Welcome to the bonus year.
Independent annuity agents and the marketing organizations that serve them were against the proverbial wall, blindfolded and enjoying a last vape when the Department of Labor’s (DOL) new secretary, R. Alexander Acosta, issued a fiduciary rule reprieve until mid-2019. Now instead of exiting from the annuity market en masse, dazed agents and independent marketing organizations (IMOs) find themselves with a new lease on life, albeit a short-term one.
But what will agents and IMOs do with this year? Early indications at the end of 2017 were that it might not be spent selling annuities.
That was Robert A. Kerzner’s concern when the LIMRA CEO laid out the facts in a third-quarter industry briefing in November.
“The S&P was up 4.5 percent,” Kerzner said, “yet we’re just not seeing any positive impact this normally would have had on annuity sales.”
In the third quarter, fixed annuity sales dropped below $50 billion for the first time in 15 years.
The rising equities market usually lifts fixed indexed annuities, typically linked to the S&P 500. Most expectations were that the third quarter would see a rebound of annuity sales because it was the first full quarter since the DOL rule went into partial effect on June 9.
The most onerous parts of the rule were put off for another two years at that point. Those parts were the exemption requirements on indexed and variable annuities, and the consumers’ right to sue. It also paused one of the most debilitating aspects — the exile of most IMOs and their agents from selling FIAs or VAs to anyone with IRA money.
So, why didn’t agents come running back to the annuities market? And will they stay away this year as well?
Roaring Markets and Fading Safety
Market analysts and distributors offer a few reasons that are affecting buyers and sellers and how those trends might play out in 2018.
Two key reasons on the buyer side are reluctance because of the publicity about the DOL rule and the roaring equities markets. It seems all eyes have turned away from the safety of insurance products and toward the arrow shooting up the stock charts, according to Joseph Corio, a senior vice president at URL Financial, an IMO in Harrisburg, Pa.
“Everybody has a little bit of greed in them — some more than others,” Corio said. “We used to see a lot of money coming from mutual funds, and now that money is staying put because it’s been doing well. So they’re hesitant to move it to an indexed annuity where preservation of principal is key. They want to try to get that 8, 10, 12 percent return that they’re hearing about.”
Indeed, data show that more money is exiting annuities than entering them. LIMRA reported that FIAs had the first downturn in net flows in five years. Net flows are the total premium sales minus surrenders, withdrawals, inter- and intra-company exchanges, and benefit payments. The other types of annuities have seen a downward trend of net flows since 2009.
Conning market researchers noted that more annuities are exiting their surrender periods. But it is looking like those dollars are not annuitizing or going into new annuities. Conning is forecasting that net flows will continue to drop into 2018.
Corio’s IMO is not dependent on annuity sales, because it offers an array of services and products for life and health, with a focus on Medicare.
Corio said they have been finding more success with life insurance products that include living benefit riders. They have multiple benefits that make them a good retirement planning tool. It’s especially good for clients who already have annuities and are concerned about the next generation getting taxed on the gains.
“We’re suggesting to agents that instead of putting money into another annuity, letting it grow and the gain will be taxed, why not look at a single-premium life product?” Corio said, using a hypothetical client in his late 60s who puts $100,000 in a policy. “That provides him about $160,000 with death benefit instantly — day one. That death benefit can be used for home health care or nursing home care if his health goes sour. That alleviates the long-term care piece, a little bit. And if they die, the $160,000 goes to the beneficiary tax-free, so they can use that to pay the taxes on all the other investments that we helped them with over the years. And if something changes and they want their money back, they can get their money back at any time or surrender the policy for even greater than the premium.”
Riders, particularly living benefit options, have been a bright spot in the life insurance market, which has seen a bit of dimming along with annuities. In the third quarter of 2017, sales in each segment of life insurance dropped, except for term.
Sales Exit With Sellers
The other factor in slowing sales is sellers themselves. Many of Corio’s 2,400 agents are dialing down their business, down to 12 hours a week in some cases. They still make six-figure incomes, but they aren’t pulling in much new business. This is typical nationally as the average agent age advances into the 60s.
As with many IMOs nationally, Corio’s URL Financial is having difficulty recruiting new agents. Many of his prospects in the Harrisburg area are already contracted with all the companies URL represents. Younger people tend to go into finance rather than insurance.
So, why not go into finance also? Many industry experts suggest that IMOs would do well to participate in the financial sector. In fact, URL did dip a toe in that water 10 years ago by developing a securities division.
But it is a tough pool to swim in. Regulation was demanding, and supervision requirements were costly to maintain. URL ended up selling that division.
Corio did not rule out taking another pass at securities at some point, but URL has found some success in the financial sector in another way — with financial advisors.
Getting financial advisors to sell insurance products has been an ever-growing insurer strategy, especially over the past few years, because of the declining agent sales force and tightening regulatory pressure on commission-based sales. But advisors are not leaping aboard that train.
According to LIMRA, fee-based fixed indexed annuities made up less than 0.5 percent of FIA sales in the third quarter of 2017. Fee-based VAs did marginally better at 2.5 percent of sales.
But much to Corio’s surprise, he is finding some success with the living benefit riders on life products. Although insurance agents have not been as quick to put those products in their tool box, financial advisors have been interested.
“We’re seeing more and more wealth managers starting to use it because it is an efficient way to transfer wealth,” Corio said. “They want to know what’s out there so they can best serve their clients.”
Corio is working the phone, cold-calling just like in the old days. Except now he is recruiting financial advisors. And finding success.
Annuities Blending With Finance
You don’t have to sell Robert Klein on insurance products. The financial advisor in Newport Beach, Calif., sees himself as a retirement income advisor and considers life insurance and annuities critical elements in planning.
“I’m not strictly fee-based or commission-based,” Klein said. “I do what’s best for the client.”
He is keeping a worried eye on the stock market because he believes many people are forgetting the lessons of 10 years ago.
“People are ecstatic that it is at this height,” Klein said of the market’s phenomenal rise since 2009. “But at the same time, people have a short memory and forget that the market lost 50 percent within 18 months, October 2007 and March 2009.”
He reminds clients of those down years, introducing the reliability of an annuity if there is an absence of a strong, secure stream such as a pension or rental income.
Klein uses a range of annuities. He might suggest that a client could do well to take $100,000 out of the market and put it into a qualified longevity annuity contract (QLAC), which avoids the required minimum distribution at 70½ that other products carry.
But wouldn’t clients be hesitant to take money out of the roaring stock market and put it into something that would pay a few percent interest?
“It’s always about how annuities are presented,” Klein said. “You can never equate the market with a secure lifetime income. It’s not about a return. It’s about how long you are going to live. If you present it as a return, the client is never going to be on board with that.”
He focuses on the income, which he said could be substantial, depending on when the client puts in the money and how long they defer the payout. Klein finds that helps soothe retirement anxiety.
“It helps people sleep better at night,” he said. “People get really anxious when they don’t have any plan at all or people don’t follow through the plan.”
That is the key to 2018 — the all-purpose plan. No year is typical now. Records are set and broken every day in finance, climate and the limits of crazy news. A plan has to be built to withstand extreme conditions. Klein suggested a bit of financial Zen to soothe clients.
“There is always stuff going on that is totally beyond your control,” he said. “All you can do is plan around it. Do the best you can to reduce the risk. You do the best you can.”
SEC Takes Center Stage on Fiduciary Issue
In light of the delayed fiduciary rule, the Department of Labor may fade into the background as the SEC becomes more active.
BY: JOHN HILTON
The fiduciary rule has been the major financial services issue for the past few years, and 2018 will be no different.
But there will likely be a venue flip. Analysts expect the Department of Labor to recede into the background, with the Securities and Exchange Commission becoming more active.
The SEC began accepting public comment this summer, and Chairman Jay Clayton has repeatedly called it a priority.
That is particularly welcome news to rule opponents, who have long pushed for the SEC to take the lead on any fiduciary standard. With the DOL having delayed full implementation of the fiduciary rule until July 2019, the runway is clear.
“It’s long been a Republican tenet on this issue that it’s squarely in the SEC’s purview,” said Steve Boms, longtime Washington, D.C., lobbyist.
Overall, financial services should expect another strong year with President Donald J. Trump giving Republicans control over the three branches of government. Legislative goals might be a tad dicey later in 2018 with its being a highly charged election year.
But the historic tax reform deal showed what can get done if GOP leadership flexes its muscles, analysts say.
SEC You Next Year
Clayton was confirmed on May 4 and, in one of his first official actions, issued a call for comments on a fiduciary standard. In October, he told lawmakers that the SEC was hard at work drafting a proposal.
The agency has offered no timelines with its work, and past chairs spoke enthusiastically of a fiduciary standard. But observers say signs point to a bolder SEC that has a good chance of following through this time.
For starters, odds are good that the SEC could operate with a full commission soon. The board has been short on members since Republican Daniel M. Gallagher and Democrat Luis A. Aguilar resigned in late 2015.
Politics kept those openings from being filled until now, but analysts expect Republican Hester Peirce and Democrat Robert Jackson will be seated early in 2018. By then, Clayton should be fully immersed in SEC operations and the agency could move quickly, Boms said.
“My view is that this is no longer a Department of Labor issue,” he added. “I see more collaboration between the Labor Department and the SEC moving forward, particularly as the SEC becomes fully staffed up.”
The 2010 Dodd-Frank financial reform law gave the SEC authority to propose a uniform fiduciary standard, but they did not agree upon specific language. That’s when the DOL stepped in with a rule that expands the “investment advice fiduciary” definition under ERISA.
But the rule applies only to qualified money invested in retirement plans. Add in various states working on specific state fiduciary laws, and industry execs are concerned.
“It just makes more sense that there’s a more consistent standard across the board as opposed to different agencies having different standards,” said Kevin Mayeux, chief executive officer of the National Association for Insurance and Financial Advisors (NAIFA).
Rule opponents are also watching the courts, where a consolidated lawsuit in the Fifth Circuit Appeals Court in New Orleans awaited a ruling as the year drew to a close. The Fifth Circuit is generally considered the most conservative in the country, with decisions that frequently define the government’s role narrowly.
The lawsuit — brought by plaintiffs such as NAIFA, the American Council of Life Insurers and others — asks the court to toss out the fiduciary rule.
DOL Huddles Up
One thing industry analysts agree on: the DOL is a mystery with regard to its fiduciary rule. The Trump DOL failed to prevent the initial regulations from taking effect June 9.
That part of the rule requires advisors and agents to follow the Impartial Conduct Standard, which is to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation. Those requirements are already cutting off access to financial advice for small savers who need it most, industry executives say.
But the real concern lies with the second phase of the fiduciary regulation. In a Feb. 3 memo, Trump tasked the DOL with studying whether the rule will deprive Americans of retirement advice and/or add undo cost burdens.
The pending fiduciary rules deal with the exemptions: the Best Interest Contract and Prohibited Transaction 84-24 exemptions. The former mandates a signed contract with the investor in order to sell variable and fixed indexed annuities. That contract comes with the potential for a lawsuit down the line.
It is very likely the DOL will remove the class action component from the BICE, analysts say. Likewise, regulators could tackle the role of insurance marketing organizations (IMOs) in the sales process.
The Obama DOL seemingly ignored IMOs, leaving them off the list of qualified financial institutions needed to sell products under the BICE. Banks, insurance companies, registered investment advisors and broker-dealers are the financial institutions under the rule.
The DOL then created an unwieldy exemption that satisfied nobody — permitting IMOs with at least $1.5 billion in premiums over each of the three previous fiscal years to join the group. Surely there will be other changes as well. DOL officials are in information-gathering mode and vow that the evidence will guide its work.
Exactly what the DOL is doing in the coming months might be hard to discern. The department isn’t obligated to make its work public until it is ready to solicit public comment.
“It’s to a large extent up in the air. I do think in the first half of  we’ll see some activity,” Boms said. “I just can’t say what that activity will be. There are just so many other variables related to Labor and the SEC that are not directly related to the fiduciary rule.”
Another thing to watch is the pro-rule camp. This not-insignificant coalition includes fee-based planners such as the Financial Planners Association and broad-based consumer groups led by the Consumer Federation of America. They could turn to the courts early in 2018 in a bid to keep the rule on track.
“We’ve reached no conclusion at this point regarding a possible lawsuit, but we are weighing our options,” said Barbara Roper, director of investor protection for the federation.
While 2018 is a huge election year in Congress, there are still opportunities for legislation to pass, analysts agree, especially early in the year.
One thing is clear: Republicans will have to work with Democrats to pass anything once tax reform is done. The tax reform vote is Senate Republicans’ last chance to pass legislation under reconciliation rules, which eliminate the filibuster option.
“When you look to 2018, is there really a desire by Congress to work together to address some of these issues?” asked Diane Boyle, senior vice president of government relations at NAIFA. She says how the tax vote ends up will help determine “how much healing time is needed, and then how much can you get done before the campaigning, when it becomes impossible?”
The Financial CHOICE Act, which rolls back much of the Dodd-Frank Act and bars the DOL from passing a fiduciary standard, is the most significant bill of consequence to the industry. It passed the House in June.
However, Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., are likely not interested in any compromises on anything involving financial services, Boms said. A bipartisan group of senators reached a deal in November to exempt about a dozen midsize banks from Dodd-Frank regulations, he noted.
“If the Senate is going to be able to pass anything,” Boms said, “it’ll be something much closer to that deal.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com. Follow him on Twitter @INNJohnH.
Uncertainty Leading to Instability in Health Insurance
Industry observers wonder whether the marketplace could collapse if the individual mandate is abolished.
BY: SUSAN RUPE
Two words come up in nearly every conversation regarding the future of the health insurance market in 2018: uncertainty and instability.
The uncertainty over the continued chipping away of the Affordable Care Act (ACA) could lead to instability in the marketplace, industry observers warn.
In particular, the ACA’s individual mandate is like that crucial piece in a Jenga game that collapses the entire tower of wooden blocks when it is pulled out. As of press time, Congress was still considering whether to abolish the individual mandate as part of its tax reform proposal. But if lawmakers are successful in repealing the requirement that everyone have health insurance coverage, the rest of the ACA could be in danger of falling unless Congress enacts measures to shore up the marketplace.
Adding to the jitters surrounding health care in 2018 is President Donald Trump’s decision to end cost sharing reduction (CSR) payments to health insurers. The payments are part of the ACA and help offset insurers’ costs of offering affordable plans to poor Americans.
Individual Mandate, CSR Payments
Washington needs to take action to keep the ACA marketplace stable and viable for 2018 and beyond, said Sara Collins, vice president, health care coverage and access, with The Commonwealth Fund.
Keeping the individual mandate and funding those CSR payments are essential to that stability, she added.
“Funding those CSR payments would bring much greater certainty to the 2019 enrollment period and stability to the marketplaces in terms of carriers being more likely to participate,” Collins said. “If that doesn’t happen, there is a risk that some insurers may not participate in the 2019 enrollment periods and that some counties might not have plans available for people to enroll in. So it really is important that that there is legislation to fund those payments.”
The repeal of the individual mandate “would be very destabilizing,” Collins said.
Repealing the individual mandate “would cause insurers to raise their premiums in anticipation that healthier people would be less likely to buy coverage under the circumstances,” she said. The Congressional Budget Office estimated the individual mandate repeal would cause average individual premiums to increase by about 10 percent in most years of the next decade.
“That would be a significant cost for federal government, which funds the tax credits,” she added.
Despite warnings about higher premiums, the majority of those who buy coverage in the individual market aren’t feeling those increases, because they are eligible for tax credits to help them afford coverage. So keeping those tax credits in place is another critical factor in maintaining stability in the marketplace, Collins said.
Can ACA Repeal Be Done in 2018?
If Congress didn’t pass any ACA-related legislation by the time everyone popped the champagne to start the New Year, will they get a chance to do it in 2018?
It could happen, but it would be a challenge, according to Diane Boyle, senior vice president, government relations at the National Association of Insurance and Financial Advisors (NAIFA).
“Even if the individual mandate is repealed in tax reform in 2017, there are a number of members on both sides of the aisle who want to sit down and roll up their sleeves and address some of the concerns, especially in the individual market,” she said. “But I just don’t know how much healing time is needed to get that bipartisan effort going in the new year.
“And then the challenge becomes how far can you go into an election year until everyone shifts into campaign mode? At that point, the chance for bipartisan effort on big items diminishes.”
Looking for Solutions
In the midst of the nail-biting over the ACA’s future, one industry organization is offering Washington some ideas on what it believes is the key to keeping the marketplace stable — and that key is ensuring continuous coverage.
America’s Health Insurance Plans (AHIP) is looking at what regulators can do to keep people covered even if the individual mandate is abolished, said David Merritt, AHIP executive vice president of strategic initiatives. The organization submitted comments to the U.S. Department of Health and Human Services (HHS) outlining its concerns. Among AHIP’s suggestions is that HHS could implement policies to require continuous coverage for individuals who are eligible to obtain health insurance for a special enrollment period.
AHIP’s recommendations included:
» Giving states greater flexibility in selecting essential health benefit benchmark plans.
» Modifying the medical loss ratio (MLR) to allow carriers to exclude certain taxes from their MLR and rebate calculations.
» Allowing greater flexibility in plan benefit designs and expanding preventive care in high-deductible health plans.
“We think that funding the CSRs would be essential to delivering more stability,” Merritt said. “We think finding an alternative to the individual mandate, if that is going to be repealed in the tax reform bill, is imperative.
“There are other options that policymakers can do to stabilize the markets, such as reinsurance, where high-cost, high-need patients can get the care they need but have a range of insurance options that they can choose from to get their coverage. We think reinsurance — even if it’s at the state level — can be an important part of the discussion. So we’re focusing on solutions and how to stabilize these markets. We have a commitment to serve that market, but there are challenges. We need policymakers to act.”
Merritt said health insurers’ reactions to the ACA differ, “depending on who you ask.”
“Many health insurance providers are committed to serving that market. Many plans have actually expanded their presence on some of the ACA exchanges. Others who were in the exchanges have decided to pull back. It really depends on the local market. Some are more stable than others.”
Optimistic But Concerned
Guy Furay said he is “optimistic but concerned” as he looks at the health insurance climate for 2018. Furay is president of The Insurance Source, a group and individual health insurance and benefits agencies in Greer, S.C.
“The health care system was broken before the ACA came along,” he said. “But instead of fixing the problems, the ACA created others.”
Furay said he would like to see lawmakers keep the parts of the ACA that work for consumers while fixing the parts of the law that are broken. But in order to do that, something needs to “break through that logjam in Washington.”
He is especially concerned about what he called “carriers trying to cherry-pick the areas where they want to do business,” giving consumers less choice and higher premiums.
Health insurance brokers have taken a beating under the ACA, dealing with disappearing commissions and fewer carriers to work with. In addition, those who serve the group market have to deliver the bad news of increased premiums to their clients.
“But we will persist because we have people who need our help,” Furay said. “As long as there is a role for the broker in the ACA, I will be there.”
Frustration Among Agents
NAIFA members are expressing frustration over the future of health insurance, Boyle said.
“Certainly, the individual market has always been challenging,” she said. “When you add additional challenges, some of the agents simply choose to focus their practices in a different manner or a different area. Others have embraced and want to work through it.
“But the frustration is still there, and combined with the uncertainty, it makes for a difficult environment. It’s extremely frustrating because it’s the policy and the political implications that have to be worked through before adjustments can be made to anything. Agents are trying to serve their clients, but they’re running into obstacles, and then they’re told, ‘We can’t address your obstacles until tax reform is done or until — insert a different issue.’”
Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents’ association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com.
10 Big Issues on the Table for the SEC in 2018
Securities industry experts weigh in on the most important issues on deck for the SEC.
By Brian O’Connell
The U.S. Security and Exchange Commission (SEC) may well expect plenty of overtime for managers and staffers in 2018.
Why? Because there is no shortage of potential game-changing issues for the government agency watchdog group to address in the coming year.
From the harmonized fiduciary standard to the rapid rise of cryptocurrencies, the following are the most pressing issues facing the SEC in 2018, according to securities industry experts.
1. Fiduciary Standard
The SEC is wading into the thicket of fiduciary rules for retail investment advisors. But where it is going is anybody’s guess, said Britt Whitesell Biles, former assistant chief litigation counsel at the SEC and a recently named partner at Stein Mitchell in Washington, D.C.
“Chairman Jay Clayton told Congress in October that the SEC is drafting its own fiduciary rule and that the agency would work to ‘harmonize’ its fiduciary rule with the controversial Department of Labor fiduciary rule,” Biles said. “The SEC has been taking public comments, but there is not yet any insight into what an SEC fiduciary rule might look like or how it could be harmonized with the Department of Labor’s fiduciary rule. This is sure to be a hot-button issue for the SEC in 2018.”
Clayton made cybersecurity a key part of his agenda when he joined the commission on May 4.
“Chairman Clayton’s focus on cybersecurity was a natural progression of the work that the SEC already had done in the cybersecurity space, including a groundbreaking enforcement action against Chinese nationals who traded on the basis of nonpublic information that was obtained by hacking prominent international law firms,” Biles said.
But when Clayton announced the SEC’s continued focus on cybersecurity, the SEC had not yet disclosed that its EDGAR system had been hacked to obtain information used for illicit trading. “Once the SEC identified itself as both a victim of a cybersecurity breach and an agency with a regulatory agenda focused on cybersecurity, the SEC ensured that every action that the agency takes on cybersecurity — whether in the regulatory, enforcement or examination space — will be closely watched by Congress, regulated entities and investors,” Biles said.
3. Retail Strategy Task Force
The SEC’s Division of Enforcement has renewed its concern for retail investors, said Kenneth Yeadon, a former SEC enforcement attorney and now a securities litigation and enforcement partner at Chicago-based Hinshaw & Culbertson.
Retail has long been a concern for the SEC, and the division formed the Retail Strategy Task Force to develop effective strategies and methods to identify potential harm to retail investors, Yeadon said.
“The Task Force draws on the SEC’s experience in this area and will use the SEC’s technology and data analytics to identify large-scale wrongdoing,” he noted.
In the coming year, the SEC will likely be investigating and bringing enforcement charges in the microcap market and against Ponzi schemes and offering frauds, where victims typically are retail investors.
“In addition, the Task Force will focus on misconduct involving investment professionals and retail investors,” Yeadon said.
Not very many people actually understand blockchain or cryptocurrency — even at the SEC, said Jason Hilton, a partner at Hilton Advisory in Rochester, N.Y.
“Right now, I believe they are in a rush to get the right people together to educate themselves and catch up,” he said. Hilton said it’s important that the SEC do something soon, as the digital cryptocurrency market is moving along with virtually no regulation.
“There’s no one to stop or prohibit a fraudulent situation,” he said. “Already investors have been swindled and taken advantage of, losing lots and lots of money in the process.
“The biggest issue the SEC will be looking at is creating more realistic valuations of cryptocurrencies,” Hilton added.
5. Simplified Disclosure Requirements for Public Companies
Public companies are required to file quarterly reports for the first, second and third quarters and an annual report after the conclusion of the fourth quarter, noted David Lavan, a former special counsel in the SEC’s corporate finance division.
“Those documents have all grown fatter over recent years with more required disclosure, but the result has been to create a document that is less user-friendly and has buried material information among less-material required disclosures,” he said.
Perhaps the best example of the need for more focus on disclosure can be seen in the proxy materials that public companies send to shareholders regarding agenda items for annual shareholder meetings.
“Proxy materials used to be 10 to 15 pages long, maximum,” Lavan said. “Now the section of the proxy materials addressing required disclosures of executive compensation alone run between 10 and 20 pages long. Those disclosures seem to have a less-than-direct connection to investment performance.”
6. New Revenue Standards
A great deal of time will be spent by the SEC’s Office of the Chief Accountant reviewing and understanding the adoption of the new revenue standard that public companies have to implement this year, and their progress on the new leasing standard required at the beginning of 2019, said Sean Clements, managing partner at Dacarba in New York City.
“Both of these standards have wide-reaching implications,” Clements said. “SEC reviews and resulting comment letters about non-GAAP financial measures and disclosures and expanded Management’s Discussion and Analysis (MD&A) will likely continue to be a focus.”
7. Fallout From the Supreme Court’s Kokesh Decision
The single biggest issue facing the SEC in 2018 is the impact of the Supreme Court’s June 2017 decision in Kokesh v. SEC, Stein Mitchell’s Biles said. In that decision, the court applied a five-year statute of limitations to the SEC’s orders for disgorgement, the surrender of ill-gotten gains.
“Every year between 2014 and 2016, the SEC obtained orders for disgorgement in amounts in excess of $4 billion. Undoubtedly, much of the ordered disgorgement reflected ill-gotten gains to which the SEC would no longer have a claim after Kokesh,” Biles said.
That is because of an “ominous” footnote in the Kokesh decision that raises a legal issue that could upend the SEC’s enforcement program, Biles said.
“The federal courts do not have express legal authority to order disgorgement in SEC enforcement actions,” she said of the footnote. “Before Kokesh, the authority to order disgorgement was thought to come from the inherent equitable powers of the federal courts because no statute authorizes the disgorgement remedy.”
But Kokesh ruled that disgorgement was a penalty, which means that the authority to impose disgorgement cannot come from the federal courts’ inherent equitable powers. Thus, federal courts have no inherent power to fashion remedies.
“Consequently, the Supreme Court’s highlighting and reservation of this issue will prompt defendants in SEC enforcement actions to challenge whether the SEC can obtain disgorgement in any case,” she said. “If federal courts find that they lack the authority to order disgorgement, that will signal the end of the SEC enforcement regime that has prevailed for the last four decades.”
8. The Future of SEC Administrative Proceedings
The constitutionality of the SEC’s administrative proceedings has been hotly contested over the past few years, resulting in a circuit court split on whether the SEC’s process for hiring administrative law judges violates the Appointments Clause of the Constitution, Biles said.
“The United States Court of Appeals for the Tenth Circuit ruled in Bandimere v. SEC that the SEC’s administrative law judges are ‘inferior officers’ who must be appointed in accord with the Appointments Clause,” she explained.
Ultimately, the lack of certainty surrounding the constitutionality of the SEC’s administrative proceedings virtually stopped the SEC from bringing cases before its in-house tribunal. The SEC is asking the Supreme Court to review the case.
“The Supreme Court will decide in 2018 whether to take the case, but a decision by the Supreme Court on whether the SEC’s administrative proceedings are constitutional or not would not come before 2019,” Biles said. “Therefore, the future of the SEC’s administrative proceedings will remain uncertain throughout 2018.”
9. Broker/Dealer Scrutiny
The population is aging, and regulators are concerned about how firms and advisors help these near-term retirees manage their assets, said Denver Edwards, principal at the law firm of Brellser, Amery & Ross, and a former SEC attorney.
As a result, the SEC’s Office of Compliance Inspections and Examinations (OCIE) “will evaluate advisors related to recommendations about retirement accounts and treatment of senior investors,” Edwards said.
For example, on the issue of retirement accounts, OCIE has a multiyear program (ReTIRE) focused on senior investors because large numbers of baby boomers are approaching retirement, Edwards said.
“OCIE will look at how broker-dealers service investors’ retirement accounts, the type of products that broker-dealers offer to them, advisors’ oversight processes, basis for the recommendations, conflicts of interest, and marketing and disclosure,” he said.
Additionally, senior investors require “special attention” because they rely on returns from investment portfolios to fund retirement more so than prior generations did, Edwards said.
FINRA’s Rule 2165, Financial Exploitation of Specified Adults, becomes effective in February 2018.
It is highly likely that OCIE will focus on the implementation of the new rules, and more broadly on firms’ compliance programs to protect seniors from abuse, Edwards said.
“This is an area of concern for the SEC, but it is a priority for other federal agencies and state regulatory authorities as well,” he said.
10. Pay Ratio Rule
The SEC is plowing ahead with the CEO pay ratio rule, said Kenneth E. Yeadon, former SEC enforcement lawyer and now with Hinshaw & Culbertson in Chicago.
“The rule will require most public companies to disclose the ratio of their CEO’s annual pay as compared with the annual compensation of their median employee,” he said.
While some speculated that the rule would not go forward, it appears that the disclosure rule will go into effect as scheduled early this year.
“The rule will require companies to identify their ‘median employee’ to meet their disclosure obligations,” Yeadon added.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books The 401(k) Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.