Excited about offering the latest private placement to your clients? Be careful. FINRA and the SEC are actively examining private placements and the firms that sell them. And if the regulators believe that something is amiss, they won’t hesitate to impose severe fines on everyone involved in the sale. As part of its ongoing sweep of firms that sold interests in failed private placements, FINRA has issued sanctions against two firms and seven individual principals of those firms. FINRA accuses them of causing significant investor losses by failing to conduct a reasonable investigation before offering the private placements for sale to investors.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of private placements in Advisor’s Journal, see Firms Selling Private Placements Face Increased Scrutiny (CC 11-32) & Tax-Free Hedge Fund Investment: Private Placement Insurance (CC 11-39).

For in-depth analysis of the use of variable products as investment vehicles, see Advisor’s Main Library: E—Limitations on Variable Products as Investment Vehicles—Private Placement Insurance and the “Look-Through” Rule.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion on anti-money laundering with regards to the insurance industry generally and agents and brokers specifically. The information is presented as a review for wealth managers who are subject to program guidelines.

The characteristics of financial products, including certain insurance products, make them potentially vulnerable to those seeking to launder money.  Recognizing the need for a more comprehensive anti-money laundering regime, Congress passed and the President signed into law the USA PATRIOT Act, which, among other things, requires that all entities defined as financial institutions for Bank Secrecy Act purposes establish anti-money laundering programs. An insurance company is defined as a “financial institution” under the Bank Secrecy Act. The USA PATRIOT Act further directs the Secretary of the Treasury to prescribe through regulation minimum standards for such programs.

Under the regulations insurance agents and brokers are not required to establish separate anti-money laundering programs apart from those of the insurance company. However, insurance agents and brokers are an integral part of the insurance industry due to their contact with customers. Insurance agents and brokers typically are involved in sales operations and are therefore in direct contact with customers. As a result, the agent or broker will often be in a critical position of knowledge as to the source of investment assets, the nature of the clients, and the objectives for which the insurance products are being purchased.

Agents and brokers have an important role to play in assisting the insurance company to prevent money laundering. Therefore, the Treasury requires each insurance company to integrate its agents and brokers into its anti-money laundering program and to monitor their compliance with its program. The Treasury also requires an insurance company’s anti-money laundering program to include procedures for obtaining relevant customer-related information necessary for an effective program, either from its agents and brokers or otherwise.

The insurance company remains responsible for the conduct and effectiveness of its anti-money laundering program, which includes the activities of the agents and brokers that are involved with covered products. The insurance company must exercise due diligence, not only in the development of its anti-money laundering program and in the collection of appropriate customer and other information but also in monitoring the operations of its program, its employees, and its agents.

The laws and regulations require an insurance company that issues or underwrites covered products to develop and implement a written anti-money laundering program applicable to its covered products that is reasonably designed to prevent the insurance company from being used to facilitate money laundering. As is true of all of our anti-money laundering program rules, insurance companies must develop a risk-based program. Compliance is risk-based, meaning that a financial institution must devote more compliance resources to the areas of its business that pose the greatest risk.

Under the Bank Secrecy Act, financial institutions are required to identify, assess, and mitigate the risk that their business will be abused by criminals. Risks can be jurisdictional, product-related, service-related, or client-related. Regardless of where those risks arise, financial institutions covered by the regulations must take reasonable steps to mitigate them.

Moreover, the obligation to identify and report suspicious transactions applies only to an insurance company, and not to its agents or brokers. Nevertheless, because insurance agents and brokers are an integral part of the insurance industry due to their direct contact with customers, the Treasury requires an insurance company to establish and implement policies and procedures reasonably designed to obtain customer-related information necessary to detect suspicious activity from all relevant sources, including from its agents and brokers, and to report suspicious activity based on such information.

The Treasury imposes a direct obligation only on insurance companies, and not on their agents or brokers, for a number of reasons. First, whether an insurance company sells its products directly or through agents, the Treasury believes that it is appropriate to place on the insurance company, which develops and bears the risks of its products, the responsibility for guarding against such products being used to launder illegally derived funds. Second, insurance companies, due to their much larger size relative to that of their numerous agents and brokers, are in a much better position to shoulder the costs of compliance connected with the sale of their products. Finally, numerous insurers already have in place compliance programs and best practices guidelines for their agents and brokers to prevent and detect fraud. Thus, it is the Treasury’s position that insurance companies largely will be able to integrate their obligation to report suspicious transactions into their existing compliance programs and best practices guidelines.

For more information about the Treasury Regulations with regards to Anti-Money Laundering see FIN-2008-G004 Issued: March 20, 2008 and FIN-2006-G010 Issued: May 31, 2006.

Tomorrow’s blogticle will continue to address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Brought to you by the experts on Advanced Market AdvisorFx “The Portability of the Spousal Credit” webinar is an exclusive session covering the opportunities presented by the deceased spouse unused exclusion amount (DSUEA). This no-cost webinar (sign up here) will cover the intricacies of the DSUEA and ensure that you know everything you need to help your clients take full advantage of this tax break. Time will allotted for questions.

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A growing number of consumers are opting for pre-packaged, low-cost portfolio managers. Portfolio-to-go companies can, at least nominally, provide many of the same services as full-service brokerage firms, since the companies are registered as either investment advisors or broker-dealers. And minimal overhead and services allow them to offer those services without the “high” price tag at brick-and-mortar institutions. Portfolios-to-go have exploded in popularity recently, bringing in over $3 billion in assets over the past three years. In a world where post-recession fears have almost everyone bargain shopping, are online portfolios-to-go the Walmart of investing, set to dominate the market and phase out traditional wealth managers? Or are these pre-packaged portfolios an opportunity in disguise?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of wealth management in Advisor’s Journal, see Estate Planning for Persons With Less Than $5 Million (CC 07-10), How Many Basis Points Is the Competition Charging for Advisory Services? (CC 11-71)

Why is this Topic Important to Wealth Managers? This blogticle presents discussion about state insurance regulation of companies. It discusses how the trend toward federal regulation of financial products, including insurance, at the national level affects traditional state regulation and oversight.

The National Association of Insurance Commissioners National Association of Insurance Commissioners (NAIC) and Financial Stability Oversight Counsel (FSOC) member John M. Huff testified in front of a house subcommittee last week regarding the issues the new FSOC is encountering from an insurance regulatory perspective.

Title I, Subtitle A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 establishes the FSOC, a panel of 15 members (10 voting and five nonvoting) who meet regularly in order to develop the system by which financial institutions are designated Systemically Important Financial Institution.

By statute, three representatives of insurance are selected for the Council:  a voting member with insurance expertise nominated by the President and confirmed by the Senate; the non-voting director of the Federal Insurance Office (FIO); and a non-voting state insurance commissioner, to be designated through a selection process determined by the state insurance commissioners.

Commissioner Huff discussed the significant difference between insurance and banking and other financial products even though both are now overseen to some extent by FSOC. He argued insurance products are fundamentally different from banking products and securities instruments:

While banking and securities products are typically bought pursuant to a consumer’s interest in gaining revenue, the purchase of insurance is often necessary for personal financial protection and to provide economic stability.  Insurance policies involve up-front payment in exchange for a legal promise to pay benefits upon a specified loss-triggering event in the future.  Bank products involve money deposited by customers and are subject to withdrawal on demand, which the bank is liable for at any time. As such, unlike bank products, most insurance products are not subject to the risk of runs. For those asset management products that could be subject to some level of run risk, mitigating factors exist such as policy loan limitations, surrender/withdrawal penalties and additional taxes. Additionally, unlike banks, insurers typically maintain a diverse product mix, so only a portion of the company’s products would be subject to the already reduced level of run risk.  U.S. insurance companies are also subject to significant regulatory oversight including stringent capital requirements, limits on the nature and extent of their investments, and quarterly analysis and periodic examinations

Thus, for these reasons, it is generally the view of the NAIC that traditional insurance products and activities do not typically create systemic risk.

Congress recognized these important differences between insurance and banking in the Dodd-Frank Act.  In fact, insurance products do not fall under the jurisdiction of the Consumer Financial Protection Bureau.  However, there are different circumstances under which insurance companies can be declared systemically risky and in need of winding down – and such activity would take place pursuant to state law.

Huff argued on behalf of the NAIC that by passing Dodd-Frank, Congress did not supplant the state-based system of insurance regulation, and intended that insurance regulators have thorough representation on FSOC in order to ensure that the unique characteristics of that system could be brought to bear on any decisions relating to FSOC’s narrow mission of monitoring systemic risk and designating systemically important financial institutions for heightened supervision.

In determining how insurance would be represented on the FSOC, Congress recognized that federal regulators may not fully understand these products and the ways in which these products have been, and will continue to be, successfully regulated by the states.

Moreover, Huff argued the interests of insurance, and specifically insurance regulators, remain inadequately represented on FSOC; a problem that is likely to continue for the foreseeable future.

Tomorrow’s blogticle will continue to address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Content obtained from: Testimony of the National Association of Insurance Commissioners Before the Subcommittee on Oversight & Investigations, Committee on Financial Services, United States House of Representatives, Regarding: Trouble with the Financial Stability Oversight Council, Thursday, April 14, 2011, John M. Huff, Director, State of Missouri Department of Insurance, Financial Institutions and Professional Registration  On Behalf of the National Association of Insurance Commissioners.

Why is this Topic Important to Wealth Managers? This blogticle provides reactions from insurance industry leaders with regards to the 1099 repeal that was recently signed into law. The repeal affects businesses at all levels, but particularly small business. The information is thus particularly helpful to wealth managers with small business clients.

President Obama late last week signed into law legislation repealing the much discussed and debated 1099 reporting provision enacted as part of the healthcare reform bill.

The bill is H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.” The legislation repeals the expansion in the Affordable Care Act of requirements for businesses to report information to the Internal Revenue Service on payments for goods or services of $600 or more annually. The legislation also increases the amount of overpayment subject to repayment of premium assistance tax credits for health insurance coverage purchases through the Exchanges established under the Affordable Care Act to counter balance the revenue lost from repeal of certain 1099 reporting.

The 1099 provision was expected to contribute $19 billion toward paying for healthcare reform. Thus the repeal legislation makes up the shortfall by making consumers repay all of their insurance subsidies under the healthcare law once their income rises beyond 400 percent of the federal poverty line.

In signing the bill, President Obama said he looks forward to continuing to work with Congress to improve the tax credit policy in the legislation and is “eager to work with anyone with ideas about how we can make healthcare better or more affordable.”

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), says, “With the repeal of this provision, small businesses can now worry a little less about Washington red tape and continue to focus on creating jobs and rebuilding our economy.

He adds that NAMIC hopes Congress and the President “will continue to look for ways to improve government regulation by removing needless burdens on American businesses.”

“The repeal of the 1099 reporting requirement is a victory for small business,” said the Small Business Administration’s Chief Counsel for Advocacy Winslow Sargeant. “This requirement would have placed an additional burden on small business at a time when they already pay 36 percent more than their larger counterparts to comply with federal regulations.”

Sargeant first called for repeal of the 1099 requirement while testifying before the Senate Small Business and Entrepreneurship Committee in November 2010, at a hearing focused on reducing the regulatory and administrative burdens on America’s small businesses.

Robert Rusbuldt, president and CEO of the Independent Insurance Agents & Brokers of America (IIABA), says, “In a strong show of bipartisan cooperation, the president and Congress have done the right thing by standing up for small businesses and repealing the 1099 reporting mandate.

“Our thousands of small business members and their clients will breathe easier knowing this ill-advised provision will not take effect.”

Tomorrow’s blogticle will continue to address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

NB: Portions of this blogticle first appeared in an online National Underwriter publication. See, Arthur D. Postal. Propertycasualty360.Com. President Obama Signs 1099 Repeal. NU Online News Service, April 15, 2011.

This blogticle reviews a new set of principles from the Consumer Bureau, State Attorneys General Partnership is designed to help better protect American consumers of financial products and services from unlawful acts and practices. This blog delivers information to wealth managers providing financial services to their clients.

The Consumer Financial Protection Bureau (CFPB) and the Presidential Initiative Working Group of the National Association of Attorneys General (NAAG) announced earlier this month a Joint Statement of Principles; the first step in the creation of a new partnership between federal and state officials to protect consumers of financial products and services.

Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB, highlighted the agreement in her remarks at the NAAG Presidential Initiative Summit today in Charlotte, NC.

“I anticipate that our cooperation will have a profound effect on the consumer financial markets,” Warren told state attorneys general and others gathered at the summit, according to her prepared remarks. “Together, we can pose a greater deterrent to unscrupulous financial services providers. We can protect more consumers, and we can ensure that more institutions follow the rules.”

“People are hurt every day by unfair financial products,” said North Carolina Attorney General Roy Cooper, who serves as President of the NAAG. “This agreement will put more cops on the beat to protect consumers and businesses that are doing the right thing.”

The Joint Statement of Principles was developed to advance three goals shared by the CFPB and state attorneys general to ensure protections for consumers of financial products and services: protect consumers of financial products or services from unlawful acts or practices; provide clear rules that improve the marketplace for consumers and remove unfair competition for the benefit of law-abiding businesses; and find ways to promote understanding and address concerns raised by consumers about financial products or services as efficiently and effectively as possible.

The Statement of Principles shows an intent to develop joint training programs and share information about developments in federal consumer financial law and state consumer protection laws that apply to consumer financial products or services between the two agencies. In addition, the agencies will likely share information, data, and analysis about conduct and practices in the markets for consumer financial products or services to inform enforcement policies and priorities.

Moreover the two agencies will actively pursue legal remedies to foster transparency, competition, and fairness in the markets for consumer financial products or services across state lines and without regard to corporate forms or charter choice for those providers who compete directly with one another in the same markets.

Some other principles set forth in the statement include:

• Development of a consistent and enduring framework to share investigatory information and to coordinate enforcement activities to the extent practicable and consistent with governing law;

• The sharing, referring, and routing complaints and consumer complaint information between the CFPB and the state attorneys general;
• Analyze and leverage the input they receive from consumers and the public in order to advance their mutual goal of protecting consumers of financial products or services; and
• Create and support technologies to enable data sharing and procedures that will support complaint cooperation.​

Tomorrow’s blogticle will address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

State insurance regulators are cracking down on stranger-originated annuity (“STOA”) transactions, and it could affect your annuities business. You will see stricter compliance procedures and could face reduced commissions—regardless of whether you’re knowingly selling annuities as part of a STOA scheme.

These changes will trickle down from the National Association of Insurance Commissioners’ (NAIC) Life Insurance and Annuities Committee, which approved a model bulletin on STOA on March 27. Although state insurance regulators aren’t required to adopt the bulletin, many certainly will distribute the bulletin to carriers operating in their jurisdiction.

For previous coverage of STOLI and STOA transactions in Advisor’s Journal, see STOLI to STOA: First Drops in a Gathering Storm (CC 10-41).

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

SEE ALSO:

National Underwriter Offers Tax Advisors Expert Analysis of the Impact of the Recently Passed Tax Relief Act of 2010 on Their Clients

The proprietary analysis is the only practitioners’ guide in Q&A format that answers the most critical questions asked by clients on insurance, estate and gift tax law changes.  National Underwriter’s wealth management experts and report authors, Professor William H. Byrnes, Esq., LL.M, CWM and Robert Bloink, Esq., LL.M., noted, “While most media attention has focused on the Act’s retention of existing tax rates on the highest-earning Americans, tax, insurance and investment advisors are finding that the most important changes, from their perspective, are likely to be found in insurance, estate and gift tax provisions that will drive client decisions on investment strategy and wealth management priorities in 2011 and beyond.”

“This is the only guide available on the market today that gives financial planners and producers issue-specific, time-critical information in Q&A format that addresses their most important technical questions with content that can also be used directly in client presentations,” Prof. Byrnes added.

Why is this Topic Important to Wealth Managers? This blogticle provides discussion and analysis on the alternative minimum tax and how it’s calculated in 2011. For wealth managers who are closely integrated with client planning, knowledge of the AMT and how it affects clients is integral to overall wealth management.

Present law imposes an alternative minimum tax (‘‘AMT’’) on individuals. The AMT is the amount by which the tentative minimum tax exceeds the regular income tax.[1] An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess.[2]

The taxable excess is so much of the alternative minimum taxable income (‘‘AMTI’’) as exceeds the exemption amount.[3] The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the individual’s taxable income adjusted to account for specified preferences and adjustments.[4]

The AMT exemption amount for taxable years beginning in 2011 is (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.[5]

Generally, present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).

Under Sec. 202 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 [6] for taxable years including 2011, the nonrefundable personal credits are allowed to the extent of the full amount of the individual’s regular tax and alternative minimum tax.[7]

This extension of the use of nonrefundable credits replaces what would have been a much different tax treatment. In other words, the nonrefundable personal credits (other than the child credit, the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric drive motor vehicles, the credit for alternative motor vehicles, and credit for new qualified plug-in electric drive motor vehicles) would have been allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign tax credit. The remaining nonrefundable personal credits would have been allowed to the full extent of the individual’s regular tax and alternative minimum tax.

For more information on the AMT see generally AMAFX Tax Facts How is the Alternative Minimum Tax calculated?

Next week’s blogticles will present interesting planning concepts for wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] IRC Sec. 55(b).

[3] IRC Sec. 55(b)(1)(A)(i)(II).

[4] See IRC Sec. 55(b)(2).

[5] IRC Sec. 55(d).

[6] Public Law 111–312.

[7] See IRC 26(a).

Retirement plan sponsors face increasing regulatory scrutiny and significant liability as plan fiduciaries. Can you leverage off these fiduciary concerns and generate advisory business for your firm?

There are a couple of key approaches you can use to address sponsors’ concerns about their fiduciary responsibilities and sell to the plans and their sponsors.

Believe it or not, there are a number of plans that don’t use an advisor—with the plan sponsor choosing to go it alone to save a few dollars. As reported in a previous edition of the Advisor’s Journal, a significant of number of employee retirement plans (19%) don’t use an outside investment advisor.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of plan sponsor’s fiduciary duty in Advisor’s Journal, see Plan Clients: Where Are the Advisory Margins? (CC 11-63).

For in-depth analysis of qualified retirement plans, see Advisor’s Main Library: Qualified Retirement Plans.