From the December 2008 Issue of Senior Market Advisor Magazine
In this special section, we'll examine the development and the repercussions of the SEC's divisive proposal, Rule 151A, and speak with those on both sides of the issue. We will also offer you some concrete steps to make sure your voice is heard and that you are taking steps to prepare yourself for the outcome of the proposal, whatever happens.
It doesn't take much of a conspiracy theorist to suggest that what itself might have been, in a normal year, the low point for the financial services industry–the much-ballyhooed "Dateline NBC" program and its "sting" on insurance agents–in some way helped set the stage for this summer and fall's controversial dealings with Securities and Exchange Commission Ruling 151A.
Long before the crisis on Wall Street and the overnight insolvency of some of America's largest financial and insurance institutions, April's "Dateline" program apparently gave extra ammunition to one individual, SEC Chairman Christopher Cox.
In the process of unveiling the proposed 151A ruling on June 25 (which would seek to turn indexed annuity products into securities instead of insurance products, requiring a major retooling of the way that much of the industry works), Cox even played an excerpt from the program, describing the indexed annuity world as an unregulated Wild West filled with unscrupulous, predatory salesmen.
The SEC's resulting proposal has, not so unexpectedly, polarized the industry, with the unlicensed fearful of losing access to a powerful and profitable tool, and those on the securities side, in many cases, suggesting that Rule 151A might not be such a bad idea.
The most interesting side effect is the way that the proposed legislation has pushed untold numbers of agents, FMOs and carriers into political action, writing letters, visiting their elected officials and, unfortunately, now contemplating a protracted legal response if the proposal is passed. 151A has also fanned the long-smoldering fires of jurisdictional dispute between state regulators and the federal government, as each side seeks to assert its control over the scope of the insurance universe. All this in the middle of election season, just for added color.
A recent poll conducted online at www.SeniorMarketAdvisor.com found that 63 percent of those responding now believe it will take more than one year for a decision to be made on the issue. The final fate of SEC Rule 151A will depend on a wide variety of factors, not the least of which being last month's presidential election and the objectives of a new Democratic president. Since this fall's near-cataclysmic economic crisis, Rule 151A has also become, admittedly, less of a priority for legislators; those close to the issue say that while the spotlight has been taken away from the proposal, there's little chance that it will be entirely swept under the rug by the new administration.
"Chairman Cox has said publically that he's leaving the SEC after the election, and that indicates that this is probably not going to get done under his watch," says Sean Dilweg, commissioner of insurance for the State of Wisconsin. "Under a Democratic government, you're going to find more consumer-friendly measures. But I don't think that 151A is something that's just going to disappear."
"Times have certainly changed since this all started, and at worst, if it still goes through, I suspect that we'll see a lawsuit," says Jim Mumford, first deputy commissioner of the Iowa Insurance Division. "But I believe (the SEC) didn't think it all through when they proposed it … I don't think (Cox) knew whose ire he would raise. I also fault the securities regulators for admitting that they really didn't have jurisdiction to do this in the first place."
After announcing the proposal, the SEC welcomed commentary from the public. And after eliciting more than 2,600 responses during a first round, the comment period was again reopened until Nov. 17; those many thousands of responses can be read online at www.sec.gov. Many were penned at the urging of a number of industry leaders who immediately rallied together to protest the implications of securitization for the many unlicensed advisors working in the business. Despite being stripped of identifying details, the comments speak volumes on advisors' feelings on the issue.
"Since indexed annuity sales are regulated more than adequately by the state insurance commissions, the SEC's proposal merely adds to governmental bureaucracy without providing consumers with additional protection," one wrote. "Since dispute resolutions within the securities industry take much longer, are more complex and are much more costly for the consumer than those overseen by my Department of Insurance, what is proposed will substantially hurt consumers rather than help them. It also will have a negative impact upon me and upon my business."
Others echoed their concerns about the financial implications of the move. "I have built an insurance business over many years and fixed indexed products have been an important part of my business success," one agent said. "I have played by the rules and have tried to provide my clients with quality products and outstanding service. And suddenly, along comes the SEC with this proposal that endangers my business, my livelihood, and my client's interests–it's preposterous."
In September, a group of representatives organized by insurance carriers who offer FIAs went directly to Washington, D.C. to state their case. Over the course of one day, 110 members of the house and senate received visits. Representatives say the warmest response to their pleas came from Congressman Gregory Meeks (D-NY), Congressman Thomas Price (R-GA) and Congresswoman Deborah Pryce (R-OH), who they hope will have a more impactful influence on the SEC's appointees.
"I was pleased with the receptive attitude lawmakers showed to us," says Andrew Unkefer, president and CEO of Unkefer and Associates. "They understood what was at stake and could see the value of keeping a viable savings product in the market. If everything becomes a security, the savers will have no place to go to safely protect their assets."
Understandably vocal throughout the entire process has been Kim O'Brien, executive director for the National Association for Fixed Annuities, who says she too believes that 151A will not just simply disappear. She suggests that those on both sides of the issue remain vigilant, as an outcome on either side of the coin will probably lead to more scrutiny on the industry as a whole.
"I think there's a good chance that the issue will move into political hiatus, but it's also equally likely that Cox is so fed up by the whole thing, he will use this as his 'flag waver' move," O'Brien says. "If he's annoyed or politically (upset) enough, it will pass. And in that event, it will probably move into lengthy litigation. He's not going to let it go, though … 2 percent of all sales of a product that makes $25 billion a year would go to FINRA, and that's a lot of money."
O'Brien and her organization continue to strategize on the proposal. In the meantime, she says that the strong showing of many fixed annuities during even the worst of the recent financial roller coaster ride indicates that the product carries plenty of weight, and agents shouldn't suddenly change course.
