Source-Of-Funds Issue? Check The Newspaper

By Linda Koco InsuranceNewsNet

Agents who are licensed only to sell insurance — the so-called “insurance-onlys” — may not be thinking about checking out their local newspaper before speaking with prospects about the funds they plan to use to pay for a fixed annuity.

However, reviewing the newspaper benchmark might be the very thing that can help an agent stay compliant with regulators in light of evolving “source-of-funds” requirements.

Cailie A. Currin, president and CEO of Currin Compliance Services, made a case for doing that during a source-of-funds webinar sponsored by the National Association for Fixed Annuities (NAFA).

The issue

The source-of-funds issue refers to emerging regulatory requirements concerning what advice insurance and financial advisors can give to consumers. The shorthand version is: if you’re not licensed to sell an insurance or securities product, don’t give specific personal advice to consumers about that product.

The session focused on suggestions for insurance-only agents who sell fixed annuities and find themselves working with clients who already have securities.

If the securities topic comes up during the discussion, Currin said, “you can discuss anything that you can read in a newspaper” where securities are concerned. That is, discuss generalities. But do not give specific advice to clients on what to do or not to do about securities.

That is true even if a customer directly asks an insurance-only about whether to liquidate certain securities in order to pull together the funds to put into the annuity.

This approach will help keep insurance-only agents compliant with what is essentially the insurance industry’s only existing standard for source-of-funds.

That standard is embodied in Iowa's 2011 Insurance Bulletin 11-4, which lays out permissible areas that insurance-licensed or securities-licensed individuals can discuss with clients. In 2013, Tennessee issued a bulletin very similar to Iowa’s. In 2009, Arkansas issued a bulletin that addressed some of the same issues but with key differences.

The suitability issue

Iowa developed the bulletin response to questions raised by the Suitability in Annuity Transactions Model Regulation adopted by National Association of Insurance Commissioners (NAIC) in 2010. These regulations lay out 12 criteria for sales to be deemed suitable.

Sellers must collect key information on these points as part of the sales process, Currin noted.

Some of those suitability criteria are fairly routine. Examples are questions about age, annual income and the annuity’s intended use. But others potentially could trigger discussion of a consumer’s personal financial situation, Currin cautioned.

For instance, one criterion asks for information about the consumer’s existing assets, including investments and life insurance holdings. Another asks about the resources to be used to fund the annuity.

In asking those suitability questions, insurance-only agents need to be mindful of the source-of-funds issue so the discussions they have with clients do not go in a direction that inadvertently gets them into source-of-funds trouble. That trouble could emerge if their actions include giving advice to a consumer about the consumer’s securities.

The law of the land

Co-presenter John L. Olsen pointed out that suitability “is the law of the land.”

All states have statutes in this area, and nearly 35 have adopted the new NAIC suitability model, with four more states pending (Georgia, Maine, Massachusetts and Tennessee), said Olsen, who is president of Olsen Financial Group, St. Louis.

In addition, he said, insurance companies that operate in states where the 2010 NAIC model is in effect adhere to those rules in other states as well.

That last is something that NAFA is encouraging annuity companies to do, added another co-presenter, Pam Heinrich, who is general legal counsel at NAFA.

Fixed annuity companies want to keep their safe harbor under the Harkin amendment, Heinrich pointed out. Harkin is the section of the Dodd-Frank Act of 2010 that ensures fixed annuities that meet certain requirements (including suitability) will be regulated as insurance products, not as securities.

As Olsen sees it, the Iowa Bulletin is a “splendid document,” because it identifies what is inside and outside the scope of the insurance-only producer.

That helps when producers address the suitability questions raised by the 2010 annuity suitability regulations.

What’s permissible and what’s not

In the financial area, the bulletin says it is “permissible” for insurance-only agents to discuss general information, Currin pointed out.

Examples include general discussions about balancing risk and diversification; discussion with consumers about their risk tolerance, financial situation and needs, and about the stock market in general terms. Also permissible is discussion that provides advice around insurance products as part of a financial plan.

But client-specific advice involving securities is prohibited. Examples include discussing risks specific to a consumer’s individual securities portfolio, and providing advice regarding the consumer’s specific securities or securities investment performance.

A key point, according to Olsen, is that insurance-only agents must disclose that they are insurance agents and are authorized to sell insurance.

Regulators do go after source-of-funds violators. One example cited by Olsen involved two agents in Arkansas who were investigated and fined by the state securities department in 2014 for sales activities in a Social Security seminar where a fixed index annuity was sold to a senior.

Among other things, the regulators had charged that the agents provided “investment advice” without proper securities registration, and that the agents had commented on the customer’s specific securities holdings, Olsen said.

In that case, the original seminar invitation didn’t make it clear that the seminar was an insurance sales presentation, Currin pointed out. “Make sure that people know you’re selling insurance,” she said.

Also, the agents apparently did not have notes “to use in refuting the version of the facts the regulators could create about what happened,” she said. Such notes can help in creating “an alternative version of the facts that is more favorable to the agent.”

Make notes during client meetings or right after, suggested Heinrich. That way, the agent will not have to try to reconstruct from memory who said what and when. One idea is to make notes in an email and send it to the client and yourself, or perhaps just yourself, and “save it to a subfolder,” she said.

If sending to the client, the agent can ask for feedback, such as whether the client agrees that the emailed summary covers the topics discussed.

The goal is to “document, document, document,” Heinrich said.

Even consider recording meetings with a client, Olsen suggested, but be sure to get the client’s permission to be recorded and also check to see if this is permitted by the product distributor and insurance company.

NAFA is urging other state insurance regulators to follow the Iowa and Tennessee lead by issuing bulletins that help agents deal with source-of-funds issues, Heinrich said. In addition, NAFA is asking NAIC to make the Iowa document into an NAIC model.

In states without guidelines, “we don’t really know what the rules are,” other than from reviewing disciplinary actions and feedback from regulators, Currin said. Without articulated standards, how those states will handle source-of-funds complaints and inquiries is not clear.

Her suggestion is for agents in all states to follow the Iowa and Tennessee bulletins. This shows they have made “a reasonable effort to follow the only standard that is available,” she said.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].