alternative mutual funds

Think Twice Before Investing in Equity Indexed Annuities

July 23, 2015 | by Staff Attorney

As long time readers of our blog know, this is not the first time we have alerted investors to the potential pitfalls to investing in equity indexed annuities. Recently, the Wall Street Journal ran an article concerning a probe being conducted by Sen. Elizabeth Warren (D., Mass.) regarding sales incentives for annuities products issued by insurance companies. The senator’s investigation comes on the heels of a speech given by Luis Aguilar, Commissioner to the Securities and Exchange Commission (SEC), before the North American Securities Administrators Association (“NASAA”), stating that the SEC is looking closely at sales practices with respect complex securities including equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes.

According to news sources, the senator’s focus is on indexed annuities which have become widely known within the industry for granting perks to agents. Sen. Warren is said to have quoted from some of the marketing materials aimed at insurance agents describing sales incentives including “four days in the heart of California’s wine country at the prestigious Calistoga Ranch and Spa”; a trip to South Africa to visit Cape Town and Kruger National Park; and the ability to win “tour the Mediterranean on a private yacht, like royalty, celebrities, and the wealthy elite.” According to the report, Sen. Warren is concerned that earning perks may provide a greater incentive for making recommendations that acting in their clients’ best interest.

Equity indexed-annuities promise a return tied to a stock-market index while protecting against losses if the market falls. Sounds good right. Except there are serious limitations built into the products which make them both very expensive and limited to almost CD like returns. Accordingly, if the market has a blockbuster year, your equity-linked annuity will not perform in kind.

FINRA Fines RBC $1.4 Million Over Unsuitable Reverse Convertibles

June 16, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered RBC Capital Markets (RBC) to pay a $1 million fine and approximately $434,000 in restitution to customers for alleged supervisory failures resulting in sales of unsuitable reverse convertibles.

As a background, a reverse convertible is an interest-bearing note where repayment of the principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Investor risk of loss comes from changes in the value of the underlying asset. If the asset falls below a certain level at maturity or during the term of the reverse convertible the investor can suffer losses. In February 2010, FINRA issued a regulatory notice on reverse convertibles emphasizing the need for firms to perform a suitability analysis in connection with sales of reverse convertible because they are complex product.

FINRA and the SEC have both expressed alarm at the growing popularity of complex products. Complex securities include, but are not limited to equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes. A 2012 SEC study on investor financial literacy found that retail investors, and particularly the elderly and minorities, lack basic financial literacy skills. Combining a general lack of financial literacy with an investment product landscape that increasingly focuses on ever more complex product offerings and investors are more reliant on their advisers than ever. Accordingly, retail investors do not always fully appreciate the risks involved with these.

SEC Warns That Retail Investors May Not Understand the Risks of Complex Investments

May 19, 2015 | by Staff Attorney

On April 14, 2015, Luis Aguilar, Commissioner to the Securities and Exchange Commission (“SEC”), gave a speech before the North American Securities Administrators Association (“NASAA”), stating that the SEC is looking closely at sales practices with respect complex securities. “Complex securities” refers to securities that include complex features such as imbedded derivatives. Complex securities include, but are not limited to equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes.

The speech cited a 2012 SEC study on investor financial literacy that found that retail investors, and particularly the elderly and minorities, lack basic financial literacy skills. When you combine a general lack of financial literacy with an investment product landscape that increasingly focuses on increasing the complexity of product offerings investors are more reliant on their advisers than ever.

Accordingly these investment products can be very opaque and complex for retail investors to fully appreciate the risks involved. It was also noted that in this environment yield-starved investors become easy prey for fraudulent schemes in complex securities.