Missouri Should Protect Investors by Regulating Variable Annuities

By Diane A. Nygaard

Small business owners should support legislation aimed at regulating sale of variable annuities in Missouri. Why? Because small business owners, particularly those who have been around long enough to establish a nice retirement portfolio, are in a class of investors considered prime targets for those who sell variable annuities. Variable annuities are excessively complex investment products that combine insurance with equity investments. Their features typically include investment options such as money market instruments, stocks and bonds, a death benefit, tax-deferment and periodic payments.

Misunderstandings and misrepresentations abound between buyers and sellers of variable annuities. Neither the average consumer nor the average securities salesperson fully understands what they are and how they work. This was clearly illustrated in an arbitration case against SunAmerica Securities Inc. SunAmerica’s own expert witness proudly testified that it took him two days to explain variable annuities to Securities and Exchange Commission attorneys in New York.

Further evidence of misunderstanding is that the main purchasers of annuities are investors at or near retirement age. For these investors, variable annuities are rarely suitable investments due to liquidity and irrelevant tax-deferment issues. Most of these investors would probably reject variable annuities if they were aware of the risky stocks held in sub-accounts or the high commissions and fees being charged. And yet, $1.7 billion in variable annuities were sold in Missouri last year. The result is an epidemic of variable annuity-related complaints and arbitrations.

Investors need to know what they are buying. They need to know whether or not a particular investment is suitable to their goals, their risk tolerance, their time horizon and their tax status. Unfortunately, Missouri investors don’t know any of these things when they are sold variable annuities, due to a loophole between federal and state law. Variable annuities are considered securities under federal law but are omitted from that definition by Missouri law. Hence, disclosure requirements are weak, and so is accountability for those selling them.

New legislation would close this loophole. The legislation proposes rules modeled after standards by the National Association of Securities Dealers (NASD) that would institute suitability and supervisory requirements, clearer disclosure statements and improved sales force training.

In addition, stronger regulatory control over the sale of variable annuities is needed. Jurisdiction should fall under both the insurance commissioner, who currently has regulatory control, and the secretary of state. In Missouri, an insurance license is all that is required to sell variable annuities.

That means a large, aggressive sales force without the necessary training in securities and in determining suitability for the consumer are able to sell variable annuities. Help is needed to protect some our most vulnerable citizens.

Missouri should pass this new legislation. It has been proposed and defeated previously, due to the efforts of the insurance and financial services industries that reap huge profits from the sale of variable annuities. State officials are requesting public input through September. Missouri small business owners and their employees should voice their support for this legislation by contacting the governor, the secretary of state, their representatives and senators.

Diane A. Nygaard is founding principal of The Nygaard Law Firm, specializing in insurance and securities arbitration and litigation on behalf of investors. She is past national president of The Public Investors Arbitration Bar Association.