Individuals
without a securities license are increasingly, and unlawfully, soliciting
business
May 30, 2019 @ 2:40 pm By Greg Iacurci
Rolling money out of a 401(k) plan to fund an
insurance product, like an annuity or life insurance policy, can be a
difficult, tense decision for retirees. After all, seniors are earmarking a
large chunk of their nest egg.
These rollovers are often initiated at the
advice of an insurance agent. And with increased frequency, the agents making
those recommendations are breaking the law.
"We've seen an increase in Vermont, and I
think across the country as well," said Michael Pieciak, president of the
North American Securities Administrators Association and commissioner of the
Vermont Department of Financial Regulation.
A recommendation to roll over money from a
401(k) plan involves two separate transactions: advice to take a distribution
from the retirement plan and advice to park that money elsewhere.
Non-securities-licensed insurance agents —
those who hold an insurance license but not a securities license — can
recommend the second part of the equation without a problem. The first part is
where these agents break state and federal law, according to regulators and
attorneys. Agents may be able to legally recommend rolling from a cash or
insurance position in a 401(k), but not from a securities product like a mutual
fund, where the bulk of 401(k) assets are held.
The law applies not just to 401(k) rollovers
but to all securities transactions — meaning recommendations to exchange
variable annuities or variable universal life insurance policies may also be
legally unsound.
While regulators, primarily at the state
level, have been monitoring this activity and enforcing their rules, experts
say those circumstances are rare and that culprits largely go unpunished.
"It's going on all the time," one
prominent attorney who requested anonymity since his firm represents insurance
clients said of rollover recommendations by non-securities-licensed agents.
"There's been no regulatory presence — none, zero. A rule that's
unenforced is, as a matter of speaking, not a rule at all."
Micah Hauptman, financial services counsel at
the Consumer Federation of America, said this type of activity is often
detrimental to investors, especially when retirees are advised to roll out of
low-cost 401(k) investments into an expensive insurance product with a long
lock-up period that's not in the customer's best interest.
Absent increased scrutiny, the situation is
poised to get worse as baby boomers continue hurtling into retirement. In 2016,
investors rolled $415 billion out of 401(k) plans, according to a report by the
Limra Secure Retirement Institute. The group estimated that figure would swell
to $466 billion by the end of 2019.
"This is where a lot of harmful activity
and harmful recommendations occur," Mr. Hauptman said. "It's an
unpoliced market."
Securities and Exchange Commission rules
forbid non-securities-licensed individuals from engaging in securities
transactions. That gives the SEC power to bring a civil enforcement case
against non-securities-licensed insurance agents, perhaps in the form of a
fine, disgorgement or cease-and-desist order, said Christopher Petito, attorney
at Willkie Farr & Gallagher.
However, the SEC doesn't go after agents for
such violations, or will only do so in extremely rare circumstances, experts
said. An SEC spokesperson didn't return a request for comment.
The Financial Industry Regulatory Authority
Inc. has limited authority in these circumstances. The group can go after the
broker-dealer that executes a faulty rollover transaction, but not the
non-securities-licensed individual who made the recommendation.
This leaves much of the enforcement up to the
states. A handful have paid particular attention to this issue. For example,
Iowa's insurance division issued a bulletin in
2011 laying out the licensing requirements for certain insurance and securities
activities. The memo allows insurance-only individuals to discuss things like risk
tolerance, financial objectives, liquidity needs and financial time horizon
with investors, but expressly prohibits insurance-only individuals from
"recommending the liquidation of specific securities, or identifying
specific securities that could be used to fund an annuity or life insurance
product."
"It's [a problem] that regulators at the
state level are working to expose and mitigate," Mr. Pieciak said.
Part of the problem, experts said, is the
law's gray area. While states have tried outlining permissible and
impermissible activities for insurance agents, the lines aren't always black
and white, Mr. Pieciak said.
Insurance companies accepting rollover money
also bear some of the responsibility.
Many insurers have processes to review the
source of funds and suitability of the transaction for the investor, Mr.
Pieciak said.
However, "you can only put so many
processes in place as a company in terms of verifying information from a
producer and providing that verification," he said.
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