The source-of-funds issue has surfaced in Tennessee. In a new bulletin, Tennessee regulators have spelled out guidelines on what insurance and securities sellers can say, and not say, about funds their customers can use to purchase their products.
The bulletin is directed to two groups: “insurance-only persons” who only hold a producer license to sell life and annuities, and “securities-only persons” who are only registered to sell securities.
In brief, it says that an insurance-only person needs to avoid talking with a customer about liquidating or otherwise using securities product to generate funds for an insurance purchase, whether life or annuities.
Similarly, a securities-only person needs to avoid liquidating or pulling money from a life or annuity contract in order to access funds to buy a security.
There is much more to the bulletin than that, but it is the source-of-funds delineation that captivates both sides of the financial fence. Neither insurance- nor securities-only persons want the other side to play in their own backyard.
Modeled after Iowa
The guidelines may sound familiar. That is because Iowa issued an almost identical bulletin—Iowa Insurance Bulletin 11-4— back in June 2011.
Arkansas issued a somewhat similar bulletin too—Arkansas Bulletin No. 14—in September 2009. But the Arkansas document is less detailed than the other two, and it applies only to insurance producers, rather than to both insurance and securities people.
A key distinction between the Tennessee and Iowa bulletins is that the former has teeth.
The Tennessee bulletin says insurance-only persons could face license revocation for engaging in prohibited activities plus civil penalties of up to $10,000 per violation. It also says that securities-only persons could face suspension or revocation of their registrations and civil penalties of up to $1,000 per violation.
Incidentally, the Arkansas bulletin, though more limited in scope, also has some teeth. An insurance producer found in violation could face a suspended or revoked license and fines of up to $5,000 per violation.
Regulators still concerned
Even though only three states have put out such bulletins since 2009, Tennessee’s arrival to the group signals that some state regulators are still thinking about nudging sellers to observe insurance/security boundaries.
The boundaries topic was a hot one right after the 2008-2009 recession. That’s when calls for regulatory scrutiny of all-things-financial became a front burner issue in the public eye.
Regulators at the time started receiving complaints that insurance-only people were recommending their clients move money from securities accounts and into the “safe haven” of insurance and annuity products. Regulators also heard complaints that securities-only people were advising clients to move money out of insurance products and into securities while the investments were “still on sale.”
The complaints were not only that the other “onlies” were doing these things, but that they were doing so without holding the appropriate credentials.
Since then, the slow economic recovery and stock market rebound seems to have quelled the buzz on this score. This may be because more people are seeing growth in their securities accounts, and some have resumed investing, so the sellers are focusing more on customers than complaints about their competition.
Some recent numbers from Aon Hewitt, bear out the rising investment activity. According to the Lincolnshire, Ill., firm, the average defined contribution (DC) plan balance rose to $81,240 in 2012 from $57,150 in 2008. In addition, 78 percent of employees participated in DC plans in 2012, up from 75 percent in 2011, and 68 percent in 2002.
Since DC plan assets, such as those in 401(k) plans, are primarily invested in securities, the Aon Hewitt figures suggest rising confidence has definitely been in the air. Assuming that this same confidence exists outside the DC world, the tone of the marketplace is much different now than when the source-of-funds issue first reared its head.
Still, Tennessee’s recent action is a reminder that concerns over insurance/security boundaries have not gone away.
Katelyn Abernathy, spokesperson for the Tennessee Department of Commerce and Insurance, says the department issued its new bulletin—Licensing and/or Registration Requirements and Permitted Activities — after hearing of concerns that had been brought to a legislator by a “constituent with a vested interest.”
The regulators reviewed the concerns and decided to issue the bulletin “to clarify the distinction the insurance-only and securities-only persons,” she says.
The department adapted the Iowa bulletin for Tennessee for this purpose, since this was “the most efficient way” to accomplish that, she adds.
The provisions are “designed primarily to provide guidance” to insurance producers, investment advisers, investment adviser representatives and broker-dealer agents, according to both state bulletins. But while certain activities of insurance-only and securities-only sellers are permitted, others are prohibited.
Suitability a key factor
An important stimulus for the bulletins was adoption of suitability in annuity transactions regulations.
Those regulations have stirred up questions “as to where the line is drawn between providing insurance advice and investment/securities advice,” the Tennessee and Iowa bulletins say.
State and federal suitability laws “have evolved to the point where any recommendation to a consumer of either an insurance product or an investment/securities product requires an extensive financial analysis of the consumer's financial affairs and a discussion of broad financial trends,” the documents explain.
What’s more, the requirements in insurance and securities laws differ, and how information received from the consumer is applied “will be different depending on whether it is an insurance transaction or an investment/securities transaction.”
To help clarify things, the departments issued their bulletins describing “permissible” and “prohibited” activities.
The source-of-funds pointers are but one part of the many examples shown.
This discussion includes comments such as, insurance-onlies are permitted to discuss “existing assets” with the consumer.
These assets include investments as well as annuity and life insurance holdings. The also include: “financial resources generally available” for funding the annuity or life insurance; and liquidity needs and liquid net worth, “including whether there are funds other than those being used to purchase the annuity, that will be available during the surrender period of the annuity or life insurance for emergency or urgent needs, and where those funds are located.”
The insurance-only person can also discuss the stock market “in general terms.”
And, in general discussion about funds being considered for use in the annuity/insurance purchase, the insurance-only person may discuss various associated topics related to market risk, tax status of the funds, use of the funds or lifetime income, and more.
What the insurance-only person may not do is provide advice regarding the consumer's specific investments/securities or performance, or compare same “with other financial products, including annuity contracts or life insurance policies.”
More to the point, insurance-onlies may not recommend liquidating specific investments/securities “or identify specific investments/securities that could be used to fund an annuity or life insurance product.
There are comparable provisions for securities-only persons. These allow securities-onlies to, for example, discuss insurance in general terms in the context of managing risk, diversifying assets and financial objectives using insurance that is “solely incidental” to the securities person’s advisory services.
But the securities-only person may not recommend “the liquidation of an insurance policy, the lapsing of an insurance policy, the taking of policy loans, withdrawals, or surrenders, or otherwise providing any insurance advice or recommendations related to the purchase of a security or investment.”
How’s it going?
Tennessee rolled out its bulletin on May 22, 2013. Since then, everything has been quiet, says Abernathy. “There has been no-kickback or concerns so far.”
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