TRADE GROUP GRIPES SOME MIGHT FLEE SALES OF ANNUITIES, LIFE: AGENTS PROTEST INSPECTION PLAN

A proposal to make it easier for state regulators to inspect the branch office records of broker-dealers, many of which are owned by insurance companies, is under fire by advisers who sell insurance.

The Washington-based American Council of Life Insurance, whose 554 members represent 95% of U.S. life insurance company assets, recently told the Securities and Exchange Commission that the agency’s proposal would harm more than half the 550,000 financial advisers registered with the National Association of Securities Dealers. Advisers who sell insurance could face expensive new reporting requirements that the council expects will drive some out of the business of selling variable annuities and other insurance products.

The proposal, introduced in 1996 as part of a broad updating of reporting requirements for broker-dealers, would require all offices with at least two advisers to keep sales and customer records there to make it easier for regulators to inspect the offices. Advisers are already required to file with their home office. Computers that tap into a main system could be used to store branch records.

“The commission has significantly underestimated the cost of doing the routine updating of customer account records,” says Ken Rickson, president of MML Investors Services Inc., a Springfield, Mass., broker-dealer subsidiary of Massachusetts Mutual Life Insurance Co. “It was purported to be pennies per client, but it’s many, many dollars.”

Mr. Rickson says his company, which supervises $25 million to $30 million, won’t fold, but others that can’t afford technology enhancements could.

“We have heard a few companies say `that the cost of compliance would outweigh the revenues that we’re getting from the securities sales, and it just didn’t make sense, we’re going to roll up that part of the securities operation,”‘ says Carl Wilkerson, the council’s senior counsel for securities and banking. He declined to name the companies.

Proposal would help states

State regulators say the proposal would help them better examine small offices. “We think it is going to provide uniformity for broker-dealers across the country,” says Matt Neubert, director of sales practices for the Arizona Securities Division in Phoenix. “Instead of having 50 different books-and-records requirements across the country this will give one standardized regulation.”

Officials of the Kentucky Division of Securities wrote in their comments to the SEC that some companies, “particularly those headquartered out-of-state and with small satellite offices in Kentucky — demonstrate a marked nonchalance toward their supervisory responsibilities.”

“There is also a disturbing trend in that many of these frauds appear to be coming from insurance affiliated broker-dealer subsidiaries,” the comments continue in a footnote. “Of the several significant fraud cases we have opened in (the) last year, in almost every one the agents investigated were contractors through an insurance broker-dealer subsidiary.” The state estimated damages against investors were “in excess of $10 million.”

Michael Macchiaroli, associate director of the SEC’s Division of Market Regulation, concedes that the issue of what constitutes a local office of broker-dealers is a “big problem,” which the agency is reviewing.

The proposal was designed, he says, “so our examiners and state examiners don’t have to go all over the state looking for the records. The question is whether two (advisers) is the right number (to meet the record-keeping requirements).”

Size of office doesn’t matter

The proposal is “designed to help states examine local offices,” he explains. “You can cheat as well from a two-person office as you can from a 10-person office.”

There is no timetable on when the SEC will issue its final regulation.