Regulatory


Troubling Questions

As a follow up to my recent posts on the trading loss at the nation’s biggest bank,  JPMorgan Chase – JPMorgan Chase And The Problem With Self Regulation and JPMorgan Execs Voiced Concerns Over CIO Bets in 2oo7, it’s clear that many of the facts are still not known and there are troubling questions that need to be answered.

Now that the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into ’s JPMorgan Chase’s huge trading loss, serious questions of wrongdoing need to be asked.  And perhaps they will now that shareholders have filed two lawsuits against the bank accusing it and its leaders of taking excessive risk The lawsuits filed in New York charge that JPMorgan changed its risk model without telling investors which led to the losses, and that company leaders misled investors. One suit was filed by California shareholder James Baker. A second was filed by shareholder Arizona-based Saratoga Advantage Trust’s financial services portfolio.

Dealbook implies that there are troubling suspicions of wrongdoing:

The first lesson [of the financial crisis] is that when they are in trouble, banks will mislead the world about their financials. And some will lie. Richard S. Fuld Jr. of Lehman BrothersE. Stanley O’Neal and Charles O. Prince of Citigroup all played down their banks’ exposures before their institutions took vast losses. Were they deliberately misleading? Because of the failures to investigate the financial crisis adequately, we still don’t know.  But we do know that when banks hide their problems, they metastasize and can hurt the economy.

What Did They Really Know?

Questions that will need to be answered include these:

  • What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it?
  • Were JPMorgan’s first-quarter earnings accurate?
  • Were top JPMorgan officials misleading when they discussed the chief investment office’s investments?
  • Why did JPMorgan change a crucial measure of risk during the first quarter. Was that adequately disclosed?

In other words, before discussing reform, the first question should be whether any existing laws were broken. According to Dealbook:

That it hasn’t been asked shows how little true accountability there has been since the financial crisis. No top-tier banker has gone to prison for the many bank failures, the deceptive sales practices or the misrepresentations of the books. As a society, we have thrown up our hands at Too Big to Prosecute financial fraud.

What Were They Hiding?

Although JPMorgan fired the three top executives responsible for the trading loss, we still don’t know much about the timing of these losses. The  trades first came to pubilc awareness in early April, 2012, when Bloomberg News and The Wall Street Journal wrote about the “London Whale.” When JPMorgan reported its first-quarter earnings on April 13, Dimon and Braunstein downplayed problem, which Jamie Dimon called  “complete tempest in a teapot.” Really?

The inconsistency here is that, while he dismissed concerns then, now the bank says that the big losses in fact happened after the first quarter, in late April and early May. They were clearly executing a damage control strategy worried that, had they admitted the extent of the problem, the losses could have multiplied as investors might have forced JPMorgan to give up its positions at “fire-sale prices.” The bluff didn’t work.

Answers Needed

From the losses that have been reported so far, the underlying value of the derivatives contracts was likely $250 billion to $300 billion, and we still don’t know what were these trades were, when the losses occurred and whether the positions were being marked correctly.  The one big “London Whale Trade” — buying and selling credit default swaps on the same index but at different expiration dates — appears to amount to only $50 billion or $70 billion, and likely accounts for only $600 million to $1 billion of the $2 – $5 billion loss.

The trades had been initiated months ago and were widely known, and, as Dealbook points out, earlier in 2012, bank insiders reported that

“Mr. Iksil was ‘defending his positions,’ implying that he was doubling down to force the market in the opposite direction. That’s a rookie trading mistake, one presumably approved by his bosses.”

Still No Accountability for Dimon?

So far CEO and Chairman Jamie Dimon has somehow managed to sweet talk his way through the debacle, trading in on his charm.  He spent all of four minutes talking about the trading loss and steps the company has taken to address it, and two more talking about accomplishments of the company over the past year. After offering a quick apology to shareholders, he survived a push to strip him of the title of chairman of the board, which he simultaneously holds with the CEO title. The vote to strip him of the chairman’s title won only 40% support. Experts in corporate governance believe that the dual role is abusive.

Also passed was a shareholder endorsement of his pay package from last year, totaling $23 million,  with 91% of the vote, according to an Associated Press analysis of regulatory filings.  Of course, most of the shareholder ballots were cast in the weeks before Dimon revealed the trading loss.  He has received the same amount, in addition to a $17 million bonus,  for two years straight.

When confronted at the meeting by shareholders upset about the trading loss, he was not very expansive in his answers. Reportedly, to some questions, he offered a simple, “OK, thank you.” According to the Register Guard:

The Rev. Seamus Finn, representing shareholders from the Catholic organization Missionary Oblates of Mary Immaculate, said that investors had heard Dimon apologize before for the foreclosure crisis and other problems.

“We heard the same refrain: We have learned from our mistakes. This will never be allowed to happen again,” Finn said. “I can’t help wondering if you are listening.”

One wonders: are answers like these worth $23 million dollars? And just what does it take for a powerful CEO to be held accountable these days?  Even the president’s response to these risky derivative trades that Dimon himself admits should never have been made was muted. On  the television show The View, all he said was: “JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion.”

As Robert Reich points out:

Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.

Nor any mention of Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.

Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on by experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.

Wall Street’s biggest banks were too big to fail before the bailout. Now, led by JPMorgan Chase, they’re even bigger. Twenty years ago, the 10 largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent.

Regulatory Conflicts of Interest

In the meantime,  the loss of at least $2 billion in trading practices similar to those that caused the 2008 financial meltdown again illustrates the need for meaningful financial reform.  Jamie Dimon is a director at the Federal Reserve Bank of New York, and has used this position to become the leading voice against regulation of Wall Street. As the Federal Reserve is currently working on crafting and implementing some of the most important aspects of the 2010 financial reform bill, voices are calling for  Jamie Dimon to resign from the Federal Reserve Bank of New York.

You can sign the petition here.

Related Links

Snap! principle of corporate accountability:
Accountability is for little people.
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Risk Management at JPMorganIn “JPMorgan Chase and the Problem With Self Regulation,” I wrote about  the vital role that regulatory compliance plays in keeping the economic sector strong and stable. Self regulation is problem-ridden, and strong regulatory oversight is required to keep the economy running.

More information is emerging about some of the problems that result from an internally-driven compliance mindset. According to ComplianceXDealbook reported that as early as 2007, top JPMorgan execs expressed their concerns over the activities of the bank’s chief investment office in London, which is said to have cause the $2 – $5 billion loss reported Thursday, May 10, 2o12.

Failure to Supervise

Apparently, a schism between the bank’s headquarters in New York and the London chief investment office may have been one of the causes of the lack of oversight that might have prevented massive loss. Part of the breakdown in supervision, current executives said, was a fundamental disconnect between the chief investment office in London and the rest of the bank. Even within the chief investment office there were heightening concerns that the bets being made in London were incredibly complex and not fully understood by management in New York.

Achilles Macris, head of the CIO, ignored concerns from the unit’s internal risk manager in 2009. Some said that Doug Braunstein, who became the bank’s chief financial officer in 2010, tolerated a too-high level of risk and was too cozy with Macris, as the pair had worked closely together in the past.  After concerns were raised about positions assembled by Bruno Iksil, now known as the London Whale, Macris brought in Braunstein, as risk officer. CIO Ina R. Drew has stepped down, and Mr. Macris, who failed to heed concerns as early as 2009, is also expected to resign.  Mr. Macris, is said to have had wide latitude as well as Ms. Drew’s support. Apparently, since risk officers are empowered to stop trades considered too risky, the coziness of the arrangement generated talk in New York as well.

Dealbook states:

In the years leading up to JPMorgan Chase’s $2 billion trading loss, risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand. But even as the size of the bets climbed steadily, these former employees say, their concerns about the dangers were ignored or dismissed.

An increased appetite for such trades had the approval of the upper echelons of the bank, including Jamie Dimon, the chief executive, current and former employees said. Initially, this led to sharply higher investment profits, but they said it also contributed to the bank’s lowering its guard. “There was a lopsided situation, between really risky positions and relatively weaker risk managers,” said a former trader with the chief investment office.

Alarms Ignored

Several factors may explain why Mr. Dimon, who is known for his ability to sense risk failed in this instance and failed to heed the first alarm bells that were sounded in early April.

First,  the scope of the chief investment’s office’s trades are said to have increased sharply following the acquisition of Washington Mutual during the financial crisis in 2008. WaMu owned riskier securities that needed to be hedged against, which caused the business’s investment securities portfolio to quadruple to $356 billion in 2011, from $76.5 billion in 2007.  Mr. Dimon was also distracted by gigantic losses from bad mortgages, and new regulations threatening the profitability of traditional banking.

When erratic trading sessions in late March resulted in big gains one day, followed by bigger losses the next on the London trading desk of the bank’s chief investment office, Ms. Drew and her team persuaded Jamie Dimon that the turbulence was manageable. After first-quarter earnings were reported on April 13, the erratic trading pattern continued. Still, no one on the operating committee questioned Ms. Drew’s conclusion, or were even advised of the scope of the problem until days before Mr. Dimon went public with the loss.

Expect An Expanded Role for Compliance

While there is a lot of blame to go around, the Compliance failure is egregious.  Whatever the new regulations coming out of Washington will look like, it’s clear that Compliance will need to take a more active and empowered role in banking.

Thanks to Beth Connolly,s Editor-in-Chief of the Wall Street Job Report and the Compliance Exchange. She blogs creatively at When Nutmeg Met Basil. Connect with her on LinkedIn Twitter, andAbout.Me.

Strengthening the Understanding of the Vital Role of Regulation and Compliance

JPMorgan Chase was regarded as having sound accounting practices. That is until they disclosed a $2 – $5 billion loss based on risky transactions involving synthetic credit securities, or hedges.  To put this in perspective, it cost JPMorgan nearly 10 percent of its stock price.

So what are synthetic credit securities? Bloomberg Business Week defines them as “derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt.” In other words,  betting on the direction of the economy. As Sen. Carl Levin (D-Mich.) explained, this is more evidence that what banks call ‘hedges’ are often actually “risky bets that so-called ‘too big to fail’ banks have no business making.”

So, despite the meltdown of 2008 caused by the very same derivatives, big banks continue to take risks that imperil the entire economy leaving taxpayers, employees and consumers on the hook.

Now A Criminal Probe

Appropriately, the Securities and Exchange Commission has launched an investigation into the bank’s accounting and disclosure practices, as is the Federal reserve, and the Justice Department through the FBI’s New York office, according to Reuters.  An investigation by the FBI means JPMorgan is now in the midst of a criminal probe.

The investigations are appropriate because this bad bet wasn’t due to a trader gone rogue as with UBS. Since all the JPM people who should have known about the big bet on corporate debt knew about it, the ouster of the bank’s Chief  Investment Officer Ina Drew and others were inevitable. Drew, a 30-year veteran of JPM, apparently volunteered her resignation weeks befire as it became apparent that the trades were losing money. We can also expect resignations from, among others, Achilles Macris, head of the CIO, who ignored concerns from the unit’s internal risk manager in 2009 and Doug Braunstein, who, as Chief Financial Officer since 2010, tolerated a too-high level of risk,

The Disconnect Between Word and Deed

JPMorgan Chase was supposedly a well-run self regulated bank. Then why did CEO Dimon lobby so hard to erode proposed banking regulations created after the 2008 financial collapse  that was precipitated by exactly the same kind of risky and secretive deal-making that resulted in JPMorgan’s incredible loss? Why did he blame excessive regulation for banking woes, and hold that the Volcker rule, designed to prevent financial institutions from taking risks with federally insured deposits, would only make things worse?

You might say that JPM violated the proposed Volcker Rule, but it has yet to be written. and Jamie Dimon’s lobbying efforts can be held largely responsible for the fact that we have a regulatory system that only reacts when it’s too late.

According to the Star Ledger, Democratic Senate candidate Elizabeth Warren of Massachusetts called on Dimon to resign from New York’s Federal Reserve Board, from which he could presumably advise banking regulators how best to regulate his bank, a clear conflict of interest.

It’s Not The Politics Stupid!

Will this loss strengthen the argument for stronger controls when the decision about how to interpret the Volcker rule is made in July? Will legislators finally be prepared to stand up to the financial lobby?

I wouldn’t bet on it.

It’s important to remember what got us here. Another banking giant, Sandy Weil of Citibank, succeeded in convincing a Republican Congress and Democratic President (Clinton) that what was left of Glass Steagall needed to be completely dismantled. This also coincided with ongoing organized efforts to establish “corporate personhood” across the country, via an agenda of judicial activism that was originally initiated by Supreme Court Justice Lewis Powell on behalf of the Tobacco Industry and continues to this day.

Partisan Republicans and Democrats may point fingers at one another, with calls by just about every politician on the Hill for more regulation, as well as the president. However, the causes are neither partisan nor even political per se.

How A Judicial Activist Agenda Led to Today’s Debacle

Although both 1972 Nixon-appointed Supreme Court justices Powell and William Rehnquist were conservatives, the principled Rehnquist resisted Powell’s radical corporatist views. From Alter Net a brief background of the under-the-radar agenda that got us where we are today:

Despite the Rehnquist dissents, Powell’s vision of an unregulated corporate political “marketplace,” where corporations are freed by activist courts from the policy judgment of the majority of people, won out. Powell, of course, could not have…moved a majority of the Court to create corporate rights if no one had listened to his advice to organize corporate political power to demand corporate rights. Listen they did — with the help of just the sort of massive corporate funding that Powell proposed.

Corporations and corporate executives funded a wave of new “legal foundations” in the 1970s. These legal foundations were intended to drive into every court and public body in the land the same radical message, repeated over and over again, until the bizarre began to sound normal: corporations are persons with constitutional rights against which the laws of the people must fall.

Huge corporations, including Powell’s Philip Morris, invested millions of dollars in the Chamber of Commerce’s National Chamber Litigation Center and other legal foundations to bring litigation demanding new corporate rights. In rapid succession, corporations and supporters funded the Pacific Legal Foundation, the Mid-Atlantic Legal Foundation, the Mid-America Legal Foundation, the Great Plains Legal Foundation (Landmark Legal Foundation), the Washington Legal Foundation, the Northeastern Legal Foundation, the New England Legal Foundation, the Southeastern Legal Foundation, the Capital Legal Center, the National Legal Center for the Public Interest, and many others.

These foundations began filing brief after brief challenging state and federal laws across the country, pounding away at the themes of corporations as “persons,” “speakers” and holders of constitutional rights. Reading their briefs, one might think that the most powerful, richest corporations in the history of the world were some beleaguered minority fighting to overcome oppression. The foundations and the corporate lawyers argued that “corporations are persons” with the “liberty secured to all persons.” They used new phrases like “corporate speech,” the “rights of corporate speakers,” and “the corporate character of the speaker.” They demanded, as if to end an unjust silence, “the right of corporations to be heard” and “the rights of corporations to speak out.”

The results of endowing corporations more rights than individuals is not just restricted to the kind of damage shown in the video below. It has resulted in economic devastation that imperils taxpayers, employees and consumers. The analogy to this video is that the economic fortunes of the middle class are going up in smoke as the effects of unbridled corporate irresponsibility trickle down.

The Fox In the Henhouse

The rest, as they say, is history. In the current presidential election, there is a limited choice between a Powell-ite Republican, and a finger-in-the-dike Democrat, both of whom rely on the funding and council of the financial sector, and the same can be said of the gridlocked legislature. Rounding this out, judicial activism leaves little hope for an end to the policies that put the fox in the hen house, leading to greater income polarization, reduced economic opportunities and a weakened economy. And the corporate financial sector, as demonstrated by JPMorgan Chase and the SROs (the SEC and FINRA) does not do a proper job of policing itself. All of which means that the economy is at the mercy of individuals like Jamie Dimon.

A Time for Regulatory Compliance

In the months ahead, you’ll be reading a lot of opinion about the JPMorgan Chase debacle. The majority of it will be meaningless reporting. A good portion of it will be partisan propaganda. Hopefully, a very small part will shed some light on the real issues about the vital role that regulatory compliance plays in keeping the economic sector strong and stable.

Related:

The 2008 economic meltdown was the subject of a recent Frontline special “Inside the Meltdown” that explains how the 2008 meltdown unfolded.

Snap! principle of regulatory compliance:

Compliance is not the enemy – it’s the white blood cells in the body of the economy.

Question:

I read an article that talks about the “Buffett Rule” and a 30% minimum tax. WE HAVE THAT ALREADY! The marginal tax rate is 35% for earnings over $379,150 for a married couple filing jointly. The last time I looked, 35% was more than 30%. Has that changed?

Why pass another tax bill to lower the tax rate on high income earners because the rich aren’t paying enough — that makes no sense at all.

Answer:

Investopedia explains ‘Marginal Tax Rate’ as follows:

Under a marginal tax rate, tax payers are most often divided into tax brackets or ranges, which determine which rate taxable income is taxed at. As income increases, what is earned will be taxed at a higher rate than your first dollar earned. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.

The Buffett Rule would limit the degree to which the best-off can take advantage of loopholes and tax rates that allow them to pay less of their income in taxes than middle-class families.

According to the IRS, 22,000 households that made more than $1 million in 2009 paid less than 15 percent of their income in income taxes, and 1,470 paid no federal income taxes on million-plus-dollar incomes. The very wealthiest American households are paying nearly the lowest tax rate in 50 years, some just half of the federal income tax that top income earners paid in 1960, while the average tax rate for middle class families has barely budged.

By changing the tax code, The Rule would create “a minimum effective tax rate for high-income taxpayers.” Regardless of whether their income derived from long-term capital gains, dividends, wages or salary, Americans earning over $2 million a year would be required to pay a tax rate equal to 30 percent of their total income. Americans earning between $1 million and $2 million would pay a graduated rate approaching 30 percent.

Question:

What impact would the Buffett rule have on the nation’s finances?

Answer:

Not as much as is needed. Estimates of how much tax revenue would be generated by the Buffett rule range from $47 billion up to $160 billion over 10 years.

The politics on both sides is weak. From a progressive perspective, the measure will not raise enough revenue to make a meaningful difference in the federal budget. From the conservative side, it’s argued that higher taxes on the wealthy will depress investment and hurt job creation, but the evidence for that assertion is weak at best. So it’s basically a fairness issue. According to A Civil American Debate – How we Got There & How We Move Forward:

Over the last 30 years, the top income tax rate has averaged about 40%.  It’s now at 35%, one-half of the 70% rate in effect throughout the 1970s.  It was even higher, at 90% in the 1950s and early 1960s, before being reduced to 70% in 1965.   As we discuss (Stable Income Inequality), these lower-than  maximum income tax rates were an instrumental factor…in greatly increasing income and wealth inequality, with disastrous consequences for the economy and for the bottom 99%.

By contrast, letting the Bush tax cuts on Americans earning over $250,000 a year expire would raise $800 billion over the next10 years. As continued deficits will crowd out investment, rolling back the Bush tax cuts is integral in restoring long-term sustained investment and economic growth.

The Buffet Rule was blocked in the Senate.

The Obama Administration is introducing sweeping financial regulation reform

The “worst economic downturn since the Great Depression” will produce the greatest change in financial oversight since then. While a number of studies must first be conducted before specific actions are taken by regulators, and the full impact of financial reform legislation may not be felt for some time since proposed legislation is subject to negotiations and compromise, it will be the most sweeping financial reform since the 1930s. Here are some of the major initiatives that may impact insurance-related operations.

Fiduciary Responsibility Rule: Higher Bar for Brokers

The legislation amends both the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to allow the SEC to impose a common fiduciary standard to broker-dealers as investment advisors.  This will permit broker-dealers to wear “two hats” when working with retail clients. While providing personalized investment advice about securities, broker/dealers would have to follow a fiduciary standard of conduct similar to investment advisors, though a return to the current suitability standard of conduct is allowed once the advice has been given. The sale of commissioned products and proprietary products would not, in and of itself, be considered a violation of the fiduciary standard.

This matter has been passed to the  Securities and Exchange Commission (SEC)  to conduct a study that will evaluate if there are any legal or regulatory gaps or overlaps and the impact of eliminating the broker-dealer exclusion from the definition of “investment advisor” in terms of potential benefits or harm to customers.

Use of Financial Designations: More Specific Terms

Based on the findings of a study by the he Comptroller General, sales professionals may need to change what they call themselves. Restrictions may be in the offing for those who wish to use “financial advisor” or “financial consultant” as titles.  The study will analyze legal or regulatory gaps in the regulation of financial planners and other individuals who provide or offer to provide financial planning services to consumers. The study will weigh the role of financial planners in providing advice regarding the management of financial resources, including investment planning, income tax planning, education planning, retirement planning, estate planning, and risk management, and the use of the title “financial planner” and misleading designations in connection with the sale of  financial products, including insurance and securities, as well as the potential risk to consumers by individuals who present themselves as financial planners through the use of misleading designations, including “financial advisor” and “financial consultant.”

Federal Insurance Office: Non Discrimination

The legislation will create a Federal Insurance Office (FIO) within the Treasury Department, which will gather information about the insurance industry and monitor the industry for systemic risk purposes. The FIO will monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance. Insurers will need to begin to look at the representation of their policyowners and review their underwriting standards.

The FIO may also preempt state insurance measures that result in less favorable treatment of a non-United States insurer. A federal insurance authority creates a single point of entry for foreign insurers and could open the U.S. market to global competition.

Optional Federal Charter: Federal Insurer Oversight

Tje FIO is also charged to study how to modernize and improve insurance regulation. The study will be based on systemic risk regulation, capital standards, gaps in state regulation of consumer protection, and uniformity of state regulation. It will examine the cost and benefits of potential federal regulation of insurance across all lines except health, and the ability of federal regulation to provide robust consumer protection, and will determine the potential consequences of subjecting insurance companies to federal authority. If enacted, federal regulation will provide a uniform set of regulations, which is not seen under the current system of regulation at the state level. In addition, it may lead to the adoption of an Optional Federal Charter, providing dual regulation (state and federal) for insurance companies.

Financial Stability Oversight Council

The legislation will establish a 15-member panel chaired by the Treasury Secretary. The Council will have the power to regulate nonbank financial companies (i.e., insurance companies) if it believes there would be negative effects to the financial system if the company failed or its activities would pose a risk to the financial stability of the United States. The Council will be able to approve Federal Reserve decisions to require large, complex companies to divest some of their holdings if the financial stability of the United States is believed to be threatened.  A limited number of large financial services firms, including insurance companies, will need to carefully guide their operations to meet not only management expectations, but those of federal authorities.

CFPB: Consumer Protection and Regulatory Inquiries

The Consumer Financial Protection Bureau (CFPB) will be established in the Federal Reserve System, and led by an independent director appointed by the President and confirmed by the Senate  to write rules for consumer protections governing all financial institutions that provide consumer financial services or products, including banks and non-banks.

The CFPB will research, analyze, and report on consumer understanding and use of disclosures and communications regarding financial products and services. The CFPB will also establish an Office of Financial Education to help improve the financial literacy of consumers. These actions should help individuals better understand the relevant risks associated with financial products and make more informed financial decisions.

The CFPB will  create a consumer hotline to investigate and respond to consumer complaints regarding financial products or services. Complaints will be routed to appropriate federal or state agencies for follow-up. There could be increased disclosure regulations for insurance products in the future. Financial services firms will need to have the appropriate resources in place to cope with the potential for additional regulatory inquiries.

Senior Investor Protections: Increased Compliance

Insurers that offer products for the senior market, such as annuities, must be prepared for a more diligent state regulatory system.

The legislation will provide grants to states for enhanced protection of seniors from being misled by false designations. The grants will be used to hire staff to identify, investigate, and prosecute cases involving misleading or fraudulent marketing, fund technology, equipment, and training for regulators in order to identify salespersons and advisors who target seniors through the use of misleading designations, provide educational materials and training to regulators and seniors.

Equity-Indexed Annuities: To Be State Regulated

An amendment  would classify Equity-Indexed Annuities (EIAs) as insurance products. As a result, EIAs will remain regulated at the state level, rather than by the SEC.  FINRA rules still require broker/dealers to supervise EIAs as if they were securities, while the National Association of Insurance Commissioners (NAIC) model regulation will impose a suitability standard on EIA sales to the extent states adopt it.

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