The Illinois Securities Department has revoked the registration of two investment adviser representatives for inappropriately liquidating clients' annuities to fund the purchase of fixed-indexed annuities.
Thomas N. Cooper and Susan B. Cooper were barred from selling securities in Illinois, as has their practice — Senior Financial Strategies Inc. — which is doing business as Pinnacle Investment Advisors. The husband-and-wife duo was also fined $10,000.
According to the order issued by Jesse White, secretary of state in Illinois, the transactions go back to 2006 when the Coopers recommended that a married couple transfer $46,000 from a Lincoln Benefit Life Co. variable annuity that was held in an individual retirement account to purchase a fixed-indexed annuity from Aviva USA. The Coopers had recommended that the clients retain $1,000 in the variable annuity in order to retain nearly $30,000 in death benefits, according to the order from Mr. White.
The clients had left $2,000 in the account but ended up losing $27,000 in death benefits due to the transfer. Both clients complained to the department, spurring audits of the Coopers' practice in 2008, according to the order.
Regulators' investigation showed that between Feb. 26, 2008, and June 9, 2008, the Coopers sold 65 Aviva fixed-indexed annuities, garnering some $426,281 in commissions, the order said.
The secretary of state's office, which regulates the securities industry in Illinois, examined 12 cases involving clients of the Coopers who had liquidated annuities or IRAs to fund the purchase of fixed-indexed annuities from Aviva, the order stated. The two reps allegedly told the clients that by moving their money to an Aviva fixed-indexed annuity, they would have access to six different crediting strategies, 4% guarantees on income for life and protection from Medicaid spend-downs.
The 12 investors, who were an average age of 73, racked up a total of $122,630 in surrender charges from the liquidation of annuities from Allianz Life Insurance Co. of North America, American Equity Investment Life Holding Co., EquiTrust Life Insurance Co. and Old Mutual Financial Network, according to the order.
In Illinois, as registered investment adviser reps and as investment advisers, the Coopers are held to a fiduciary standard.
Securities cops in the state said that the transactions were unsuitable and not in the clients' best interests, due to their age and the surrender penalties.
Although fixed-indexed annuities are insurance products, the Coopers' registration as investment adviser reps placed them squarely in the jurisdiction of the state's securities department, said David Finnigan, senior enforcement attorney for the Illinois Securities Department.
“This was more based on the fact that they are providing investment advice and are registered with the department,” he said. “We took action against them because they were registrants.”
Thomas Kelty, an attorney representing the Coopers, said that he had filed an appeal against the order and a motion to stay the enforcement action until the appeal has been concluded. It will take at least 90 days for the appeal to be concluded, he said.
Mr. Kelty argued that the state also had violated the insurance department's jurisdiction.
“For the securities department to summarily declare that an annuity insurance product is a security is a broad leap of faith and a leap of the law,” he said.
“This bold statement by the securities department is an attempt to override by fiat an established case law and reach a conclusion that's unsupported by the Illinois securities act,” Mr. Kelty said.
E-mail Darla Mercado at [email protected]
