Speakers at the ALI-ABA’s annual conference on insurance and financial services regulation in Chicago offered extensive commentary on changes in enforcement strategies for insurance and securities fraud, in light of recent overhauls to the regulatory scheme. Representative panelists from the SEC and FINRA commented on federal enforcement strategies, while a state insurance commissioner’s representative opined about updates and changes in state-level enforcement.
Universally, regulators are concerned about insurance fraud on senior citizens. One panelist commented that there are so many scams in the current marketplace that regulators would be able to occupy themselves for years with enforcement actions. Current regulatory concern is focusing mainly on the marketing of variable annuity contracts and stranger-originated life insurance products, with some lesser concern on the market for life insurance settlements. For its part, the SEC has begun to scrutinize the life settlement industry, which has grown from $2 billion a year in 2001 to $16 billion a year in 2008.
From the perspective of the SEC and FINRA, current “free lunch” marketing schemes and bogus sales certifications, particularly for products marketed toward seniors, are a major concern. Both highlighted extensive enforcement actions that they are taking in their respective realms to curb the activity. The SEC is taking action against financial institutions that market these products, and FINRA is pursuing enforcement actions against individual and institutional broker-dealers who are selling them. In particular, FINRA is issuing new rules (including Rule 2330) and reminding broker-dealers that they have an obligation to pass on the suitability of particular investment classes before recommending them to customers.
The SEC is taking a particularly aggressive stance with respect to investments involving life insurance contracts. It takes the position that selling interests in pools of life insurance policies constitutes the offering of a security, as it does with the selling of fractionalized interests in a single life insurance policy. Its litigation position is that the offerors of these insurance products must submit a registration statement, abide by the disclosure requirements of the Securities Act, and sell their products only through licensed broker-dealers. The aim, according to the SEC, will be to protect the consuming public from fraud.
State regulators are moving in tandem with the SEC and FINRA, though, to rein in abuse of variable annuity products; and some states, including Iowa, have gone so far as to implement regulations affecting the sale of fixed annuity products. What has not changed, however, is the state-by-state regulation of insurance in the United States. State auditors are continuing to monitor the financial health of insurers and acting in the role of consumer watchdog.
Very recent developments in the law are affecting enforcement strategies. On July 15, the DC Circuit invalidated SEC Rule 151A, which attempted to define a class of annuities that fell outside the statutory exemption from registration provided by the Securities Act, on grounds that it is ambiguous. At the same time, though, the passage of the financial reform bill by the United States Senate on July 15 is spurring new regulatory efforts. Section 989J of the proposed legislation, for instance, gives broad new regulatory authority to the SEC and a host of other entities. The state insurance commissioners do not necessarily see the demise of Rule 151A as a bad thing, though. Several regulators saw the shift in enforcement from market-oriented regulators to securities-oriented regulators as ill-advised, primarily due to different enforcement methodologies. They are generally welcoming the additional regulatory muscle that they, too, will get under Section 989J of the financial reform bill.
