By Linda Koco
The Iowa Insurance Division has drawn a line in the sand regarding permitted activities for advisors who hold only an Iowa insurance license or only an Iowa securities license.
Insurance Bulletin 11 -4 and Securities Bulletin 11 1, issued today by Iowa Insurance Commissioner Susan E. Voss, outlines what these advisors can and cannot talk about with consumers, says Jim Mumford, first deputy insurance commissioner and securities administrator in Iowa.
The Bulletin focuses on two categories of advisors: insurance-only and securities-only.
It defines an insurance-only person as one who holds only a life and annuities license, with no additional Iowa license as an investment adviser, securities agent or investment adviser representative under Iowa securities law. It defines a securities-only person as one who holds an Iowa securities license, but not also an Iowa life and annuity license.
The eight-page document then lines out numerous “permissible” and “forbidden” activities for each type of advisor.
For instance, it says insurance-only persons “may discuss with the consumer the consumer’s risk tolerance, financial situation, and needs.” But they may not discuss “risks specific to the consumer’s individual securities portfolio.”
As for securities-only persons, it says they may discuss “risks specific to the consumer’s individual securities portfolio” but not “the benefits or negatives of insurance, its cost versus benefits, in specific terms relating to the consumer’s individual or group insurance policies.”
The Bulletin also offers guidance for “unlicensed persons and entities” who are permitted to give limited insurance-only advice, as well as for advisors who have both insurance and securities licenses.
“The purpose is to let advisors know where the line is between talking about insurance and securities, and to encourage them to think about what they are saying to clients so they don’t cross that line,” says Mumford.
These are guidelines, he stresses. “They are designed to be non-threatening. They are not regulations with teeth.” For instance, while the Bulletin identifies what is and is not permissible, it does not stipulate consequences for advisors who do not adhere to the guidelines.
“If you mention threats, attention always goes to that. Without the threats, we think the guidelines will get the attention.”
If an advisor does cross the line, however, and if the Iowa Insurance Division finds out about it, “we’d do a cease-and-desist order,” says Mumford. “If the situation is bad enough, we’d take the advisor’s license, too.”
Source of funds
Industry professionals consider the Bulletin to be a regulatory effort to help resolve the so-called “source of funds” issue that has sprung up around the country.
The source of funds debate zeros in on financial transactions funded by withdrawals from another type of financial product (the source of funds) about which the recommending advisor has no license to talk or to provide advice.
For example, some securities-licensed reps have complained that insurance-licensed advisors have been advising clients to pull money out of securities products for deposit into insurance products, such as indexed annuities, even though the insurance advisor does not have the securities credentials to advise on securities. Some insurance-licensed advisors have voiced similar complaints about securities-licensed advisors, saying these advisors have recommended that clients make withdrawal and other decisions about insurance products without having the credentials to advise on insurance.
The new Iowa Bulletin does not mention “source of funds,” but the introductory words make clear that the boundaries for advice depend on licensure.
Questions about where the line is drawn between providing insurance advice and securities advice are what spurred the Division to develop the guidelines, indicates Commissioner Voss in the introduction to the Bulletin.
These questions have cropped up, she says, ever since Iowa adopted its annuity suitability rule, which she says is “substantially similar” to the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation of 2010 (NAIC 2010).
State and federal suitability laws have reached the point where any recommendation to a consumer of either an insurance product or a securities product “requires an extensive financial analysis of the consumer’s financial affairs and a discussion of broad financial trends,” Voss continues.
In addition, consumer information is applied differently depending on whether it is an insurance or a securities transaction, she says. This is “because of the differing requirements of insurance and securities laws.”
More guideline examples
The Bulletin gives seven points for what is permissible and what is prohibited for insurance-only and then securities-only advisors. Here are a few more examples:
An insurance-only person may “discuss with the consumer the stock market in general terms including market risks and recent or historic economic activities that are generally known to the public and regularly discussed in public media.”
However, insurance-only advisors are prohibited from “providing advice regarding the consumer’s specific securities or securities investment performance, or comparing the consumer’s specific securities or securities investment performance with other financial products, including annuity contracts or life insurance policies.”
Also, insurance-only advisors may not recommend the liquidation of specific securities, or identify specific securities that could be used to fund an annuity or life insurance product.
A securities-only person may “discuss insurance with the consumer in general terms in the context of managing risks and recent or historic insurance activities that are generally known to the public and regularly discussed in public media.”
However, securities-only advisors are prohibited from “providing advice regarding the consumer’s specific insurance policy performance, or comparing the consumer’s specific insurance policy performance with securities.”
In addition, securities-only advisors 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 provide any insurance advice or recommendations related to purchase of a security.
The Bulletin also has a word of caution for insurance producers who also obtain investment advisers licenses so they can advise clients about selling a security in order to purchase an insurance product. Such producers “could be subjecting themselves to the jurisdiction of state and federal securities regulators for violation of securities rules pertaining to fiduciary requirements,” it says.
The Iowa Insurance Division announced its intention to issue the guidelines early this year.
According to Deputy Commissioner Mumford, the Division sought input from a number of industry sources. The insurance industry sources include members of the National Association of Insurance and Financial Advisors (NAIFA) and its state affiliates, the National Association for Fixed Annuities, the American Council of Life Insurers, and the Insured Retirement Institute.
Advisors are particularly happy with the outcome, he says. “They love it because it recognizes that, although insurance and securities professionals must collect the same types of financial information about a customer, they look at the information differently based on whether they are in insurance or securities. The guidelines let them know where the lines are between the two.”
The Iowa Insurance Division can issue Bulletins for both insurance and securities advisors, because the division oversees both insurance and securities. Mumford says Iowa is one of a handful of U.S. state regulators that combine financial regulation in this manner.
State Regulators Developing ‘Source of Funds’ Guidelines