State regulators on high alert for complex investment and insurance sales
July 2, 2014 by Darla Mercado
Retirees’ search for yield, combined with complex product innovation, has put regulators on high alert about a handful of investments that are making the rounds.
Structured products, nontraded REITs, and private placements are just a few of the items on state securities and insurance regulators’ list of potential targets.
Regulators Joseph P. Borg, director of the Alabama Securities Commission, and Jim Mumford, first deputy insurance commissioner in Iowa, participated in a panel discussion on regulatory developments at the Insured Retirement Institute’s Government, Legal and Regulatory conference in Washington Tuesday. The two shared their latest list of regulatory worries.
“We’ve seen a tremendous increase in agents selling unlicensed products, what we would call selling away,” Mr. Borg said, noting that he was referring to independent agents, as opposed to career agents. Following the 2008 crash, which brought down product sales for many, “we saw insurance agents getting into private placement sales and moving people out of insurance products into 506 Reg D’s,” he added.
Under federal securities laws, Rule 506 of Regulation D creates a safe harbor for the private offering of securities. These are supposed to be made available only to accredited investors or non-accredited investors who are sophisticated enough to evaluate the investment.
Offending agents attempt to get around securities laws by claiming that they had a letter from “some lawyer who doesn’t exist, saying [the private offering] isn’t a security,” Mr. Borg said.
Other questionable products that have been circulating include promissory notes and self-directed IRAs that are full of worthless investments that aren’t receiving valuations, he added.
Brokers and agents have been particularly interested in selling structured products, but few are able to really grasp what they’ve been selling. “I haven’t found an agent yet who sold one and can come into my office and explain it to me,” Mr. Borg said.
With respect to insurance products, a number of new offerings are attracting the attention of Mr. Mumford, who points out that more than 30 states require insurance agents to undergo specific product training, per the National Association of Insurance Commissioners’ annuity suitability rule.
“A lot of the new products we see, the designs filed with us, we go back and ask [insurers], ‘How will you train your agents on this because we don’t understand it?’” said Mr. Mumford. “They have to have the agent training down to the point that the salesperson has to know what they’re selling.”
Both regulators spoke of the merits of sharing information between insurance and securities departments, particularly with respect to punishing bad behavior. In Iowa, regulators have broken down the specific list of “do’s” and “don’ts” for individuals who are only licensed to partake in securities transactions and those who can only participate in insurance transactions. This way, it’s more difficult for someone who is insurance-licensed to sway someone into selling out of securities to buy an insurance product, and vice versa.
Additionally, Iowa can pursue dually licensed brokers and agents, stripping both licenses from wrongdoers who cross the line on either the insurance or the securities side, Mr. Mumford said.
Currently, Mr. Borg is encouraging insurance and securities regulators to share information in Alabama. “We’re making our CRD system available to the insurance regulators any time they want it,” he said. “We want to know who has a bad record.”
