Illinois Securities Regulators Treat Indexed Annuities as Securities
June 3, 2011 by Arthur D. Postal
WASHINGTON BUREAU — The Illinois Securities Department has issued an order that treats indexed annuities as securities.Illinois Secretary of State Jesse White, who oversees the department, recently entered the order in connection with In the Matter of: Senior Financial Strategies Inc., d/b/a Pinnacle Investment Advisers, Thomas N. Cooper and Susan B. Cooper (File Number 0800064).
The respondents today filed an appeal of the order with an Illinois state court in Springfield, Ill.
The Illinois Securities Department order “is an arbitrary characterization of an equity indexed annuity as a security,” says Tom Kelty, the lawyer representing Senior Financial Strategies Inc., Champaign, Ill., and Thomas and Susan Cooper.
If the order stands, “it establishes law that excludes any insurance agent in Illinois from writing any state-regulated annuity, because it will now be classified as a security, and an insurance agent is not allowed to sell a security,” Kelty says.
The Order and the Appeal
Senior Financial Strategies, a registered investment advisor, and the Coopers, who have been investment advisor representatives at the firm, helped an Illinois couple shift assets into an indexed annuity, from a variable annuity, in 2006. The couple later alleged that the transaction led to a $27,092.43 reduction in life insurance death benefits, White says in the order.
The Illinois Securities Department looked into the matter and found that Senior Financial Strategies had generated $426,281.79 in commissions from the sale of 65 indexed annuities from Feb. 26, 2008, through June 9, 2008. A dozen of the transactions involved clients who cashed in other annuities or individual retirement accounts (IRAs) bought from Senior Financial Strategies The average age of the 12 clients involved in those transactions was 73, and those clients received $107,350.97 in bonuses and paid $122,630.24 in surrender penalties, according to the order.
The transactions violated both the suitability standard, which requires a salesperson to recommend a product that meets the client’s needs, and the fiduciary standard, which requires a salesperson to consider alternative products, disclose conflicts and disclose the fact that some products pay higher commissions than others, White says in the order.
Of indexed annuities, White says, “Each of the above referenced investment plans is an investment contract and therefore is a security as that term is defined” by Illinois state law.
“The respondents employed devices, schemes or artifices to defraud in connection with the sale of securities directly or indirectly,” by giving incorrect or incomplete information about how the indexed annuities were likely to perform, White says in the order.
In the order, White revokes the securities registrations of the Coopers and of Senior Financial Strategies, and he imposes a $10,000 fine.
The order has no effect on the Coopers’ ability to sell insurance, according to David Finnigan, a senior enforcement lawyer with the Illinois Securities Department.
Senior Financial Strategies and the Coopers say in their appeal that the proceedings leading up to the order were not in accordance with the rules and regulations implementing the Illinois Securities Act of 1953.
“The language of the statute under which the proceeding was conducted and the order issued is vague and arbitrary and violates plaintiffs’ rights to constitutional due process,” according to the appeal. “The use of the term ‘investment plans’ in the order is vague and undefined”
In December 2008, U.S. Securities and Exchange Commission (SEC) adopted Rule 151A, a regulation that classified indexed annuities as securities and asserted that the SEC had the authority to help regulate the products.
In July 2010, Congress included a provision affecting indexed annuities and other insurance company products in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provision calls for the products to remain state-regulated as long as they are governed as state-regulated insurance products under standards developed by the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.
Also in July 2010, a panel of the U.S. Court of Appeals for the D.C. Circuit held in American Equity Investment Life Insurance Company, et al, vs. the Securities and Exchange Commission, Case Number 09-1021, that, while the SEC had the authority to decide to regulate indexed annuities as securities, the SEC had “failed properly to consider the effect of the rule upon efficiency, competition, and capital formation.”
Additional information was added to this article by Allison Bell.