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VT Bulletin 198

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On Monday, January 8, 2018 Vermont joined Iowa and Tennessee and issued detailed guidance on providing advice for securities and insurance products. Insurance Bulletin 198 (and Securities Bulletin S-2018-01) is a joint bulletin that the Department of Financial Regulation felt was necessary in order to provide financial professionals additional guidance on what activities are and are not permissible when it comes to providing advice on securities and insurance products.

The Department had issued more general guidance back in 2011, however, they stated two specific reasons for providing more detailed information now.

First, the Department said, there has been “an increase in investigations and enforcement actions relating to unregistered investment advice.”

Second, the “continuing evolution of state and federal suitability laws that now require an extensive financial analysis of a consumer’s financial affairs and a discussion of broad financial trends prior to making a recommendation on an insurance product or an investment/securities product.”

One point I found interesting is that, in the past, we’ve thought of this guidance as related to “source of funds”; that is, a specific focus on where the funds are coming from, and who can provide what level advice on those funds. While that’s still something that is being addressed in this bulletin, the #2 reason the department cited is related but broader than just source of funds. It goes to the growing discussions and developing regulations around how financial services are provided to consumers and what standard of care is owed to those consumers of financial services.

With NY’s proposed changes to their suitability regulation (which includes a number of significant changes, one of which is including life insurance within the suitability standards) as well as the questions of what will become of the DOL rule and what will the SEC do, as well as the NAICs current work on incorporating “best interest” standards into the suitability model, it’s clear that there are lots of questions around how financial transactions should be handled and what the burdens of the financial professionals are to ensure consumers are getting the “best” products and services for their needs.

With this bulletin, VT is stepping into the arena to add a bit more clarity at least around who can provide what services, and what types of discussions are permissible depending on the licensing and/or registration the financial professional holds. While only two other states have issued nearly identical guidance, we think it’s prudent for financial professionals to follow these guidelines regardless of what states they live in.

Why? Because this language is the most detailed we’ve seen, except in TN and IA and by using it as a benchmark of how financial discussions should be had and what the limits of those discussions may be, it allows financial professionals to say that they are trying their best to provide advice that they’re qualified to give without stepping over any boundaries. It shows a commitment to using integrity with consumers, and that even for states outside of VT, IA, and TN, it may provide a “safe haven” of sorts to be able to show documentation of complying with these regulations.

Bernie Madoff’s Chief Compliance Officer

AP Images

AP Images

Did you watch the Madoff mini-series on ABC this week?  I recorded it, like I do most TV, and watched the first part last night. There was a scene where Madoff – played by Richard Dreyfuss – comes into an office and says he needs his brother, Peter Madoff, the Chief Compliance Officer’s “rubber stamp” on a form related to an SEC investigation. Yes, in the dramatization, he uses those words.

The interaction was much more blatant than we usually see in compliance, but I think we have all felt that pressure. Someone in a position of power in our organization wants us to sign-off on something that just doesn’t feel right, or on something that merits some looking into but the demand is to “rubber stamp” it now. We wouldn’t be asked to do anything wrong is often the implication and to refuse to sign may be taken as a lack of trust.  But it is our jobs in compliance to refuse – to look where no one wants us to look – to take the time to see what is there to be seen. 

We know we can’t rubber stamp anything, no matter what the pressure from sales, distribution, owners, etc. We have to look even if there is nothing to see– we are the check and balance in an organization, sometimes the last, sometimes the only. 

None of us would have wanted to be Madoff’s CCO. Peter Madoff pled guilty and was sentenced to 10 years in prison. Most of us will never come close to such an extraordinarily criminal operation. Thank goodness, right? But that doesn’t make our role less important. My Friday takeaway is:  Keep up the good work – Compliance Matters! 

DOL Fiduciary Discussion RE: Use of Term Advisor

In a recent article about the DOL fiduciary rule proposal on, Michael Kitces, a partner at Pinnacle Advisory Group, brings up a very interesting point: the multitude of ways that financial professionals represent themselves to clients and prospects, particularly in the titles they use, and the description of services they claim to offer.

In the article, Mr. Kitces is quoted saying, “How often do you see ‘stockbroker’ on a business card anymore? You don’t. You see ‘advisor.’ We’ve allowed the sales people to communicate to the public that they are in the business of giving advice. And then we have not held them accountable for doing so.”

Gone are the good old days when an insurance agent calls himself or herself just that – an agent. The term “advisor” is used indiscriminately by so many professionals, very often in an inappropriate manner. Individuals who sell insurance products for commission, who are not registered as an investment or financial advisor, do not provide “advice” (at least, they shouldn’t, unless it is incidental to the sale of the insurance product they are recommending).

In fact, the NAIC advertising model regulation for life insurance and annuities, in an attempt to draw the distinction between insurance agents and financial advisors, specifically includes language in the regulation, which reads, “….No insurance producer may use the terms, such as “financial planner”, “investment adviser”, “financial consultant”, or “financial counseling” in such a way as to imply that he or she is generally engaged in an advisory business in which compensation is unrelated to sales unless that is actually the case.”

Have we, as an industry, helped create our own mess here? It’s hard to say for sure, since, as Mr. Kitces calls out in the article, this point has not been raised by the DOL as part of the proposed rule discussion. The article states, “While no fan of the DOL’s proposal, Kitces shares a perspective with those lobbying hardest on Labor’s behalf: after years of the SEC’s failure to adequately enforce the ’40 Act, consumers can no longer tell the difference between broker and advisor.”

But it certainly begs the question. Had the SEC and the state insurance divisions better enforced this issue, had the industry done a better job of self-regulating ourselves in this regard, what would the DOL proposal look like today? Or would there even be one?

Read the full article here... “DOL fiduciary rule puts broker-dealers in Catch 22”

Cybersecurity : Recent Conference Perspective

It is unlikely that any insurance industry conference in 2015 and beyond will omit a session on cybersecurity. I have attended many sessions already. What fascinates me more than the subject matter itself is that each one is significantly different from the others. I have attended sessions that I can barely understand because they are so technical, and others that barely go beyond a mere warning that we all need to be careful about online and network security. I try to approach each session with an open mind and few expectations so that I can get the most out of it, no matter what the focus.

At the ACLI Legal and Compliance Section Annual Meeting, there were two sessions on cybersecurity. Both were general sessions and each had a different focus.

At the first, specifically titled “Cybersecurity”, John Walsh, a partner at Sutherland, made a strong point of avoiding technical jargon. He emphasized the changing nature of the risk from one based in criminal activity to today’s cybersecurity risk that is solely for the purpose of disruption. His point was that criminals want to get paid and therefore to find them it is possible to follow the money. When disruption is the goal, there may not be a money trail to follow. He also spoke of the politics of cybersecurity, indicating that there was actual bipartisan congressional action on this issue, e.g. HR 1560 (Protecting Cyber Networks Act) and S-754 (Cybersecurity Information Sharing Act of 2015). Walsh’s view was that we may see actual legislation pass that will be signed by President Obama on this issue.

From there, Walsh focused on the SEC/FINRA efforts to both build expertise and pursue exams while that happens and the significance of reports issued by both agencies. FINRA issued Report on Cybersecurity Practices was designed to help firms respond to the risk of cyberattacks as well as attacks themselves appropriately, while the SECs risk alert was based on exams of 57 broker-dealers and 49 RIAs. Both of these were issued in February of this year. Walsh’s focus was on the Legal and Compliance role in cybersecurity, saying it is the same as in all compliance issues: preventative, detective, corrective and predictive. He suggested compliance questions such as: Who is running the security program? What are their credentials and expertise? What standards are they assessing against? How often is testing happening? What are the checks and balances in place? Are there reasonable policies and procedures in place? These are familiar questions and from a compliance perspective, that is the appropriate role. He reiterated that we in compliance do not have to be engineers to be effective in our positions. But we need to be active and keep digging for information. Finally, he warned of the culture clash between engineers and compliance. Engineers often respond that they followed procedures. Compliance’s role is to ask if those procedures are reasonable.

This session was extremely valuable because of the focus on compliance as compliance and the very clear ways that were provided for compliance to add significant and unique value to enterprise efforts on cybersecurity.

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.