SEC Member Calls FIAs Dangerous, Wants Fed Scrutiny

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – A Securities and Exchange Commission member is calling on all securities regulators to focus more attention to the sale of complex securities, including what he called “equity indexed” annuities, or what the industry calls, “fixed index” annuities, to retail investors.

“The protection of retail investors is paramount and demands immediate attention,” SEC Commissioner Luis A. Augilar said in a speech Tuesday at the annual meeting of the North American Securities Administrators Association (NASAA) and the SEC, held in Washington, D.C.

Augilar cited FIAs as among a group of complex securities that pose dangers to individual investors, even though FIAs are insurance products regulated by the state. The SEC has previously attempted to regulate FIAs as securities by enacting Rule 151A, but a federal court threw out the rule in 2010 and Congress barred the agency from regulating the products.

In his speech, Augilar said “investors face a bewildering array of options,” and that, because of low interest rates, “they are more likely to chase yield by buying investments touting higher returns.

“However, oftentimes, these investment products can be very opaque and complex for retail investors to fully appreciate the risks involved,” Augilar said. “Unfortunately, as NASAA has pointed out, yield-starved investors become easy prey for fraudulent schemes that are cloaked as investments in complex securities.”

Augilar defined “complex securities” as instruments that often involve embedded derivatives, said that includes FIAs, leveraged and inverse exchange-traded funds (ETFs), principal protected notes and reverse convertibles.

Complex securities can also include exchange-traded products, or ETPs, and alternative mutual funds.

He said the difficulty in defining the exact contours of what constitutes a complex security also makes it difficult to ascertain the size of the market. “One thing is clear, however, complex securities have been increasingly marketed to retail investors in recent years,” Augilar said.

Augilar said one reason for concern is that new data indicates “that the retail market for complex securities will continue to grow in the years to come.”

He called on the SEC staff to expand its focus on structured note disclosures to include all complex securities sold to retail investors.

And, he added, “the SEC staff should not go it alone.” He said NASAA members and FINRA “have extensive experience with complex products and can provide valuable insights into how these securities are being marketed to retail investors and how to ensure investors are protected.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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