Posts Tagged ‘SEC’

SEC’s EIA rule may resurface – Investment News

July 27, 2009

The US District Court of Appeals has ruled that the SEC cannot regulate Equity Index Annuities. The SEC may reconsider it’s approach and could justify the regulation of a product that is not a security at some point in the future, but for the foreseeable future, these products will continue to be regulated by the Department of Insurance in each state. Insurance is not federally regulated, it is handled at the state level. Either way, you should know about Equity Indexed Annuities in detail before considering purchasing one.

Annuities are a product sold by insurance companies that offer tax-deferral of any income and gains that are not withdrawn from the contract. Fixed annuities offer guaranteed principal and an interest rate that is either fixed or based on a market index. Variable annuities offer the ability to invest in sub-accounts, similar to mutual funds, that can be in equities, fixed income, cash equivalents, and alternatives such as real estate. Gains and income are not taxed until they are withdrawn from the contract. Both fixed and variable annuities are offered either as deferred or immediate contracts. An immediate annuity offers a regular income stream that is generally a fixed amount for life, a time period, or a combination of both. As an example, the payments are for ten years guaranteed and for life thereafter. In that case, the insurance company agrees to pay the purchaser an amount for ten years whether they are alive or not. If they are alive after ten years, the payments are guaranteed to continue until their death.

Equity Index Annuities(EIAs) are a type of fixed annuity. They are not a security and although they contain the word equity, you should not expect an EIA to offer performance that is similar to the stock market. In exchange for the guaranteed principal of the EIA, you give up a portion of the markets return. Many EIAs base their interest rate on a market index like the S&P 500. If the S&P 500 falls, your annuity value remains the same. If the S&P 500 gains, your interest rate will rise either as a percentage of the gain (for instance 50%) or up to a limit or cap (for instance 6.5%). It is important to understand that the index that the EIA uses to determine the interest rate only uses the principal return, dividends are not included. As a result, these contracts are not an alternative to equities but they can be a valid option for funds that might be in fixed income or bank accounts.

The problem with EIA’s is that they are very complex products. Most have high surrender charges and long surrender periods. The worst EIA’s do not allow withdrawals and must be converted to an income stream (annuitized) when you want your money back. Do not buy an EIA if your agent is unable to fully explain the product to your satisfaction. Do not work with any agent, or company, that advertises that you can get the return of the market without the risk! That will not happen!

This overview is minimal, you should go to the NAIC website and request one of their consumer guides. The National Association of Insurance Commissioners offers insurance guides for Auto, Home, Life, Long-term Care, and Annuities. Their guides are educational and not advertising. You can download some of the guides but the annuity guide must be mailed. To get yours, visit NAIC.
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SEC’s EIA rule may resurface – Investment News“>
The reporter for Investment News, Sara Hansard, asked my opinion of these products and was kind enough to include my comments and my picture in her article. To read the article, just click this paragraph or the link below.

SEC’s EIA rule may resurface – Investment News

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What, exactly, does fiduciary really mean? – Investment News

July 23, 2009

Had a great weekend but didn’t follow up on the fiduciary rule, which I had promised. The following article does a great job in covering this issue. It is a must read, and written by a very knowledgeable expert on the fiduciary rule.

What, exactly, does fiduciary really mean? – Investment News

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Madoff Plea

April 13, 2009

Fascinating reading, in my humble opinion, and it supports the position taken in my previous posting about Madoff’s investment advisory firm being a hedge fund. You can find this attachment on line at, or you can click the pdf on this blog below.

Unreal, and in my opinion evidence that the SEC is not to blame. Bernard Madoff admits to knowingly committing the crimes that have been charged. In my humble opinion, he could not have succeeded, as smart as he was, if he had not been functioning as a hedge fund advisor. Any state or SEC audit of a Registered Investment Advisor would have found the discrepancies in his accounting. They couldn’t audit him because he was exempt from registration. The hedge fund advisor was registered in February of 2006, but the US District Court of Appeals struck down the registration requirement in June of 2006. The SEC no longer had the ability to simply waltz in and audit. They needed more than Markopolous. Still wondering why they aren’t publically saying that, but…

Call your congressman and demand that Hedge Fund Advisors be subject to the same regulations as other advisors. Congress needs to amend the Investment Advisors Act of 1940 to make it law.

US Department of Justice, Transcript, Madoff Plea on 3.12.2009

A Fresh View of the Madoff Scandal

April 2, 2009

The news of the crimes by Bernie Madoff has dominated the headlines since his arrest in December. As the lynch mob mentality has now run it’s course, it is appropriate to re-examine the method that he used to commit his crimes and the regulatory environment that allowed him to get away with it for so long.

We know that Madoff chose to utilize a “secret” firm located on a separate floor to run his Ponzi scheme. We know that he registered this firm, on advice of counsel, in 2006. The firm was not new and had been managing, or in Madoff’s case stealing, money for years. However, prior to 2006, there was no requirement to register this particular type of advisor as it was considered exempt from the Investors Act of 1940. This act required the registration of firms that provided investment management as defined by the Act and the Madoff firm fell under the exemption because it was an advisor to hedge funds. Neither hedge funds, or their advisors, were required to register with any self-regulatory or governmental agency.

The Act exempts these funds and advisors because of the limited number of clients that invest in them and because their investors had to be “accredited”. Accredited investors must have a minimum net worth of $1,500,000 or an annual income for the previous two years of at least $200,000. Basically, congress decided many years ago that wealthy investors would be willing to give up some regulatory protection in exchange for the ability to invest in products that were limited in distribution. Consider it a privilege of wealth! In 2005, the SEC adopted new rules requiring “advisers to certain private investment pools (“hedge funds”)” to register their firms with the SEC by February 1, 2006. They decided to require the registration because they redefined the definition of investor. In most of these funds, the investors are institutional hedge funds with numerous clients. Prior to the new rule, each one of these funds was considered to be one investor and the SEC did not “look through” the fund to find the actual number of investors that the fund represented. With the new rule in place, Madoff was advised to register his fund and he registered prior to the deadline of February 1, 2006.

In justifying the new rule, the SEC stated that they ”are concerned that individuals have targeted hedge fund investors and chosen hedge funds as a vehicle for fraud because these individuals could operate their funds without regulatory scrutiny of their activities”. Hedge funds offered, and continue to offer, an unregulated environment that provided generous compensation and the ability to manage money without oversight!

Phillip Goldstein, co-founder of Bulldog Investors, hedge fund advisor, director, and a well-known hedge fund activist filed suit to block the SEC rule. Mr. Goldstein has worked vigorously to prevent regulation of hedge funds and has portrayed the ability of hedge funds to operate in secret as a “first amendment issue”. In a unanimous decision on June 23, 2006, the US Court of Appeals for the District of Columbia agreed with him and struck down the rule. As a result of this decision, advisors to hedge funds could continue to operate with minimal regulation and without registering!

In his testimony to congress on July 25, 2006, then SEC Chairman Christopher Cox responded saying, “given the recent invalidation of the SEC’s hedge fund rule by the United States Court of Appeals, we have been forced back to the drawing board to devise a workable means of acquiring even basic census data that would be necessary to monitor hedge fund activity in a way that could mitigate systemic risk.
The current lack of such basic data requires me to hedge when I say that the SEC’s best estimate is that there are now approximately 8,800 hedge funds, with approximately $1.2 trillion of assets. If this estimate is accurate, it implies a remarkable growth in hedge fund assets of almost 3,000% in the last 16 years.” If the Chairman of the SEC doesn’t know how many hedge funds exists, how can we expect the SEC to successfully prevent criminal activity within them?
Congress needs to remove the hedge fund exemption in its entirety. Allow the SEC to examine the books and records, just as they do for investment advisors. The SEC cannot be expected to investigate operations that can simply turn them away at the door. Blame Madoff, not the SEC.