The National Association of Insurance Commissioners (NAIC) has agreed to steps that will allow for the easier identification of brokers who have been barred from the securities industry yet continue to sell other products. The association is tasked with providing states regulatory guidance, as well as drafting model laws.
It is not uncommon for securities brokers to sell insurance, as well as other products and services. Even after someone has lost the license to sell bonds and stocks, he/she is still legally allowed to sell insurance with an insurance license. This type of license also lets individuals sell products that are like securities, such as fixed annuities and equity indexed annuities. Now, regulators are worried that such leniency will enable further bad behavior from brokers who have already been barred.
It was the Wall Street Journal that first reported on how many states can’t do a lot to track these brokers. Because of inconsistent coordination between regulators and insurance watchdogs, the latter may not even know that a broker has been barred from the securities industry. An insurance license lends credibility to ex-brokers even when they have a questionable broker record.
For example, one insurance salesperson, Richard Gearhart promoted a promissory note to clients while guaranteeing that it came with an 8% yearly return. The notes later stopped paying interest and dropped in value. Gearhart is now the defendant in nine securities fraud lawsuits. Retirees who purchased the notes said they didn’t know Gearhart was unlicensed to sell this type of security or that a brokerage firm had allowed him to step down from his job after a customer made a complaint.
Under NAIC’s new steps, the association’s staff will look at the monthly disciplinary reports issued by the Financial Industry Regulatory Authority. The reports offer specifics about when a securities broker has been barred. Staff members would then crosscheck that list with its database of insurance agents to identify possible matches. This information would then be passed on to the state where an agent is licensed, with the request that there be further due diligence.
States Aim to Intensify Checks of Barred Brokers, The Wall Street Journal, June 4, 2015