Securities Law Reminders for Insurance Agents Part I

By Thomas E. Geyer, Darius Kandawalla

Insurance agents seeking to provide a broad range of financial services to their clients must keep in mind the requirements of the state and federal securities laws. As described below, the securities laws apply to persons who offer, sell, or give advice regarding securities products. Compliance with the securities laws ensures that persons transacting in securities have a minimum level of competency and provide agents with opportunities to achieve additional professional credentials. However, non-compliance can be disastrous and result in legal liability for agents and negative financial consequences for their clients.

This article reviews securities law basics and describes the common activities that trigger the applicability of the securities law. While this article is intended to remind agents about the securities laws, it is not intended to provide legal advice. Agents who wish to engage in the activities described in this article should consult with their firm’s compliance personnel or other qualified legal counsel before engaging in these activities.

Securities Law Basics

The securities laws apply to those financial transactions that qualify as a “security.” Common examples of a security include stocks, bonds, mutual fund shares, and options. However, the definition of security is very broad and also includes other investment opportunities with certain characteristics regardless of what that opportunity is called. In general, a security exists when an investor provides initial value based on the promise of a return on the investment, the investment becomes part of a common enterprise or operation, and the investor has no management control over the enterprise or operation. An investment opportunity that has these characteristics is commonly referred to by courts and securities regulators as an “investment contract.” The definition is functional in nature and applies to transactions or products that have these characteristics, regardless of the name or label that may be affixed to the transaction.

If a financial transaction constitutes a security, the securities laws impose three basic requirements. First, the person offering or selling the security must be licensed or properly exempted from licensure. In addition, persons providing advice regarding securities generally must be licensed. Second, the product itself must be registered with securities regulators or properly exempted from registration. While large public offerings must be registered, the law does permit certain smaller offerings to proceed without registration depending on the nature of the offering and investors. Third, misstatements or omissions of material facts in the offer and sale of securities are prohibited. Importantly, the prohibition on misstatements and omissions applies regardless of whether the seller of securities is licensed or not and whether the securities product is registered or not.

Offering or Selling Securities

With a few limited exceptions, a person engaging in the offer and sale of securities must be licensed by the appropriate state securities regulator(s) and the Financial Industry Regulatory Authority (“FINRA”). Most insurance agents recognize and appreciate this basic licensing requirement in the case of common securities products like stocks, bonds, and mutual funds. However, the licensing requirement applies in the case of any product that qualifies as an “investment contract” as described above. Further, it is important to note that an agent cannot be an “independent” securities salesperson or broker. Rather, in order to be properly licensed to sell securities, he or she must be properly affiliated with a registered securities broker/dealer firm. And all securities products must be approved by the person’s sponsoring broker/dealer firm.

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