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“1035 exchanges are about to get easier. Is that a good thing?”

This title is not original. It is the title of an article written by Greg Iacurci in InvestmentNews’ January 21, 2019 edition. It is an interesting piece about the effort to use technology to speed up the 1035 annuity-to-annuity transfer on a tax-free basis. Whenever I see 1035, I think replacement and when I think replacement, I think about Regulation 60 in NY. When I read this article, I kept thinking how likely it is to lead to Reg 60 violations and fines.

While not mentioned in the article, I am hopeful that those working on this streamlining effort are familiar with Reg 60 and its mandates. The article states “Annuity products are often derided as being expensive, complicated products, a criticism that’s compounded by cumbersome industry infrastructure that often creates a month-long exchange process. Technology can reduce the time line substantially, executives said, likely to within a week, start to finish.” That does not appear to be enough for all that is required by Reg 60.

Sheryl Moore, CEO of Moore Market Intelligence does point out that it is possible that “more bad actors would get missed” due to the streamlined process, and that is certainly true, but my concern is a compliance one. I do not see how it will be possible to comply with the disclosure requirements of Reg 60 within that process. So perhaps NY is outside the scope of these efforts? Perhaps once the rest of the country has successfully expedited the replacement process, pressure can be brought to bear on the NY DFS to revise Reg 60 to increase the speed of these transactions.


However, that seems a long shot given recent experience with Reg 60 procedures filings. In most cases, if not all, an expedited process for replacements requires revisions to a company’s DFS-filed procedures. Those filings are reviewed in granular detail and changes are often requested along with every screen shot of an electronic process. If changes are also required to the application to accommodate a new process, the slowdown at DFS is dramatically increased. Both the policy form reviewers and Reg 60 reviewers hold these types of changes to an extremely rigorous scope of review, far in excess of anything that exists in the review of paper processes. The chance that 1035 exchanges will get easier in NY seems remote.

Humor: It's all relative!


This Investment News article’s headline about a regulatory attorney caught my eye:  “Giachetti adds humor to compliance.” At CCS, we talk about bringing humor to compliance all the time, but it isn’t easy. There is laughter in the office, but not too much of it relates to our work. After reading the article, and no offense to Mr. Giachetti, I think humor may be relative. The article refers to the possibility of an alternative universe in which there is a comedy club for “financial regulatory wonks.” I think that is very alternative. I do not think, in this universe, there is such a demand. I am not one to talk: my family tells me I am generally only funny once a month. As the end of the month approaches, there is often discussion about whether I have been funny yet.

That said, there is a specific comment from the article that is very consistent with our experience – though it is not humorous at all: “firms will hire marketing consultants, most of whom haven’t got a clue about the business. And they will spend an exorbitant amount of money on a marketing campaign, but they won’t spend an hour to pay me to review the proposed material to make sure that they can actually use this stuff.” So often, with advertising review, we are brought in too late to avoid the compliance problem – we can only try to minimize the regulatory impact after the fact. Don’t be like that. Pay for the hour up front… it is worth it.

DOL Fiduciary Rule Product Development Underway

An article by Greg Iacurci titled Insurance adjust to DOL rule with fee-based indexed annuities in the July 25, 2016 issue of InvestmentNews reports states that insurers are, “going full steam ahead developing fee-based fixed-indexed annuities due to greater anticipated demand from distributors for advisory products as a result of the Labor Department’s fiduciary rule.” The article specifically mentions the following carriers as having products under development:  Allianz Life Insurance Company of North America, Voya Financial Inc., Symetra Life Insurance Co., and Lincoln Financial Group. Midland National Life Insurance Co. launched its fee-based product before the final DOL rule was published.

For those of us involved in product drafting, review and filing, one important question is how significant will the product changes need to be to accommodate a fee-based compensation structure. Surrender charges are the obvious place to think there might be design changes. However, many products are filed with the surrender charges bracketed, so if the only difference at the contract level, is a reduction in surrender charge, there may not need to be any policy form filing. However, depending on how the actuarial material was presented in the filing, an informational filing may be required. Similarly, if there are changes to caps or other non-guaranteed elements the original filings may be sufficient to accommodate any change to product designs for fee-based distribution. 

While New York is not typically known as a state friendly to indexed annuities, at a recent compliance seminar offered jointly between LICONY and the NYSDFS, NY Life Bureau staff members indicated that they view the certified process as being a great fit for products being filed to make changes as a result of the DOL rule. 

In addition, DFS personnel offered the possibility that §4228, NY’s compensation law, provides a unique model of what constitutes reasonable compensation. 

Clearly, there is a lot to talk about and work through as we move toward implementation of the DOL Rule and as product development continues.  

Where is state regulation?

An Editorial (subscription required) in the May 12, 2014 edition of InvestmentNews was titled “FINRA right to watch indexed annuities.” Know what was missing from the piece? A single reference to state regulation of fixed annuities. “The indexed annuity business has been booming, with sales last year climbing to $38.6 billion, up 13.2% from 2012, according to Wink, Inc. This growth alone warrants close attention from Finra.” That growth alone should not warrant close attention from Finra if state regulators are doing a good job at enforcing suitability mandates and replacement rules. There is no analysis in the editorial suggesting they are not. There is no indication that state insurance regulators even exist. If someone were to read this with no experience in insurance, they would reasonably think that without Finra there is, and will be, no regulation of indexed annuities at all.

The editorial goes on to describe indexed annuities as “hybrid investment vehicles.” As fixed insurance products, they are not investment vehicles. When we review advertising, we advise that describing a fixed insurance product as an investment product is misleading. When we review advertising we advise that calling an indexed annuity a “hybrid” is misleading because it is not a cross between a fixed annuity and a variable annuity. It is a fixed annuity, in which the interest rate is determined, in part, based on the performance of an external index, but it is a fixed annuity.

The editors at InvestmentNews seem to believe that without Finra’s oversight “investors” will not understand surrender charges or the pros and cons of replacements. “It is altogether appropriate and commendable that Finra is being proactive about the indexed annuity business. Its attentiveness is likely to prevent a scandal involving the inappropriate sale of these products to unsophisticated or unwary investors, especially those who are retired or nearing retirement.” Are state regulators not attentive to the possibility of scandal? If they are, why is it not more visible? Why is the conclusion so apparently clear to InvestmentNews that Finra is the only viable regulator?

Enforcement of suitability for indexed annuities lies with the states. Anyone who talks to state regulators comes away believing they take that responsibility very seriously. Why is it not evident to InvestmentNews and others? The editorial concludes “Indeed, it is better to head off a problem than try to repair any damage after it occurs.” True. That is a true statement for indexed annuities, and also for state regulation of indexed annuities. Trying to hold onto state regulation after Finra more aggressively steps in will be a difficult “repair.” Heading off that problem is better. Take note state regulators: your regulation did not merit a single reference in this editorial. Not one. That is a problem that needs to be addressed.

Rogue Brokers and Rogue Agents

In its January 13, 2014 edition, InvestmentNews has an Editorial titled “Finra going after rogue brokers.” The editorial opens with the information that FINRA’s annual letter this year indicates that rogue brokers are to be one of the 2014 agency priorities.
The column makes the point that “[s]ince Finra has disclosed that it will have rogue brokers in its cross hairs, it behooves broker-dealers to make sure they are doing everything they can on the front end to not hire a problem employee.” The same should be true for insurance organizations. Rogue agents can bring misery to many. InvestmentNews also makes the important point that there is movement back and forth between the securities and insurance industries of problem brokers. The editors state “legislators and government regulators should start looking at ways to make sure the pipeline between the securities and insurance industries is being monitored more closely. In some cases, problem insurance brokers have been able to restart their careers at securities firms and vice versa.”
While standards and processes may differ in important ways, it is hard to argue with the general conclusion of the editorial that “InvestmentNews has documented several cases where stockbrokers have been barred from the securities industry by Finra or the Securities and Exchange Commission but have been able to retain their state insurance licenses. This gives them carte blanche to take advantage of investors and consumers in new ways that are just as devious as their past practices.
It would be good to know that once individuals have been thrown out of one industry, they cannot simply start again in a related business and hurt more people.” Right. It would be good to know that.