SEC 151a – Profile in Courage and Cowardice

Unless you are still in mourning over the death of Michael Jackson, you are probably aware that the U.S. Court of Appeals in Washington, D.C. has ruled that the SEC failed to conduct an adequate analysis of the effects of the proposed 151a regulation that declares EIA annuities to be securities for the purpose of regulation. Basically, the Court of Appeals ruled that the SEC did not properly follow its own rules when it annnounced regulation 151a and so voided the current planned implementation. However, the Court did allow the SEC to review its process and make a new proposal, if it so desired.

As with most Court of Appeals rulings this decision offers a metaphor of conflicting analysis rather than a clear ruling.  This allows both sides of the issue to claim victory. Those who (properly) argued that the EIA is an insurance product and not a security were pleased that the proposed SEC ruling had been blocked. However, those who favor seeing the product declared a security pointed out the Court of Appeals had not disagreed with the ruling itself, but only the process of determination.

For what its worth, having consistently argued that 151a is both illogical and illegal, I believe this Court of Appeals ruling effectively kills the 151a regulation. I reach this conclusion because the SEC – with lots of bigger issues to deal with now, including its own survival – will not want expend the time or energy to reopen the battle over the ruling. Besides, since FINRA (the front group for broker dealers) has implemented ruling 2310 which “requires” broker dealers to supervise all annuity sales by their registered representatives, the actual implementation of SEC rule 151a is overkill and mute.

But this blog is not about the Court of Appeals ruling on 151a per se. (You can read my full views on the SEC, FINRA and 151a by reviewing a number of previous blogs on the subject.You might start with SEC Further Fogs and The 151a Fiasco). Rather, this blog is about how the management of various companies reacted in the face of the attacks on the EIA product and the agents who sell it. For most – especially the leading sellers of the EIA – it is a revealing and sad story.

First of all, every agent who has ever sold an Equity Indexed Fixed Annuity owes a debt of gratitude and thanks to the management of American Equity Insurance, for showing the courage to support the agents by standing up to the media and the SEC by filing the law suit that led to the Court of Appeals ruling. And, to the other companies – Life of the Southwest, Midland, National Western and Old Mutual – that joined with American Equity in filing the lawsuit. If agents have not written business with these companies they should consider doing so, if only because these companies have shown their support for the agent.

On the other side of the coin, the agents should also take note that the two leading sellers of EIAs – Aviva and Allianz Life – were nowhere to be seen when it came to fighting for the agent and the product. As I wrote in a previous blog: The response by insurance company executives to the attacks on the EIA could best be described and dimwitted, dismal and ineffective. In effect they were like drugged sheep who passively accepted their fleecing.

It is only fair to give Allianz Life some credit. After all, when the SEC was accepting comments on the proposed 151a ruling Allianz did write a wonderful letter expressing opposition to the proposal. Wow, such a supportive and powerful effort to support the product and the agent!

Once the proposal was adopted by the SEC, the Allianz response was passive compliance by increasing its efforts to work with broker dealers and to encourage agents to attain registered representative status. Agents should take notice of this approach when assessing just how committed Allianz and Aviva are to the independent agent and just where these companies will come down when the next major issue involving the future of the agent comes up.

In this case, agents should recognize and appreciate the way American Equity and the other companies involved in the lawsuit stood behind the agent and the product. At the same time, the agents should take note of how others sought only what was best for the companies and left agents alone to fend for themselves.

And the moral of the story …

It is an old truth, but one that should be constantly remembered: Adversity brings out the courage of some and exposes the cowardice of others. Any company can profess commitment and support of the agent in good times, but agents should measure their support from a company and determine their loyalty on the basis of how a company acts in bad times.

3 responses to “SEC 151a – Profile in Courage and Cowardice

  1. Isn’t it odd that EIA products from companies like Allianz (two tiered) are what first got the regulators and publics attention.

    I have never done business with Allianz and never will.

    Last month I contraced with LSW and currently have $350 in annuity premium pending.

    I have been with Midland since 1999, excellent company.

    I’ll be contacting Am. Equity to see about contracting.

    Independent agents should support those companies that stand up and avoid those that roll over.

  2. I have made a point of calling every company I do business with and asking them why they don’t speak out publicly to defend the independent agent as distributor of their index annuity business. I’ve heard nothing but lame excuses, or something silly like “We’re working behind the scenes.” The former is just shameful. The latter I do not find plausible, or believable.

    I was shocked to find that most wholesalers didn’t even see this one coming, and a month after 151a was in the public domain, they were still pretending everything was business as usual. I’ve lost confidence in almost all FMOs and other middlemen who, in my opinion, did not do the right thing.

    The worst FMOs started brow beating their agents to get registered, and not surprisingly, “Register with OUR B/D!” is the tune the worst FMOs are singing. That tells me these FMOs are not supporting economic freedom and competition, but instead seek to further the anti-competitive agenda of the collectivists and fascists.

    I’ll have nothing to do with them ever again.

    Patriots must stand for something, or they will fall for anything. I’m ashamed of the majority of companies for their singular failure to do the right thing, to put their money where their mouth is, to fight for economic freedom and capitalism when it is threatened by the same people who ignored clear warnings about Bernie Madoff for more than ten years!

    The true colors of all companies are now manifest. There can be no doubts as to which companies deserve our support, and which companies deserve our disdain.

    Taking it further, there are companies that do NOT manufacture index annuities that spoke out in support of 151a. I strongly suggest that all agents put these shameful companies at the bottom of their due diligence lists, and only send them the poor quality business they so richly deserve.

    Given the results we’ve seen over time, I believe strongly that the federal government must exit (or be forced to exit) the securities regulation business entirely, and the several states must return to their role as the ultimate governor and regulator of the business within their borders.

    Many, if not all, state securities regulators have bona fide law enforcement officers with badges, guns, and special arrest powers. The SEC has none, and never has. FINRA wouldn’t recognize a badge, gun or special arrest powers, if it landed on their anti-competitive heads.

    Both entities are equally worthless in preventing malfeasance and criminality, while they are equally effective at turning solutions into problems. I seek the abolishment of both.

  3. Regarding the ruling that “the SEC failed to conduct an adequate analysis of the effects of the proposed 151a regulation”, many believe that it is merely a “stay of execution.”

    There is still a good chance that the legislation will go into effect. If you do not plan to drastically change your businesses or start your own broker dealer, you should be actively searching for the right broker dealer. Considerations go beyond compensation. Does the broker dealer understand insurance? Do they understand your business model? Does it seem like a cultural fit? Choosing your broker dealer will be one of the most important business decisions that you ever make.

    You might consider starting to search for an insurance friendly broker dealer.

    FMOs might would also be well served to associate with “wholesale broker dealers.

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