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Licensing Labyrinth

Licensing of insurance salespeople is still confusing and the process is still mired in the old style traditional method for sales of insurance.

Judith A. Hasenauer, 04/07/2011

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During our career of over 40 years of providing legal support to the financial services industry, we have probably spent as much time on issues involving licensing of salespeople as on any other subject. From the earliest days of the "crossovers" from life insurance to sales of securities such as mutual funds, variable annuities and variable life, to the entry of banking institutions into the full spectrum of financial services, the confusion about licensing requirements and the conflicts between the various regulators have made it difficult for anyone to accurately determine who has to be licensed with which regulatory body to sell what product.

In the early days of variable annuities, insurers were concerned about SEC requirements for special securities licensing. The early insurer entrants into the variable annuity business were suspicious of the NASD (currently FINRA) since the NASD was one of the leaders in the litigation that determined that variable annuities were not exempt from federal securities laws as was the case with other insurance products. As a result, insurers formed the belief that if they came up with a separate form of variable annuity licensing at the state level, the SEC would not require a federal license. Of course, the insurers were wrong, and that is why we currently have a duplicate state variable annuity license and the requirement for a federal license administered by FINRA.

This duplicate licensing requirement has led to a great deal of confusion, largely as a result of the different organizational structures that traditionally separated the life insurance business from the securities business. Traditionally, state insurance regulation, insofar as licensed insurance agents are concerned, treats such agents as owing the primary duty to the insurers that provide them with products. In most instances, this duty is direct between the insurer and the agent; there is no recognition of any intermediary organization. In the securities industry, the exact opposite is true. The relationship between the issuer of a security and the selling securities salesperson does not exist. Instead, the broker-dealer is interposed between the issuer and the salesperson. It is the broker-dealer, not the issuer, that has the responsibility for the salesperson.

With insurance products that are securities, this paradox leads to confusion and often bizarre results. A major part of the problem stems from the process of "appointment" of insurance agents. Traditionally, when an insurance salesperson wants to sell the products of a particular insurer, the insurer has to "appoint" the sales person as an "agent" of the insurer. This "appointment" process required the insurer to file a form with the insurance regulator in all states where the salesperson wants to make sales. This requirement is imposed even though the salesperson already possesses a license to sell the products involved. It adds an extra layer of expense and administration to an already expensive and burdensome process.

State insurance law holds the insurer accountable for misconduct of the salesperson. FINRA rules look solely to the broker-dealer for accountability. Of course, the salesperson is always personally accountable under both systems. FINRA rules have long prohibited one broker-dealer from any contact with the registered representatives of another broker-dealer without the permission of the first broker-dealer. All variable insurance products are distributed through a broker-dealer acting as the principal underwriter for the products. This broker-dealer is usually affiliated with the insurer issuing the variable products and in some cases is the insurer itself. Therefore, any contact between the insurer's broker-dealer and the salesperson is strictly limited. Thus, we have a disconnect between the practices and requirements imposed under state insurance laws and those imposed under federal securities laws.

When Congress decided to eliminate the prohibitions against banks selling insurance and securities, the confusion over licensing became even greater. In order to ameliorate this confusion, Congress decided to promote a form of uniform licensing for salespeople. The intent was to eliminate the ability of any state insurance regulator from using agent licensing to prohibit banks from selling insurance. The scheme was that the states would be given a period of time to come up with a uniform licensing program that would standardize licensing for salespeople across the entire spectrum of financial services--at least insofar as the insurance licensing end of the business was concerned. The law provided that if the state insurance regulators failed to establish a standardized insurance sales licensing program, then a new formal association would be created under the auspices of the federal government. This association would be known as the National Association of Registered Agents and Brokers or "NARAB." This organization would provide a national program for insurance licensing and would limit the licensing capacity of state insurance regulators.

Many years have passed since the original legislation was enacted, but there is still not a universally accepted uniform licensing program in existence in this country. Licensing of insurance salespeople is still confusing and the process is still mired in the old style traditional method for sales of insurance. Finally, there has been introduced into Congress a new bill, the "National Association of Registered Agents and Brokers Reform Act II" to finally implement a national program for insurance agent licensing. In this era of financial unrest, it is difficult to predict how this new law will fare under the political process that is likely to be encountered. Hopefully, we will eventually see a new licensing program that will provide uniformity on a national basis to this currently confused area of the financial services industry.

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