Equity-Indexed Annuities - Understanding Regulations

Q. I read your article about equity-indexed annuities. I am a student and this is a very basic question that if I look you may have already answered. What laws are being broken when a broker makes these transactions where the firm cannot defend? Thanks.

A. I'm not sure if you would refer to a regulation as a law. The SEC and NASD have oversight responsibility for the sale of securities. For the studious, the SEC derives it's authority from the securities laws of 1930 and 1933, which were put in place to put an end to many of the egregious practices that resulted in the stock market crash of 1929 and the subsequent Great Depression.

The Investment Advisor Act of 1940 further defines actions by investment advisors.

These regulations clearly state that an investment must be suitability (it's called the suitability requirement). That is the area in which the NASD is most interested in the actions of agents/broker/advisors relevent to EIAs. If an advisor is moving a client out of one high-commission product and into another and the client is paying a penalty to get out of the one and into the other, there may be a question of suitability.

If an advisor is recommending that a client invest to large a percentage into an EIA based on the clients age, needs, etc, there could be a question of suitability.

If an advisor is recommended a long-term product like an EIA to an 80-year old, there might be a question of suitability.

Your posted comments on this and other questions are welcome.
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