States Ready ‘Source of Funds’ Rules

February 03, 2011

By Linda Koco

Feb. 3, 2011 -- Regulators in Iowa and Minnesota are co-developing “source of funds” guidelines that will help draw the lines for advisors on making recommendations about moving money between insurance and securities sources.

The guidelines are being circulated among experts, Jim Mumford has told Mumford is first deputy commissioner and securities administrator in the Iowa Insurance Division. 

The new guidelines will be for producers and companies whether in insurance or securities, Mumford says.

“The guidelines are designed to help sellers know when they are crossing the line in making a recommendation that money be taken from a securities product and put in into an insurance product or from an insurance product and into a securities product,” he says.

The source of funds issue has come up across the country as part of ongoing discussions about sales of annuity products, especially index annuity products.

People in the securities industry have complained that some insurance-licensed advisors have been prompting clients to pull money out of securities products for deposit into insurance products, such as indexed annuities, but without the securities credentials to do so. Such recommendations constitute investment advice and the advisor needs to be securities-licensed to provide such advice to clients, the critics say.

Regulators in the Iowa Insurance Division and the Minnesota Department of Commerce are attempting to address the source of funds advice issue from the perspective of both insurance and securities, Mumford says.

Both state offices regulate both insurance and securities, he points out. Both states are also considered hubs in the index annuity industry.

The departments are seeking comments from various experts before issuing the guidelines, Mumford says, because “we want to get it right.” The guidelines should be completed by April, he says. “After that, we may submit them to the A Committee of National Association for Insurance commissioners for review and consideration.”

Another state, Arkansas, has already issued its own source of fund rules. It did this a little over a year ago in Bulletin No. 14-2009.

The Bulletin was issued jointly by both the Arkansas Insurance Department and the Arkansas Securities Department, but the rules deal only with recommendations to move funds out of securities. They say nothing about moving funds out of insurance sources for deposit into, say, mutual funds or stocks.

The Arkansas Bulletin says: “The recommendation to replace securities such as mutual funds, stocks, bonds and various other investment vehicles defined as securities under the Arkansas Securities Act is the offering of investment advice. It is unlawful to offer investment advice unless one is registered (licensed) with the Arkansas Securities Department as an investment adviser or investment adviser representative.”

Producers who don’t comply with the Arkansas Bulletin can lose their licenses and can also be subject to various finds from both the insurance department and the securities commissioner.

For more on source of funds, see Source of Funds Looms on Horizon in InsuranceNewsNet Magazine.

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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James D. Johnson

7/5/2013 9:04:10 AM - MA

Moving money from a mutual fund to an insurance product is a securities violation if the person does not have a securities license. It is plain and simple.

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