Last year, Congress finally settled the question of whether indexed annuities are securities subject to regulation by the SEC by including a provision in the Dodd-Frank Wall Street Reform Act that conclusively defines indexed annuities as insurance products outside the agency's jurisdiction.
This year, some states are refusing to take Congress' "no" for an answer. In the latest action on the issue, Illinois Secretary of State Jesse White issued an order on May 24 indirectly concluding that indexed annuities are securities under Illinois law.
The Facts
White reached his conclusion in an order sanctioning two advisors for making improper annuity sales. The advisor are Thomas N. Cooper and Susan B. Cooper (the Coopers), of Senior Investment Strategies, Inc., doing business as Pinnacle Investment Advisers. In addition to being registered investment adviser (IA) representatives, both were licensed as insurance agents permitted to sell life, accident, and health policies. According to the complaint, Susan Cooper was also licensed to sell casualty insurance and variable products.
The secretary of state investigated the advisors for three years, alleging that the couple violated Illinois securities laws when they convinced a dozen clients to surrender variable annuities that were still within their surrender period and purchase a particular indexed annuity product.
The clients whose complaint precipitated the investigation are a married couple that engaged Pinnacle to review their investment portfolio. The order refers to the clients as GK and DK.
Pursuant to the engagement, the Coopers prepared a "Plan of Action" (Plan) for GK and DK. The Plan recommended that GK and DK execute a partial surrender of a Lincoln Benefit Life variable annuity held in an IRA and purchase a fixed indexed annuity referred to in the order as "Aviva USA EIA" (EIA). As recommended in the Plan, GK transferred $46,000 from his variable annuity to the EIA. The partial surrender left $2,000 in the variable annuity, which the clients expected to allow them to retain $31,625.85 in life insurance death benefits.
After the partial surrender, Lincoln Benefit informed the clients that, as a result of their partial surrender, their life insurance coverage was reduced to $4,533.42.
GK and DK complained to the Illinois secretary of state claiming the advisors had breached their fiduciary duty to the clients, and that, as a result of the advisors' negligence, the clients lost $27,092.43 in life insurance coverage.
The subsequent investigation revealed that Pinnacle had sold 65 EIAs between Feb. 26, 2008 and June 9, 2008, yielding $426,281.79 in commissions. Twelve of those sales were made to clients who purchased an EIAs by liquidating another annuity that had been sold to the clients by Pinnacle. In all 12 cases, the liquidation resulted in surrender charges to the clients.
The secretary of state found that, in addition to fumbling the life insurance coverage issue, the advisors made multiple misrepresentations to the couple
