November 4, 2008
It's remarkable that the SEC didn't ask the advice of the National Association of Insurance Commissioners (NAIC) about their suggestions regarding how to improve the regulatory regime of fixed indexed annuities (FIAs). The NAIC has over 12 years of actual experience in regulating the sale of hundreds of billions of dollars of FIAs, and to my knowledge not one dime has been lost do to market risk. Given the current financial crisis, the principal protection NAIC has accomplished in regulating FIA's is a feat that surpasses putting a man on the moon. Instead of taking it for granted, I feel the SEC and FINRA should try to get to the bottom of how they did it.
Another amazing thing that has been overlooked is the protection insurance clients have in dispute resolution that simply isn't available to securities clients. For example, if an insurance client believes he/she has been wronged, most states allow for an insurance complainant to meet directly with a state insurance commissioner staff person within a matter of days at no cost. And if the insurance commissioner staff believe the complainant is in the right, it's generally a matter of days or weeks before effective resolution is accomplished. I have never heard of anything in the Securities Industry resolution process that is anywhere nearly as effective. Even in the extremely biased Dateline TV episode, it was acknowledged that virtually everyone who felt deceived or wronged through the sale of a FIA was given the opportunity to have their full investment returned with interest. Imagine the Securities Industry trying to match this with every securities investor who felt they were deceived or wronged being returned their principal plus interest.
Shouldn't it be acknowledged that FINRA and some Securities Regulators are competitors to insurance licensed only FIA salespersons? As such, a sharp eye is often used to evaluate sales and marketing tactics that take revenue generating assets out of the hands of the Securities Industry. This can be good if those ultimately making the rules have an overriding concern for the public good. Just as the public might benefit from having Honda automobiles critiqued by Toyota engineers. One way to spoil the results, however, would be to have Toyota make the rules for their competitor Honda, because it would be in Toyota's best financial interests to put Honda out of business.
Likewise, if FINRA and some Securities Regulators make the rules for FIA insurance only producers, it would be in their best financial interests to put FIA insurance producers out of business without regard to the public good. For example, let's say FINRA makes a rule that an insurance producer can't receive compensation for selling a FIA when the source of funds is a security replacement. Otherwise the insurance producer is giving "financial advice" and needs a security or investment advisor license. This rule would effectively stop the majority of fixed indexed annuity sales, since even a money market fund is a security. If this hypothetical rule had been put in force 12 months ago, the unintended damage to the public would have been that many billions of dollars that are now protected in fixed indexed annuities would likely have been greatly reduced and possibly lost due to the market decline and resulting panic selling that generally occurs during significant market declines.
Back to my original point, I believe the NAIC are best able to regulate FIAs. An example would be the NAIC's quick response to the securities regulators suggestions about implementing suitability standards. Unlike the "Sledge Hammer" rule implemented in the security industry to fine a registered representative $50,000 for an unsuitable sale to a senior, the NAIC implemented suitability standards that apply to everyone at every age through an easily implementable, standardized suitability form an insurance agent must now use when completing a FIA application. This is on top of FIA carriers having developed internal compliance teams to review and provide second (overriding)opinions on FIA suitability on every FIA application.
I really don't understand why the NAIC is so open to suggestions, and the SEC and FINRA are exactly the opposite--it's as if the SEC and FINRA don't even want to know the opinions of those who have the most experience and knowledge in regulating insurance matters. Yet they strongly desire to make the rules for, and receive the revenues resulting from insurance regulation.
Finally, if the tables were turned, and NAIC were to start making the rules for the Securities Industry, I'll bet one rule would be to eliminate the word "security" and only use the word "investment" when describing what are currently called "securities". How many billions of public dollars have been lost because of the false sense of security the word "securities" brings to investments which risk principal. And I'll bet this suggestion will never be implemented because of the net loss of billions of dollars of revenues that would result if registered representatives could no longer use the word "securities" when describing their products.