Individuals without a securities
license are increasingly, and unlawfully, soliciting business.
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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