Thursday, February 4, 2010


On February 2, 2010, the AARP, NASAA, CFA and Fund Democracy issued a joint letter to members of the Senate Committee on Banking, Housing and Urban Development in support of the Restoring American Financial Stability Act of 2009 (the Act). The letter expresses support of Section 913 of the Act, which ensures that brokers who offer investment advice are subject to the same standards as investment advisors by removing the broker-dealer exclusion from the Investment Advisers Act of 1940.

The authors of the letter express concern that Section 913 appears to be under attack by members of the broker-dealer and insurance industries whose sales practices would be subject to the new fiduciary duty standard and disclosure obligations imposed under the Investment Advisers Act. The letter does not approve of the broker-dealer community's proposed changes that would limit the fiduciary duty's scope by applying it to investment advice but not to the sales recommendations designed to implement that advice. The letter's authors are of the opinion that this would create the impression of investor protections where none exist.

The letter also expresses concern over the insurance industry's objections to Section 913. Under the fiduciary duty imposed by the legislation, insurance agents who sell variable annuities and other variable products would be required to make recommendations in the best interests of their clients and to disclose all material information regarding those recommendations, including information about costs, risks, and conflicts of interest. Concerns over abusive practices involved in the marketing and sales of annuities and more particularly variable annuities have led NASAA to issue numerous warnings about the products to investors and were similarly identified as a problem area in the joint SEC-FINRA-NASAA Investor Alert on schemes to defraud senior investors.

The authors of the letter are of the opinion that holding insurance agents and brokers to a fiduciary duty when they provide investment advice in association with the sale of variable annuities would provide additional investor protection tools. Most notably, it would no longer be sufficient to show that a variable annuity was generally suitable for the customer; they would have to determine that, among the investments they have available to sell, the variable annuity was the option best suited to the customer. While certain segments of the insurance lobby have also opposed the pro-investor provisions of Section 913 on the grounds that the legislation would require these firms to register and be regulated as investment advisers, the authors note that the requirements for such registration are quite modest. They note that registration can be accomplished by filing a form electronically with either the SEC or appropriate state regulators and annual state registration fees average only $210 per firm and $60 per individual.

A complete copy of the letter sent to the members of the Senate Committee on Banking, Housing and Urban Development can be found here.

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