State regulators on high alert for complex investment and insurance sales

Structured products, non-traded REITs and private placements just a few of the products under scrutiny

Jul 2, 2014 @ 12:21 pm

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.”

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Ric Edelman: 3 factors transforming the financial advisory industry

We are at the "knee in the curve" of a transformation of the financial advice industry, according to Ric Edelman. But what's next and how will it shape your practice of the future?

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print