Regulatory turf war brewing over indexed annuities?

State regulators say that securities regulators in Illinois were operating within their jurisdiction when they punished two investment adviser representatives for allegedly moving clients into “unsuitable” investments.
A recent order from the office of Secretary of State Jesse White revoked the securities registrations of Thomas N. Cooper and Susan B. Cooper, a married couple who are both IARs and insurance licensed. The two, along with their practice, Senior Financial Strategies Inc., were also prohibited from offering or selling securities in Illinois.
The Coopers were fined $10,000 following an investigation of 12 cases involving clients who had allegedly liquidated annuities or individual retirement accounts to fund the purchase of fixed indexed annuities from Aviva USA, according to Mr. White’s order. In that group of cases, the 12 investors were saddled with a total of $122,630 in surrender charges after liquidating their annuities, according to the order.
The Coopers’ attorney, Tom Kelty of the Kelty Law Office, argued that the Illinois Securities Department had no business regulating a product that would otherwise be under the jurisdiction of the state’s insurance department.
“I say they have no real basis for going after the Coopers,” Mr. Kelty said. He cited as his primary point of contention a paragraph in the order that says “each of the above investment plans is an investment contract and is therefore a security.”
Mr. Kelty contends that for the securities regulator to punish the Coopers, the agency had to conclude the insurance product is a security. Otherwise, he said, “they have no case and no basis for issuing this order.”
Some members of the insurance industry, particularly the indexed annuity industry,” are watching the case with interest, said Jack Marrion, president of Advantage Compendium Ltd.
He noted that this wasn’t the first time the securities department in the state had punished an insurance agent: In January, the department barred an agent who sold fixed indexed annuities from selling securities in the state after he failed to respond to a series of inquiry letters from the department.
But regulators claim the latest order is hardly a sign of a turf war over indexed annuities.
“I see this as a case against a producer — an investment adviser — and they violated the fiduciary responsibility,” said James R. Mumford, first deputy commissioner in Iowa’s insurance division and its securities administrator. “It has nothing to do with the issue as to whether indexed annuities are securities or not.”
State law in Illinois subjected the Coopers to a fiduciary duty as registered investment advisers and IARs. The transactions were found to be neither suitable nor in the clients’ best interests because of their age and the surrender fees, the order said.
“It doesn’t matter if they sold insurance, a [certificate of deposit] or telephones,” Mr. Mumford said. “It’s a violation of fiduciary duty.”
The Illinois Securities Department said those who questioned its authority in the case are missing the point.
“To make this an issue on whether indexed annuities are securities or not is going beyond what the order states,” said David Finnigan, senior enforcement attorney for the department. “That wasn’t an issue in the hearing or the order.”
He reiterated that the regulators took action because the Coopers were IARs.
Currently, the Coopers are still licensed with the state insurance department. Anjali Julka, spokeswoman for the Illinois Insurance Department, declined to comment on the case.
Kim O’Brien, executive director of the National Association for Fixed Annuities, noted while some might suspect an unseemly motive for the regulators’ action — be it political or motivated by revenue — this doesn’t seem to be the case with the Coopers’ order.
“This isn’t an attempt to bring in indexed annuities under their wing,” said Ms. O’Brien. “I think it’s less of a turf war and more to protect the consumer.”