Tuesday, September 16, 2008

My Response to Jeff Taggert re: NAIFA's position on SEC 151A

This my response (2 weeks ago) to Jeff Taggert, the national NAIFA President re: his statement of NAIFA's position on SEC 151A. Read his comments after my response.


While I agree with your conclusion regarding opposition to the approval of SEC Rule 151A, I take exception to certain language in your explanation.

You indicate that you are frustrated with “the inappropriate ways in which many of these products are marketed.” That is the kind of broad-brush approach the securities industry and some in the media have adopted without considering the facts. It is not “many of these products.” The complaint ratio of index annuities is surprisingly low, and the majority of them relate to non-marketing issues.

You add a concern over the “suitability of certain indexed annuity sales and the methods used to market indexed annuity products” as if, again, this is a widespread epidemic, when, in fact, it is very isolated and not at all common. Further, there are far more problems and a larger complaint ratio in the securities industry.

The comments you have distributed seem to accept as valid many of the SEC’s unsubstantiated contentions that are not supported by the facts. We should be able to expect more from NAIFA.

Your response further cements my belief that NAIFA has lost touch with its insurance industry roots.

Bruce E. Dickes, CLU, ChFC
Financial Brokerage, Inc.
2238 S. 156th Circle
Omaha, NE 68130
402-691-6105 fax


From: Jeff Taggart
To: NAIFA Members
Date: September 3, 2008
Subject: NAIFA's Position on SEC Proposed Rule 151A

On August 21, the NAIFA Board voted to accept the recommendation of the Policy Formation Subcommittee and oppose SEC proposed Rule 151A, which would classify most indexed annuities as securities. If the SEC proposal is adopted, the SEC and FINRA would have regulatory authority over most indexed annuities, which have traditionally been viewed as insurance products regulated by state insurance regulators.

The SEC proposal and NAIFA's position with respect to the proposal have generated a great deal of interest among NAIFA members. Numerous members have sent us emails stating that they do not agree with NAIFA's position, and they believe that indexed annuities should be regulated by the SEC as securities. I thought it would be helpful if I tried to clarify and explain NAIFA's position, and hopefully address the concerns raised by these members.

First and foremost, let me state as clearly as possible that NAIFA strongly believes that people who engage in unscrupulous or misleading sales practices should be aggressively prosecuted and subject to appropriate and meaningful sanctions. There is no place for these people in our business. We understand and share the frustration of our members over the inappropriate ways in which many of these products are marketed, and NAIFA acknowledges the concerns that have been raised regarding the suitability of certain indexed annuity sales and the methods used to market indexed annuity products.

However valid these concerns and frustrations may be, the issues surrounding suitability, disclosure, product complexity and marketing practices are not the criteria that should determine whether a financial product is or is not a security. In NAIFA's view indexed annuities do not meet the test for determining whether a product is a 'security' because, among other reasons, the investment risk of a downturn in the related index rests with the issuer of the product, not the consumer, which is not the case with investment products such as mutual funds and individual stocks.

An insurance product that does not meet the test for being classified as a security should be regulated by state insurance departments and should not be under the jurisdiction of the SEC or FINRA. This is an important principle which must be preserved in order to protect the appropriate regulation of all insurance products. An additional concern that NAIFA has with the SEC proposal is that the application of proposed Rule 151A would not be limited to indexed annuities, and that other annuity and insurance products that fit the rule's criteria could be brought within the scope of the rule. In fact, the SEC has specifically asked for public comment on whether the proposal should apply to life insurance and/or health insurance.

NAIFA is committed to working with the NAIC and state insurance departments towards the goal of having every state adopt and vigorously enforce the NAIC's model regulations on annuity suitability and disclosure. In addition, existing state insurance laws and regulations addressing unfair trade practices and advertising are powerful weapons to use against inappropriate marketing practices. Some members have raised concerns about whether terms and provisions contained in some indexed annuity contracts make them inherently unsuitable for any purchaser. To address these concerns, NAIFA also recommends that a state regulatory body be designated to develop standards for indexed annuity product design that would be implemented by state insurance regulators and used to prevent inappropriate indexed annuity products from reaching the marketplace.

Thank you for taking the time to read and consider this message. NAIFA greatly values your involvement in and input on these important issues.

Sincerely, Jeff

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