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The landscape for producers has been chanced.


ON ITS FACE, the Securities and Exchange Commission's decision on Rule 151A--to regulate index annuities as securities beginning in January 2011--would, if left in place, seem to mean business-as-usual for annuity producers selling these products for the next two years.

But the landscape has changed.

The SEC has said index annuities are securities, but will not treat them as such for a while; however, the SEC has also implied that annuity producers should be securities-regulated because current state insurance regulation is impotent. The impact on annuity producers prior to 2011 depends on how they conduct their business.

Producers without securities registration

For the annuity producer who does not do seminars, and simply explains the features and benefits of the index annuity to annuity prospects, life should not change for 2 years (one year for Florida producers if HB 141 is enacted).

But producers who do conduct seminars, or use ads or mailings to attract prospects, need to be very careful in what they say about not only index annuities but everything else. AARP is encouraging its members to nark about annuity seminars attended and mailings they receive where information is not, in the member's opinion, balanced. The North American Securities Administrators Association is on the watch for producers providing investment advice without proper registration.

One would hope investment advice is not offered if the consumer decides the index annuity is a better place for the money and the consumer makes his or her own decision to sell the security and buy the annuity.

However, since the securities rep who is losing fees derived from the departing assets under management may complain to securities regulators about even appropriate annuity sales, it would probably help if the producer had a signed statement from the consumer saying the decision to sell the security and buy the annuity was the consumer's alone and that no investment advice was given by the producer.

Producers with a broker-dealer

Within hours after the SEC ruled, a copy of an email arrived in my office, purportedly sent from a broker-dealer to its reps. The gist of it was that, since the SEC had ruled that index annuities are securities, all annuity business has to be processed through the B-D effective January 2009. It also indicated the commission payout would use the same grid as other securities products. Further, it recalled that, in its Notice 05-50, the Financial Industry Regulatory Authority, Washington, D.C., made it very clear that index annuities should be treated as securities, and they have been so judged.

Annuity producers already had to send written notice telling their broker-dealer they were selling fixed annuities as an outside business activity. Now, more B/Ds will likely require all fixed annuity and insurance activity to flow through them; this activity will range from approving letters to clients to determining individual sales suitability. The B-D will be compensated for the extra work.

Only the producer can determine whether a B-D relationship is worth it. There are a lot more rules to follow. In 2008 alone, FINRA issued 65 ride filings and 82 regulatory notices totaling 3,928 pages, all redefining how registered people do their job.

It is worth stating that a Series 6 or 7 securities registration can hang inactive for up to 2 years, which coincidentally is smack on the proposed start date for FIAs to become EIAs.

In this vein, it's worth noting that, right after I received that first email, I was copied on another email sent by an agent to his B-D saying, "Effective immediately please terminate my registration with your firm and send me a U-5. I'll call you in 2011."

Producers with investment advisor registration

Becoming a registered investment advisor means the annuity producer acts as a fiduciary. This subjects producers to a higher level of liability and accountability. For example, an advisor must provide fair balance in recommendations, but it is the securities regulators that determine what is fair.

On December 17, 2008, NASAA released a statement saying, "Equity-indexed annuities ... have taken an especially heavy toll on our nation's most vulnerable investors, our senior citizens for whom they are clearly unsuitable" That suggests that annuity producers who are registered with a NASAA member are being regulated by an entity that may have little understanding of fixed annuities and even believe the products are never a suitable solution.

It is unlikely that the SEC will win the court fight that will come over Rule 151A. This is because the decision to issue the rule was based much more on Dateline's televised broadcast on index annuity sales practices than it was on case law.

Still, win or lose, the regulatory world for annuity producers will become more complex. Rule 151A was simply the opening bell in the fight that will determine who may offer financial solutions to consumers.



Producers without securities registration

Producers with a broker-dealer

Producers with investment advisor registration

Source: Jack Marrion, Advantage Compendium, St. Louis, Mo.

Jack Marrion is president of Advantage Compendium, s St. Louis based research and consulting firm. His e-mail address is
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Copyright 2009 Gale, Cengage Learning. All rights reserved.

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Title Annotation:SPECIAL REPORT ON RULE 151A; annuties rule
Comment:The landscape for producers has been chanced.(SPECIAL REPORT ON RULE 151A)(annuties rule)
Author:Marrion, Jack
Publication:National Underwriter Life & Health
Geographic Code:1USA
Date:Jan 19, 2009
Previous Article:Internet regulation: distasteful but inevitable.
Next Article:For fixed index annuity carriers the timing couldn't be worse.

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