July 13, 2008
As much as I would like to see the marketing of Indexed Annuities watched more closely by the Department of Financial Regulation of the State of Florida, I am not in favor of the SEC's latest grab for power over the Indexed Annuity business and by extension, insurance companies of the United States.
Generally, I am in favor of less regulation of the securities industry, and totally against SEC regulation of Indexed Contracts for very specific reasons:
1. The American Public cannot be protected from investment risk by over-regulation. The public needs to become more proactive in its approach to self-education about investments and investment risk. Personal responsibility needs a greater emphasis than currently exists. The SEC cannot protect the buying public from itself.
2. The SEC in its regulatory role has not protected investors from market behavior in the past, nor will it in the future. The SEC and now, FINRA (formally the NASD) has failed in its mandate of consumer protection as any cursory examination of the annual Dalbar study will show, i.e., according to Dalbar, since measured, market returns have beaten individual holding returns by a compound average of over 10%. Individual investors insist upon buying high and selling low, and the SEC is partially responsible, because it has failed to curtail abuses at the highest level of the investment management business. All one needs to do is look at the current environment to know that the SEC has not been able to provide the consumer protections that it is supposed to. The investment marketplace has been filled with one embarrassing fiasco after another, creating an environment of greedy buying followed by panic selling. I don't believe that the SEC is capable or knowledgeable enough to regulate another large chunk of the financial services industry.
3. In my dealings with the SEC both as a person who was interviewed by an SEC enforcement attorney investigating the sales practices of a variable annuity insurance provider, and as a person who barely survived a branch office audit, (a process that was expansive, secretive, expensive, and completely inefficient) I found SEC personal to be professional, but lacking in basic knowledge regarding how annuities work as well as the methods of money management employed, and the techniques used to guarantee both living and death benefits. According to the SEC's enforcement attorney, he had only researched the variable annuity product for 30 days before he questioned me. Furthermore, I found the SEC office auditors' knowledge of qualified plans and the numerous ERISA rules that they are regulated under, sadly lacking. These people, the SEC office auditors, worked directly for the regulators of our industry, and they did not understand the rules that they were supposed to be examining, and making sure I followed.
4. Who regulates the regulators? Within the security industry, licensed representatives have no representation within the SEC. We are supposed to be "represented" by our respective broker-dealers, but the B-D's are held in a state of perpetual contempt by the regulators who hold each of us within their absolute power. I am unwilling to support the SEC's similar power over the insurance industry.
5. The Indexed Annuity by its very design is not a security. Regardless as to the contractual fine print, client monies deposited into Equity Indexed Annuity, like every other fixed guaranteed annuity, is backed by the General Account of the insurance company. It is not a Separate Account asset. Does the SEC also propose to manage the insurance industry's general accounts?
6. "Abusive Practices" against seniors should be handled by the respective state insurance regulators. The SEC has apparently used the newspaper, television, and other written accounts of so-called senior abuse to attack an industry in the unenviable position of not being able to defend itself. What insurance company president is going to say that the reported experiences of a senior who is complaining about a sales abuse is wrong? Furthermore, in cases where I have worked to help correct the sale of a misled consumer who was sold an indexed annuity (yes, with long surrender charges, and a nice commission to the writing representative), I found in every case insurance company representatives who were willing to forgo all surrender charges and make the client whole again. In other words, there is both a state level of consumer enforcement, and an insurance company level of consumer service that exceeds the rest of the investment industry. For example, when was the last time a mutual fund gave back the investment deposit of a stricken senior? The insurance industry, particularly those who have earned the IMSA medallion have a market incentive to help out stricken owners of these type of contracts. Should they fail to help, then individual representatives, like me will never sell another one of their products and we'll tell all of our colleagues as well. For that matter, in the minimum of times that I have had to employ the help of my state's insurance commissioner, I found them to be more accessible, and more consumer friendly than either the NASD (FINRA) or the SEC.
7. The SEC will not help increase competition within the industry. The insurance industry is very competitive for both representatives and clients. Further regulation imposes additional costs and these costs are passed on to the consumer. In the current (and future) investment arena, the consumer needs more choices with more options to manage investment risk. As Baby Boomers retire, and their children realize that Social Security will be broke by the time they think about retirement, the investment industry should be using every risk-management technique possible to encourage savings and investment. The SEC has no solution to the failure of either Medicare, Medicaid, Social Security, and company pension funds. The SEC should begin to examine ways to encourage market competition and get out of the way of regulating a part of the industry that actually works.
8. No on has ever lost money in a fixed or indexed annuity or life insurance contract, because of market risk. There is no other investment that can make that claim. Even when an insurance company's general account has entered a period of state ordered "reorganization" owners of these contracts have been able to get their money back. The insurance industry does not have FDIC guarantees, and there is an absolute incentive to making sure a default on an issued contract does not occur. The industry has it's own method to guarantee the repayment of principal without having to resort to a government bailout. (Hello, Bear Stearns?)
In conclusion, I have little faith in the SEC's actually listening to the little guy within the industry. I am one of the little guys, I have over 20 yeas of experience. I don't think what I have written here will be taken seriously the SEC has already made up its collective mind. Slowly but surely, the SEC and it's minions will chip away at Capitalism's primary structure, and socialize the entire investment industry until the only people who can make a decent return on their money will be the very rich and the extremely well connected. If this power grab is allowed to occur, not one consumer will be protected, the inscrutable salesman will still exist, internal expenses will go up, and the consumer will lose. Look around, how has your CMO or mortgage backed mutual fund done lately? Where was the SEC when all this stuff on Wall Street was going down. Where were the regulators? Will anyone go to jail from any of the big firms on Wall Street?