Iowa to shed light on sources of insurance funding

In a move that could affect the sales of securities and insurance in the state, Iowa’s insurance regulator this week is expected to issue guidance on how far insurance agents and brokers can go in advising clients on the suitable sources of funds for insurance products.

The move is intended to reduce the potential for abuse when a non-securities-licensed insurance agent offers recommendations on liquidating securities to fund the purchase of an insurance product, said Jim Mumford, Iowa’s first deputy commissioner of insurance.

The guidance will go a step further by deterring securities-licensed brokers who don’t hold an insurance license from recommending that clients surrender an insurance product to purchase investments.

The guidelines will detail what securities-only representatives and insurance-only agents can discuss when talking to clients about funding an insurance or securities purchase. They won’t say anything about enforcement actions or penalties for errant reps or agents, Mr. Mumford said.

“What we wanted to say is that when you make these recommendations, consider that you may also need a different license,” he said. “This is more of an educational guideline for producers.”

Mr. Mumford said he eventually will bring the guidelines to the National Association of Insurance Commissioners’ life and annuity committee. If accepted there, the guidelines could spread to other states.

Iowa’s move generally has been welcomed by financial advisers. It raises hopes that other states will take a similar tack, rather than single out insurance agents as bad guys, as did Arkansas in 2009 when it issued a regulatory bulletin on liquidating investments to fund insurance product purchases.

Agents in Arkansas now can be fined as much as $5,000 per violation — and as much as $20,000 if the client is over 65.

Mr. Mumford has consulted with the National Association for Fixed Annuities and representatives from the Financial Industry Regulatory Authority Inc. on the guidelines. He views the guidance as an addendum to Iowa’s recent implementation of the NAIC’s annuity suitability model.

The regulation bodes well for dually licensed brokers such as Randy M. Herr, a broker in Iowa with Ameriprise Financial Services Inc.

“It shouldn’t prevent a competent, licensed life agent from assessing needs and resources,” Mr. Herr said. “But if it involves the redemption of a licensed product, he should stop and tell the client to consult someone else to make sure it’s appropriate.”

On the insurance-only side, executives at independent marketing organizations applaud that the guidance will put insurance producers at parity with securities reps instead of singling out agents.

GOOD BALANCE

“The balance is good, and that’s the appropriate route instead of trying to hijack an industry,” said W. Andrew Unkefer, president and chief executive of Unkefer & Associates Inc., an independent marketing organization that distributes fixed-insurance products.

In the past, concerns surrounding “source of funds” guidance have had led to marketing organizations’ forming registered investment advisory units and trying to push insurance-only agents to become investment advisory representatives. The intention was to allow them to sell annuities under the assumption that the funds had to have come from the liquidation of an investment product.

Mr. Unkefer’s firm instead created a disclosure form that gives clients a breakdown of the agent’s role, spelling out that the client is not receiving advice from the agent and that a broker-dealer must be consulted if securities are being liquidated to fund a purchase.

He added that brokers usually try to “shoot holes in the sale” of fixed-insurance-product sales during the 30-day free-look period.

Some believe that such guidance constitutes regulatory overreach.

“This is a way for the securities industry to gain control of the insurance industry through a back door,” said Sheryl Moore, president of Advantage Group Associates Inc. She believes that the issue could be bigger than Rule 151A, which sought to place indexed annuities under the Securities and Exchange Commission’s jurisdiction.

“It’s more of a licensure issue than a product issue and, in my eyes, a smart move from the securities side,” Ms. Moore said.

E-mail Darla Mercado at [email protected].