple later alleged that the transaction led to a $27,092.43 reduction in life insurance death benefits, White says in the order.
The Illinois Securities Department looked into the matter and found that Senior Financial Strategies had generated $426,281.79 in commissions from the sale of 65 indexed annuities from Feb. 26, 2008, through June 9, 2008. A dozen of the transactions involved clients who cashed in other annuities or individual retirement accounts (IRAs) bought from Senior Financial Strategies The average age of the 12 clients involved in those transactions was 73, and those clients received $107,350.97 in bonuses and paid $122,630.24 in surrender penalties, according to the order.
The transactions violated both the suitability standard, which requires a salesperson to recommend a product that meets the client’s needs, and the fiduciary standard, which requires a salesperson to consider alternative products, disclose conflicts and disclose the fact that some products pay higher commissions than others, White says in the order.
Of indexed annuities, White says, “Each of the above referenced investment plans is an investment contract and therefore is a security as that term is defined” by Illinois state law.