Investment Advisor Regulatory Considerations for Insurance-Only Agents
Frequently Asked Questions about Whether an Insurance-Only Licensed Agent Offering Equity-Indexed Annuities (EIAs) is Acting as an Unregistered Investment Adviser
The following information, presented in the form of frequently asked questions and answers, is intended to provide guidance and a general overview regarding some of the more common issues relating to recent investigations by state securities regulators, which focus on whether insurance-only licensed agents offering equity-indexed annuities are acting as unregistered investment advisors. However, this webpage is not intended to be an all-encompassing analysis of whether an insurance agent is acting as an unregistered investment advisor or the consequences of an insurance agent registering as an investment advisor. Moreover, a viewer of these frequently asked questions and answers should understand that there are differences in each state's investment advisor regulations and interpretations, and the answers to these frequently asked questions are not specific to any particular state. Consequently, a viewer should not rely upon the contents of this page as a substitute for engaging a compliance professional and/or attorney to review the viewer's specific circumstances in order to determine if the viewer is acting as an unregistered investment advisor in his or her local jurisdiction.
- Question: If an insurance agent offering equity-indexed annuities (EIAs) is not licensed as a registered representative of a securities broker-dealer, why should the insurance-only licensed agent be concerned about state securities regulators?
Answer: Although the Financial Industry Regulatory Authority (also known as “FINRA” and formerly known as the “NASD”) does not have any regulatory authority over an insurance agent that is not licensed as a registered representative under a broker-dealer, a state securities regulator generally has the authority to enforce its state’s securities laws and regulations independent of and without regard to whether an insurance agent offering equity-indexed annuities (EIAs) is a registered representative of a FINRA member.
- Question: What’s the basis for a state securities regulator to assert jurisdiction over an insurance-only licensed agent offering equity-indexed annuities?
Answer: In general, a state securities regulator does not have authority to regulate the offering or sale of insurance products, such as an equity-indexed annuity (EIA), under a state’s insurance code. However, in almost all states, a state securities regulator has authority to regulate an individual or entity acting as investment adviser as defined by the applicable state’s securities act, including an individual licensed as an insurance agent.
- Question: What’s the definition of an investment adviser?
Answer: Under the securities acts of most states, an investment advisor is an individual or entity that (1) provides advice or analysis by making direct or indirect recommendations regarding securities or securities markets; (2) for compensation in any form; and (3) engages in the regular business of providing advice regarding securities. There’s generally no exemption or exception from the investment adviser registration requirement under the state securities act due to an individual’s status as a licensed insurance agent.
For example, if an insurance-only agent discusses the risks of the stock market in even general terms or specifically recommends the client to liquidate his or her securities and then receives a commission from an insurance carrier for selling an equity-indexed annuity (EIA) to the client, most state securities regulators will assert that the insurance-only licensed agent acted as an unregistered investment advisor.
- Question: What are the consequences of acting as an unregistered investment adviser?
Answer: In most states, a state securities regulator may publicly issue a cease-and-desist order prohibiting an entity or individual from taking certain actions in the future and fining the entity or individual for violation of the state’s securities act. If the insurance-only licensed agent decides to challenge such an order by the state securities regulator, then in most states the agent will need to request an administrative hearing. If there’s an adverse decision and/or fine issued by the administrative hearing officer and the party would like to appeal the ruling, most states will require the party to initiate a legal proceeding challenging the state securities regulator in the state’s local court system. In certain states, acting as an unregistered investment advisor is also considered a felony.
The administrative hearing and regulatory enforcement process differs in each state, and the results from such actions can be significant. As a result, RCC recommends that you retain local legal counsel to represent you in such administrative and/or court proceedings.
- Question: What is an insurance-only licensed agent prohibited from discussing with a prospective client under state securities regulations for investment advisers?
Answer: With respect to insurance-only licensed agents, the following topics, representations or actions would be considered “red flags” from the perspective of the average state securities regulator conducting an investigation as to whether an agent acted as an unregistered investment advisor: (a) discussion of the risks of the stock market; (b) recommendation to liquidate a security; (c) the offer of research, analysis or recommendations to a prospective client regarding specific securities; (d) the completion of paperwork to liquidate a security position; (e) the comparison of an equity-indexed annuity (EIA) to a security; (f) the use of the term “investment adviser” to describe an insurance only licensed agent; (g) the use of professional designations considered misleading by the state securities regulator such certified senior advisor (“CSA”); and (h) a description of equity-indexed annuities as “investments”.
In order to avoid a regulatory investigation and enforcement action by the state securities regulator, RCC strongly recommends that insurance-only licensed agents should consult with an investment advisor compliance professional and securities attorney about the agent’s current practices.
- Question: If an insurance-only licensed agent does not conduct “free lunch seminars,” is it likely that a state securities regulator will investigate the agent’s equity-indexed annuity (EIA) activities?
Answer: State securities regulators are scrutinizing registered representatives, investment adviser representatives and insurance agents that are conducting “free lunch” seminars targeted toward seniors. It’s a common practice for the state securities regulator’s investigatory staff to attend such “free lunch” seminars without announcing in advance the individual’s affiliation with the state securities regulator. If the content of the “free lunch” seminar references or relates to securities, it’s likely that state securities regulator will initiate an investigation of those individuals that are only licensed to sell insurance.
Even if an individual, who is only licensed as an insurance agent, does not conduct “free lunch” seminars, there’s still a significant risk that the insurance-only licensed agent may become subject to an investigation by state securities regulators as to whether such agent is acting as an unregistered investment adviser. When a mutual fund or annuity is liquidated and invested in an equity-indexed annuity through an insurance only agent, it’s not uncommon for the previous securities broker-dealer and/or its registered representatives to report this liquidation and the insurance-only licensed agent’s possible role in this transaction to the state securities regulator.
In other words, each time a client liquidates a security position in order to fund an equity-indexed annuity sold by an insurance-only licensed agent, there’s a possibility that the state securities regulator may be notified and launch an investigation as to whether the insurance-only licensed agent is acting as an unregistered investment advisor.
- Question: If an insurance only agent successfully passes the Series 65 exam, will this satisfy the requirement of the state securities regulator?
Answer: No, successfully passing the Series 65 examination is only the first step. In order for an individual to become registered as an investment advisor representative, such individual must not only meet the Series 65 examination prerequisite but actually file a Form U4 with the state securities regulator through an investment advisor firm.
In other words, passing the Series 65 examination merely qualifies an individual to apply for registration as an investment advisor representative under an investment advisor firm. Once approved by the state securities regulator, the individual must meet the state and firm’s numerous requirements, obligations and restrictions for investment adviser representatives.
- Question: If an insurance-only licensed agent previously passed the Series 6 or Series 7 examination, does this exempt them from the scrutiny of a state securities regulator?
Answer: No, if an insurance-only licensed agent is no longer affiliated with a securities broker-dealer as a registered representative despite passing the Series 6 or Series 7 examination, the state securities regulator will assert the insurance-only licensed agent is acting as an unregistered investment advisor if the agent gives advice about securities and receives indirect compensation.
- Question: If an insurance-only licensed agent is under investigation by a state securities regulator, can the agent apply to register as an investment advisor?
Answer: Although it might be a sign of good faith that the insurance-only licensed agent is willing to comply with the state securities regulator’s requirements, it’s highly unlikely that the state securities regulator will approve the investment advisor application until a currently pending investigation has been concluded by the state securities regulator.
- Question: Does an insurance agent offering equity-indexed annuities (EIAs) and also licensed as a registered representative (Series 6 or Series 7) with a broker-dealer need to become registered as an investment advisor?
Answer: Registration as investment advisor is probably not necessary for a registered representative of a broker-dealer if the reason for applying to register as an investment advisor is due solely to a concern that a state securities regulator will assert that the insurance agent offering equity-indexed annuities (EIAs) is acting as an unregistered investment advisor.
Thus far, we haven’t observed any actions against any registered representatives for acting as an unregistered investment advisor due to the offering of equity-indexed annuities (EIAs). This is presumably due to the fact that a registered representative is already securities licensed and under the jurisdiction of the state securities regulator.
- Question: If an insurance-only licensed agent decides to establish his or her own investment advisor firm, what is the greatest risk facing the agent once he or she has established an investment advisor firm?
Answer: There are numerous administrative, compliance and risk management challenges facing registered investment advisors. However, with respect to individuals that were previously insurance-only licensed, it should be understood that a person associated with an investment advisor will likely have increased fiduciary duties to his or her clients as compared to a person serving in an insurance-only agent status.
You should expect a state securities regulator and/or a plaintiff’s attorney to argue that a person associated with an investment advisor has a greater obligation to disclose all material facts surrounding a client’s purchase of an equity-indexed annuity (EIA) and select a specific equity-indexed annuity (EIA) or equity-indexed annuity (EIA) issuer that best meets a client’s needs. An investment advisor firm with associated persons offering equity-indexed annuities (EIAs) will need to thoroughly disclose material facts and potential conflicts of interest, carefully outline the scope of each investment advisory engagement, and only make suitable recommendations to clients.
If you are seeking advice pertaining to your individual situation and the investment advisor registration process, please contact RIA Compliance Consultants at 877-345-4034, or request a proposal online for our Investment Advisor Registration Service.
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