Common Sense Investing… Rule 151A- This Is Going To Hurt
Issue 43.09
You have probably never heard of SEC Rule 151A but it will very likely affect you. If this rule takes effect as scheduled in January 2010 most people over 55 are going to feel the pinch. You better sit back and take a deep breath because this one is going to hurt.
Rule 151A refers to the sale of Fixed Indexed annuities, or FIAs (once known as EIAs). FIAs work somewhat like a traditional fixed annuity in the sense that they have a minimal (emphasis on minimal) guaranteed rate of return if held for the life of the contract which is commonly 10 years or more. They also have a feature that ties them to a stock market index, usually the S&P 500. If the index goes up then the annuity has the potential to share in a portion of the gain (emphasis on potential and portion). Even though the client must hold the annuity to maturity or suffer high surrender penalties, many clients are surprised to learn that the insurance company is permitted to make annual changes to how the contract credits earnings.
FIAs are sold mostly by insurance agents. An agent represents an insurance company in the sale of their products for which the company pays them a commission. They do not get paid by the client because under agency laws, they do not represent the client.
The SEC determined that since FIAs earn returns based on the stock market, then the people who sell FIAs should be educated, trained and licensed to deal in securities. Under Rule 151A a securities license will be required to sell FIAs. Securities licensees are not agents of a company, but are required by law to act in the best interest of their clients. They must be able to demonstrate the suitability of recommendations to compliance departments, regulators and auditors. As you can imagine, the insurance industry has spent huge sums to overturn this Rule before January.
And now for the bad news. If Rule 151A takes effect in January, free dinner seminars across the country will come to a screeching halt. Securities’ licensees are generally not permitted to use this sales tactic, and without the large commissions FIAs generate, insurance salesmen could no longer afford to. Retirees may be forced to say “Goodbye” to all those free dinners at the local buffet. I told you it would be painful.
Dan Wyson, CFP® is author of the book “21 Financial Myths” and owner of Wyson Financial. 1173 S. 250 W #305 St. George 435-986-9525 - Securities offered through LPL Financial FINRA/SIPC
