The Securities Industry Takes Its Propaganda Campaign to Washington

The Senate Committee on Aging got an earful from securities industry representatives, as it met on March 29, specifically for the purpose of examining methods con artists use to persuade older Americans to invest in a wide range of fraudulent investments, such as fake promissory notes and fake real estate investments. From this agenda you would think that the securities representatives would have enough concerns about such illegal activities within their own industry and stay on topic. A victim and a convicted con artist, who testified, only talked about schemes that had no relationship to insurance or annuities. But the 3 securities regulators who testified, chose instead, to once again step completely outside their area of jurisdiction, and take this opportunity to continue the misleading statements against indexed annuities we now so quickly recognize as part of their ongoing propaganda campaign, which is meant to eventually wrestle control of indexed annuities from the insurance industry. Patricia Struck, president of the Wisconsin NASAA, Elisse Walter, executive VP for regulatory policy and oversight at the NASD, and Susan Ferris Wyderko, director of the Office of Investor Education and Assistance at the SEC, all chose to devote from 10 – 20% of their written testimony to emphasize the need to keep seniors from buying unsuitable annuities. Besides the same false and misleading statements about the product details we have seen so often from securities regulators, their illegal references to categorize indexed annuities as investments, and the vague generalized statements, they also managed to attack the “free lunch” seminar as a sure way of spotting a con artist who is selling unsuitable annuities to seniors. Ironically, these securities representatives found a way to get it on record that “variable annuities are legitimate and suitable investments,” although they go on to provide their required disclaimer about potential risk and costs. As I read about this hearing, it reminds me of the way Hollywood actors have been brought in to testify about some social issue, not from their overwhelming knowledge or expertise, but simply because one of the character roles they played in a movie portrayed some knowledge about the issue. In the case of this hearing, in their comments about indexed annuities, the three securities reps don’t even have that credential to fall back upon. It is not surprising that the securities industry is taking its propaganda campaign to Washington, where misleading and confusing statements, insinuations, and deception are normal ways of doing business; and where having a strong financial concern about some issue is sufficient to earn an individual or a group, the title of expertise. Even though many of these securities reps’ comments and statements are false and misleading insinuations, in Washington, at least, they simply call that “spin.” And we have come to see how the NASD and others in the securities industry are becoming very skilled at this kind of political “spin.”

Generalizations Can be Harmful to Consumer’s Financial Health

In a USA Today article, written by Greg Farrell, entitled SEC targets investment scams aimed at seniors, he has fallen hook, line, and sinker into the journalistic trap of allowing previous misstatements and generalizations about this topic to fuel inaccuracy and misleading assumptions in his own article. The subject of his piece is addressing concerns that, as baby boomers continue to reach retirement, there will be increasing motivation for scammers to come up with ways to profit from this enormous amount of retirement money looking for a home. Since the first use of currency, preying upon opportunity has been a given practice of the underside of human nature, and it would be surprising if there were not swarms of deceptive practices meant to get rich from this rising tide of retirees. But besides his stating the obvious, as Farrell tries to explain with examples, he resorts to generalizations in a way that implies that all such practices similar to the ones he cites are scams aimed at harming seniors. He mentions seminars that “promise” to provide a free lunch, as if the scam he is concerned about is that the promise of lunch would not be fulfilled, and the seniors would go away hungry. The other inference Mr. Farrell makes is that seniors are an “increasingly vulnerable group,” as if when this group grows older, they also grow stupid, making them more likely to make bad choices and decisions when confronted by any shyster who offers them a free meal. The generalization that really provides the greatest amount of disservice by misleading the readers is his accusations that “high-pressure sales pitches (are) designed to get older Americans to put their assets into unsuitable investment programs, such as annuities.” Since the only annuity product that is classified as an investment is a “variable” annuity, we have to assume Farrell is insinuating that they are an unsuitable investment program for senior adults. I wonder if the SEC or the NASD would agree with this broad assumptive statement. And of course, if you hear about such a financial product at a “seminar” where there is also free food, then there must be something rotten afoot, so beware. This kind of article, in such a prominent publication is irresponsible journalism. Seminars provide a perfect venue for someone to anonymously check out any type of program without obligation or commitment. At a seminar someone can evaluate if they want further information or if they like and believe the presenter, all from the safety and comfort of the back row, if they so choose. If Farrell is insinuating that simply because you provide a free lunch, that you will suddenly impair a lifetime of intelligence and the ability to made good judgments in a senior, then the next article he writes should be an apology for insulting a complete generation of people whose lives have proven that they get wiser and more street smart with age. Scams come and scams go, but the wise will always survive. Perhaps the real answer is that these people are willingly making decisions to buy these products with no coercions whatsoever, because they have evaluated them, they understand them, and they believe them to be exactly the product that meets their needs. Let’s give the seniors some credit and stop generalizing them as stupid, weak, and vulnerable individuals who will fall for anything when their stomachs are full. It is Mr. Farrell who is the one who has provided the scam in this instance.

Glauber Continues His Personal Vendetta to Control Indexed Annuities

With the announcement of a planned Annuity Roundtable in Washington, DC on May 5, by exiting NASD CEO and Chairman Robert Glauber, he continues to be the strong voice of misstatement and propaganda, meant to weasel control of fixed and indexed annuities from state Insurance Departments, and place it with the NASD. The March 23rd press release, not surprisingly issued by the NASD, lists an impressive group of participants from both the securities industry and the insurance industry. But this call to discussion is not initiated by the insurance side, which has sole authority over the regulation of fixed and indexed annuity sales and marketing practices, but rather, it is an intrusive move by the outsiders in the securities industry to force their involvement into an area which is none of their concern. The first striking impression of this announcement appears to be as oddly misplaced as if Baptists leaders were to invite Catholics to attend a summit for the purpose of discussing their concerns with the liturgical practices within the Catholic Church. The parties who are putting together this Roundtable are completely outside of the regulatory circle of authority of these pure insurance products. But that does not stop Glauber with his statements of misleading propaganda. He continues his rhetoric of illegally calling fixed and indexed annuities investment products, which they are not, and stating that “equity-indexed annuity sales are a jurisdictional jump-ball, because it isn’t clear whether they’re securities, insurance products or something in between.” To everyone but Glauber, it is very clear that fixed and indexed annuities are completely within the jurisdictional domain of the state insurance departments, and are not subject to ANY authority of the NASD or any securities regulators. But since Glauber and the NASD members are not happy with that answer, they continue their lies; all with the purpose of confusing this well know fact in order to justify their intrusion into an industry outside of their legal authority. Fixed and indexed annuities are not investments but are insurance products, and only insurance products. Glauber may claim that he is not proposing new rulemaking by the NASD or any expansion of its regulatory jurisdiction, but he continues to insist on their involvement in such discussions about indexed annuities using his propaganda about their uncertain identity and that for the protection of “investors” the NASD and these other “interested parties” need to speak up. As long as the proper authorities allow his lies and misstatements to influence their actions, he will continue to get attention for his propaganda campaign. But my suggestion is that the insurance industry not kowtow to his rhetoric any longer, and suggest to Glauber that he sit down and forever hold his peace.

Does Charles Schwab Want to be the Pot, or the Kettle?

I recently became aware of the fact that discount brokerage house, Charles Schwab, is promoting a couple of indexed annuities of its own design, called Index Rewards and Index Rewards 5. It is interesting to see such a prominent member of the NASD family, using the same marketing "catch phrases" that so many registered insurance agents have been criticized, and even punished for using. Reading from their own web site, I see a section labeled: Potentially higher returns, and, Guaranteed minimum interest. The information provided is technically accurate, in that it states that, "interest rate is linked to a formula that uses the performance of either the S&P 500 or the Dow Jones Industrial Average," and that “a minimum guaranteed interest rate floor…preserves principal and credited interest when held to maturity.” Still, I fail to see how the Schwab site differs from the highly criticized methods of so many agents who have been offering indexed annuities for years making similar marketing claims, only to be severely attacked by the NASD for doing so. These descriptions only hint at the full details of how those indexes will be used to calculate that interest, as most marketing materials only provide highlights. The amount of missing information yet needed to help a client understand the products fully is enormous. Usually that is where the sales agents steps in and can help fill in the blanks, when the literature is insufficient or confusing to the average layman considering the purchase of an indexed annuity. The real question I have, is simply this: how does a brokerage house, that grew to its current level of prominence by offering inexpensive, self-directed trades, and provides little or no investment support or advice to its customers, expect to be able to sell indexed annuities with ANY level of explanation or service such as the NASD has so vehemently clamored needs to be extended from the current level provided by sales agents. Is Schwab planning on being a clearing house for people who are simply shopping annuities and find their offer enticing? I have no problem with a major brokerage house getting into the indexed annuity business. It is a type of confirmation that the product is both viable and desirable enough that they want a piece of that market. I do, however, have a problem with a brokerage house getting into the insurance business, when they do not possess the experience, the knowledge, the understanding, or the manpower to provide what the public needs, in order to make informed choices. This shortcut step by Schwab could be interpreted as an admission by a powerful member of the securities industry, that the current marketing materials, forms, and contracts are sufficient for many people to educate themselves before buying an indexed annuity. If this is so, then where did all this recent criticism we have been hearing from the NASD and others in the securities industry come from? I am curious to see how, or if, the NASD will have negative comments on how Schwab is marketing their indexed annuities.

Is There Finally Some Hope for the NASD Regarding Indexed Annuities?

New NASD Chairman, Mary Schapiro appears to sound a little more reasonable about her view of the role of the NASD regarding insurance products. When a planned notice to members is released soon, regarding the position of the NASD on life settlement transactions, we will know more definitively how balanced her positions really are. But in her recent talk at a conference in Hollywood, Fla., organized by the compliance and legal division of the Securities Industry Association, Washington, Ms. Schapiro was quoted saying that, "equity indexed annuities may not be securities" and further stated that “plain vanilla annuities are not securities.” While this may not be a full admission that EIAs are purely insurance products, it is a few steps back from the confusing double talk of her predecessor. Her other comments, about the need for brokers to carefully weigh the alternatives before recommending the sale of an existing life insurance policy through a life settlement company, at first may seem somewhat an intrusive interference by the NASD into a business which is not under their jurisdiction. But if this is as far as her comments go, I have hopes that maybe some of the recent attacks by the NASD on fixed and indexed annuities may be slowing to a manageable discussion. I strongly agree with her explanation, that while variable, fixed, and indexed annuities are often purchased to provide a similar purpose, the inherent differences in each of each of these products do not equally fulfill the needs of every client. Nevertheless, this does not provide the NASD an invitation to participate in the decisions regarding the regulation or the sale of non-registered insurance products such as fixed and indexed annuities. The truth has to be accepted that registered representatives, who are also insurance licensed, will have to answer to two different masters, depending upon which products they are presenting. The NASD certainly does not accept that a licensed insurance agent, who is registered to sell mutual funds, must also answer to their state insurance department regarding their activities in the sale of these registered products. That portion of their business clearly does not fall under the domain of insurance regulators, but the NASD. Likewise, fixed and indexed annuity sales by a registered broker do not fall under the jurisdiction of the NASD, but are only subject to the authority of each state insurance department.

Are EIA's Really That Hard to Understand

I have been reading a lot of commentary lately that accuses EIAs of being extremely complicated and difficult to understand, with the implication, that, perhaps this makes them unsuitable for elderly consumers. Compared to a bank CD, which simply adds the stated interest over the agreed time period, perhaps this accusation may at first appear to be true. But even in the simplicity of CDs, consumers have had to learn the differences between simple and compound interest, and the effects it has on real returns. With any stock or mutual fund, the complexities of the inner workings go up exponentially. Do these people, who accuse EIAs of being so complicated, really believe that the majority of mutual fund purchasers understand the complete workings of all the fees, the risks, the commissions, the full potential for gains AND losses, the strength or weaknesses of the underlying stocks and bonds, or even something as vitally important as the primary investment objectives of the fund? The truth is that people blindly buy securities based upon such feeble information as a feature article they read in a prominent financial magazine or newspaper, a comment by a friend or family member, or the unsupported suggestion of their broker. Often the basis for their interest in a particular fund is so shallow, that if they really understood the full details of how that investment worked, they would know that this fund does not actually achieve what they are looking for. But because every investor receives a prospectus, which is rarely read, it is assumed that they are therefore, fully informed. With EIAs there are complete detailed disclosures required to be provided by the agent, and signed by the purchaser at the time of application. Additionally, the client receives the same complete disclosure information again in the contract when the annuity is issued, with which they are always given a “free look period” of 10-30 days; in order to do all the reading of this detailed information they desire. The new standard that is being called for with EIAs, by its critics in the securities industry, is not just proper disclosure of all facts and details, as is the only requirement with securities products, but, rather, they want certainty of complete client understanding. If insuring understanding is a feature that is to be required of annuity sales, it should also become a requirement for the sale of every securities product. Then, if client’s ultimately only purchase the product they completely understand, I think we will then see just whether it is really the annuities that are complicated, or if it will finally reveal the deceptive veil of confusion with which the securities industry has effectively masked the buying public of securities instruments for years. If a standard of insuring client understanding is then equally applied, before the sale of an annuity OR a security is allowed, it will become quickly evident just how easy to understand annuities really are, compared to ANY security product offered on the market.