Permitted Activities and Source of Funds

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As a valued partner of American Equity, we appreciate your hard work and accomplishments. Your continued success helps facilitate our own success. In an effort to assist you with conducting proper business, we will continue to send you updates about the compliance rules and regulations of our industry. Thank you for your partnership with us.

The NAIC Suitability in Annuity Transactions Model Regulation, and the many state laws and regulations governing suitability, require you to gather certain information and use that information in making a recommendation to a consumer. Some of the specific items you are required to review with your client include:

  • Financial situation and needs, including the financial resources used for funding the annuity
  • Financial experience and objectives
  • Existing assets, including investments and life insurance holdings
  • Risk tolerance

If you have an insurance agent license but not a securities license, some of these items seem to put you in a situation where you need to discuss certain financial items and concepts with the customer that you may not be licensed to discuss. 

So, how do you avoid the “Catch-22” of meeting the suitability law requirements while avoiding violation of the securities laws? The answer is – very carefully! 

While we cannot provide you with specific answers, here are some generally permitted and prohibited activities that you, as an insurance only licensed agent may address:

Generally, you may discuss items an individual consumer can access through public resources or are considered to be of general knowledge to the average consumer and information in the media that is general in nature about financial markets or products. For example, the discussion may touch on:

  • The consumer’s risk tolerance, financial situation and needs
  • The stock market in general terms, including what market risk is and recent/historical economic activity that would be general public knowledge (for example, what the market fluctuations experienced starting in the spring of 2020 meant in general for individuals who had large portions of savings in stocks, etc.)
  • Tax status of the proposed product and whether the assets to be used for the purchase need to be tax deferred
  • The consumer’s desire to have a minimum lifetime income stream available
  • The suitability, replacement and transfer forms, and the information contained in them, as required by law
  • General expectations of funds being considered in the purchase of an annuity
  • Balancing risk or diversification
  • The insurance or annuity product as part of a sound financial plan

All of these topics should be explained and discussed only as necessary.

So, what can you discuss and what should you avoid? Again, in general, you shouldn’t talk to a consumer about specific performance of a security product or provide information you would gather from a non-public resource. This likely includes:

  • Discussing specific risks in a consumer’s individual securities portfolio
  • Giving advice to a consumer about securities or investment performance or providing a comparison of how specific securities have performed compared to other financial products
  • Recommending the liquidation of a specific security or identifying securities that could fund an annuity or insurance product
  • Offering or performing research, analysis or providing a recommendation to a consumer on securities
  • Completing securities forms
  • Using improper titles, terms or descriptions that might mislead a consumer as to what you are licensed to perform or sell

If you get specific or personal with a consumer in providing information or services surrounding securities, you most likely will be in violation of securities laws. 

So, how do you protect yourself from accusations of improperly providing securities advice or performing securities functions? 

Document everything. After a discussion with a consumer, send a letter of understanding to them outlining your discussion and recommendations, if any. Consider having the consumer sign and return a copy of this letter for your records. Keep copies of all documents, tools, comparison forms and more that demonstrate your discussion and the action you took. 

While we cannot say for certain that doing the above will guarantee you avoid any violation of securities law, we suggest you look into implementing similar processes. Before adopting any process, you should seek the advice of an attorney or another expert in securities laws to assist you in determining whether or not your business processes are compliant. 

Some state insurance departments have issued bulletins or statements aimed at providing you guidance in this area. You should consider contacting your state regulator for additional information. 

Finally, if you hold or are considering getting a securities license, make sure you do so for the right reasons. If you decide to pursue a securities license simply so you can talk to consumers about their security portfolio or to increase the ease of handling liquidation of securities, but only offer consumers fixed products as a solution to their financial goals, you could be fined or worse.  

There have been cases where securities regulators have found a licensee has acted improperly by not offering advice on all possible types of products or solutions, or for having refused to discuss such option with consumers. 

Be advised, American Equity and/or Financial Markets Inc do not provide legal advice or guidance on issues surrounding securities laws and regulations. This article should not be relied on as providing any advice other than encouraging you to consider your practices to better serve your clients and remain compliant with all necessary laws, rules and regulations.