By Linda Koco
Contributing Editor, InsuranceNewsNet
June 3, 2011 --
An Illinois dispute over whether indexed annuities are securities is heading for court.
An attorney for two Illinois advisors said he filed in Illinois circuit court today for a stay of an administrative order that suggests the indexed annuities the advisors sold are securities.
The Illinois secretary of state issued the order on May 24. It includes an indirect “proclamation” calling indexed annuities securities, according to Thomas W. Kelty, the advisors’ attorney. Kelty also filed an appeal in circuit court on June 1.
This “proclamation” appears in paragraph 40. It states that “each of the above referenced investment plans is an investment contract and therefore is a security as that term is defined pursuant to Section 2.1 of the Act.”
“I think the Secretary of State was being cagey in the terminology and phraseology used in the Order,” says Kelty, who practices out of his Kelty Law Office in Springfield.
“There is no basis in the record for addressing the question of whether an insurance product is a security. and there is nothing in the Order that shows how that conclusion was reached.”
Furthermore, Kelty says, “there is nothing in the Department’s Notice of Hearing in October 2009 about indexed annuities being a security.”
The vagueness of the May 24 order is among the grounds Kelty cites in his June 1 Complaint for Administrative Review. For instance, the complaint contends that:
- “The language of the statute under which the proceeding was conducted and the Order issued is vague and arbitrary and violates Plaintiff’s rights to constitutional due process.” [Section 2(iii)].
- “The findings and conclusion of law in the Order are not supported by the record below and the preponderance of evidence burden of proof.” [Section 2(vi)].
- “The use of the term ‘investment plans’ in the Order is vague and undefined, including all other legal and actual infirmities contained therein.” [Section 2(vii)].
In Illinois, the filing of a Complaint for Administrative Review triggers the appeal process. The Secretary of State Securities Department has 35 days to respond to the complaint. The Circuit Court for the Seventh Judicial Circuit in Illinois will rule on the appeal, based on its review of the transcript. The circuit court is the first level of state trial court in Illinois.
Kelty says he believes political motivations may have something to do with the order and the hearings that preceded it over the past three years.
He notes that the attorneys on the case are from the Illinois Securities Department. “I think the chief lawyer in the department is out to make a name for himself, and they (the attorneys in the department) are hostile to the industry and frustrated that they can’t regulate the indexed annuities.”
He also wonders at the rationale for the rulings in the order. He points to White’s decision to ban the advisors — Susan B. Cooper and Thomas N. Cooper, and their firm, Senior Financial Strategies Inc., dba Pinnacle Investment Advisors — from offering or selling securities in Illinois.
The Coopers are insurance agents who are also registered as investment adviser representatives in Illinois, Kelty says. “Their registration enables them to give fee-based advice on investments but they don’t sell securities and never have. They are licensed to sell insurance and annuity products, and that’s what they sell.
"If you don’t have a securities license — which these advisors don’t — how could the Secretary of State conclude that these people should be barred from selling securities?”
The order documents 12 cases where the two advisors had liquidated an existing annuity to purchase an “EIA.” It also details the surrender charges, bonuses and income rider options related to the transactions and faults the Coopers for misrepresenting various policy features and for transactions that were both unsuitable and not in the best interests of the clients,
The order not only bars the Coopers and their firm from offering or selling securities in Illinois but also revokes their investment adviser registrations and fines them, jointly and severally, $10,000.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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