Illinois Ruling May Reopen Indexed Annuity, Securities Issue

May 31, 2011

By Linda Koco,
Contributing Editor,

May 31, 2011 -- The Illinois Secretary of State Jesse White hinted that indexed annuities are securities in an order he issued barring two advisors from selling securities in the state.

The ruling against the advisors came on May 24 following more than three years of investigation into alleged violations of Illinois Securities Law. The case involved transfers into indexed annuities from older annuities that were not yet out of their surrender periods.

This is a “huge story” for indexed annuity professionals, says Jack Marrion, president of Advantage Compendium, a St. Louis indexed annuity research firm.

Not only does Illinois Order 0800064 provide a “cautionary tale” about understanding and explaining policy features, he says, “but it also strongly intimates— without saying — that Illinois considers index annuities to be securities.”

The hints concerning the latter come from the language used in the ruling, Marrion says. 

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, followed by a word-for-word definition of a “security” as stated in Section 2.1 of the Illinois Securities Law. 

Then, the order 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.”

The order does not specify the “investment plans” to which that sentence is referring, and it does not include a definitions section that would make this clear, Marrion points out. “So, apparently, the order is saying that investment plans include index annuities.”

He says he reached that conclusion after noting that indexed annuities are among the plans mentioned in the preceding sections of the order (sections 1 through 39).

“That’s the important part of this ruling — that the Illinois State Securities Department, which operates under the Illinois Secretary of State, is trying to call index annuity products securities,” Marrion says. This has happened even though the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has stated that indexed annuities meeting certain conditions are not securities, he observes.

Case highlights

The advisors named in the order are Thomas N. Cooper and Susan B. Cooper, both of whom were named in a January 2011 Money Magazine article covering alleged abuses in sales of indexed annuities. The two are principals of Senior Financial Strategies, Inc., doing business as Pinnacle Investment Advisers, with offices in Bradley, Champaign, Normal and Peoria, Ill.

According to the order, the Illinois Secretary of State Securities Department began investigating the Coopers in 2008. The trigger was a complaint from clients who alleged the Coopers were negligent and had showed lack of oversight and breach of fiduciary duty.

The complainants maintained that they suffered a $27,092.43 loss in life insurance death benefits when the Coopers transferred funds from an existing variable annuity into an Aviva USA EIA (the order does not define EIA but observers take it to mean a fixed indexed annuity, not a registered indexed annuity). 

Both Coopers held investment adviser representative and insurance agent licenses in Illinois.

According to the order, the department launched an audit and investigation and said it found the Coopers had made 12 transactions with clients who purchased an EIA from the liquidation of another annuity or IRA previously sold to each of the 12 clients by the Coopers. The department also held hearings on the case in late 2010.

White’s order faults the Coopers for misrepresenting various policy features. He ruled that “the transactions were both unsuitable and not in the best interests of the clients due to the clients’ age as well as no derivation of additional tax benefits and the surrender penalties incurred due to the early liquidation of existing annuities and IRAs.”

The order revokes the investment adviser registration of the Cooper’s investment firm and of both Coopers. It prohibits them from offering or selling securities in Illinois and subjects them each to a fine of up to $10,000 per violation.

The Cooper’s attorney, Tom Kelty, of the Kelty Law Office in Springfield, Ill., did not return calls for comment.

Here is the definition of a “security” as stated in Section 2.1 of the Illinois Securities Law:

Sec. 2.1. definition of security from the Illinois Security Law as stated in Illinois Secretary of State Securities Department Administrative ruling 0800064: "Security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, investment fund share, face-amount certificate, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral lease, right or royalty, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "Security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. "Security" does not mean a mineral investment contract or a mineral deferred delivery contract; provided, however, the Department shall have the authority to regulate these contracts as hereinafter provided.

Click here to see Illinois Order 0800064 as posted at Illinois Secretary of State Jesse White’s website.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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