NAIFA GovWatch

Senior Vice President Bill Anderson Profiles Newly Confirmed SEC Commissioner Mary L. Schapiro

Issue: Securities and Exchange Commission

Date: January 23, 2009

The vast majority of NAIFA members are registered representatives of broker-dealers and are therefore regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). It is of significant interest to NAIFA that President Obama has chosen Mary Schapiro, current CEO of FINRA, to head the SEC. Ms. Schapiro emerged from her confirmation hearing before the Senate Banking Committee on January 15 advocating stronger, centralized regulation of all financial services products and reinvigorating the enforcement authority of the SEC. She also stated that the SEC would focus on the interests of investors and work to eliminate the “stovepipe” approach to regulation that currently exists whereby various federal and state regulators oversee different parts of the financial services industry. This philosophy may well have ramifications on NAIFA members and the manner in which they conduct their business. Ms. Schapiro was confirmed as SEC Chair by the Senate yesterday, January 22, 2009.

Background: Ms. Schapiro comes to her new position with considerable background and experience. Most recently CEO of FINRA, she is credited with leading FINRA’s creation in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the New York Stock Exchange’s Member Regulation. Ms. Schapiro joined NASD in 1996 and was named Chairman and CEO in 2006. Prior to that, she was chairman of the Commodity Futures Trading Commission (CFTC).

Prior to assuming the CFTC chairmanship, Ms. Schapiro served for six years as a Commissioner of the SEC. She was also appointed by former President George W. Bush to the President’s Advisory Council on Financial Literacy. A 1977 graduate of Franklin and Marshall College, Ms. Schapiro earned a Juris Doctor degree from George Washington University in 1980.

Modernization and Centralization of Regulation: Federal Oversight of Insurance:

At her confirmation hearing and in many speeches that she has made over the years, Ms. Schapiro has made it clear that she believes that the regulatory structure of financial services needs to be modernized and that all financial products need to come under a common regulatory scheme. She stated at the hearing that there must be an end to the “stovepipe” approach to regulatory oversight and specifically said that there needs to be federal oversight of the insurance industry, although there might also be a role for state regulators. She said the SEC must take a clean look at how it regulates and she is determined to beef up its enforcement authority.

Sales of Annuities to Seniors:

Improper sales of annuities to seniors is a subject that Ms. Schapiro has frequently used as an example of “stovepipe” regulation. In an article in the Dallas Morning News of March 10, 2008, she referred to a “spaghetti bowl of regulators.” She said, “We have multiple banking regulators, we have securities regulators, we have 50 state insurance regulators…and they all have different regulatory regimes around the sale of products that put the investor in an untenable position. As an example, she said, “You can buy a variable annuity, which is a security product, or you can buy an equity-indexed annuity, which is an insurance product, but you don’t get the same level of disclosure, the same assurance that the advertising is fair and balanced for the equity-indexed product. The quality of the person selling you those two products are different…There’s no suitability analysis for insurance products for the most part.”

This statement is very revealing about Ms. Shapiro’s opinion of insurance- regulated products and would seem consistent with SEC’s recent promulgation of Rule 151A wherein they have declared that most indexed annuities are securities, a position with which NAIFA and other insurance industry organizations, including NAIC and NCOIL, vigorously disagree.

Need for Harmonized Investor Protection:

Ms. Schapiro has repeatedly called for more cooperation among the various regulators of financial products. In remarks she delivered at Georgetown University’s McDonough School of Business on September 26, 2007, Ms. Schapiro stated:

We have the SEC, CFTC, FINRA, NFA, myriad banking regulators and 50 state insurance and 50 state securities regulators, and the list goes on…

Whether an investor is buying insurance, securities or banking products or whether they’re working with an investment adviser, a broker or an insurance agent, the protections afforded to them should be the same – but they most decidedly are not…

Financial product regulation must have a harmonized approach irrespective of whether the product is insurance, securities, banking, or investment advisory, or which regulator has jurisdiction over it…

It’s my view that there are four basic areas requiring harmonization in the sale of financial instruments: suitability, disclosure, advertising and qualifications/training of salespeople.

Ms. Schapiro promised the Banking Committee that she will be a dynamic and forceful regulator and reenergize the SEC. The solutions to the recurring themes of harmonization of regulation and equal protection to the investor presents enormous challenges given the current structure of financial regulation. In dealing with these issues, the SEC will inevitably confront major issues of interest to NAIFA members like financial services regulatory reform and regulation of insurance and financial advisors. Your NAIFA Government Relations team will follow all these developments and vigorously represent NAIFA members on these issues.

AHIA/NAIFA Staff Contact: William Anderson, Senior Vice President – State Government Relations.

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