As discussed in the first part of this article, insurance only agents that sell equity indexed annuities may be unknowingly acting as an unregistered investment adviser and opening themselves up to regulatory scrutiny. There are three elements to the definition of an investment adviser; the first factor was discussed in Part One of this Article. In this article the final two elements of the definition will be discussed.

This second part of the "investment adviser" definition asks whether the person giving investment advice is in the "business" of providing investment advice. As with the first element, the SEC paints a broad brush with its interpretation of this "business." The SEC will look at several factors when analyzing the second part of the definition with the first being the frequency of the advice given. The insurance only agent should be concerned when there is a pattern of replacing securities with equity index annuities. The more often this happens the more likely they will meet this part of the element.

According to SEC Release No. 1092, they will consider this element met when one or more of three conditions are present. These include: 1) holding oneself out as an investment adviser; 2) receipt of separate or additional compensation clearly associated with the advice; or 3) specific investment advice is provided other than in rare isolated instances. Once again the insurance only agent who sells equity-indexed annuities may fall into anyone of these three. For example, many agents offer "Free Portfolio Analysis" as part of marketing their services. If this is part of an advertising campaign mailed to the public, the insurance only agent may be considered holding oneself out as an investment adviser. After all, they will be advising clients about the investments held in their portfolios.

In addition to these advertising offers, insurance only agent frequently move client's out of securities into annuities. By doing so, there may be a presumption that the insurance only agent offered advice on the securities the client previously held. If the agent has continually done this with multiple clients, a pattern of "regularity" could easily be found. It would behoove an insurance only agent to review his past recommendations to see if a pattern has been created inadvertent or not.

The final element concerns whether the advice given is "for compensation." In other words, as a result of giving the advice will the person giving it receive compensation? Once again the SEC has broadly interpreted this element. According to SEC guidance, the compensation does not have to be large; It does not have to come directly from the client; and it can come from a third party. There only has to be receipt of an economic benefit. With the large commissions equity-indexed annuities pay, it is clear that the SEC would consider that the advice has been given for compensation.

All insurance only agents that sell equity indexed annuities should take a close look at their sales practices to ensure they are not acting as an unregistered investment adviser. They may be putting their careers at risk!

These articles are not an exhaustive analysis of the definition of investment adviser. Each individual's situation may vary and a closer review should be taken if there are concerns.

David R. Millar is President of Integrity Compliance Consulting, Inc.

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