Friday, August 31, 2018

Illinois Insurance Code did not bar Securities Department from investigating VA sales

By John M. Jascob, J.D., LL.M.

The Illinois Securities Department had authority to investigate allegations that a broker-dealer committed fraud in the sale of variable annuities. The Illinois Securities Law authorizes the Securities Department to investigate whether registered broker-dealers and advisers have committed fraud in any business practice, even if that practice involves insurance products. Accordingly, the Illinois Court of Appeals affirmed dismissal of the broker-dealer’s complaint (Thrivent Investment Management Inc. v. Illinois Securities Department, August 28, 2018, Walker, C.).

Variable annuity sales. In October 2015, the Securities Department sent notice to Thrivent Investment Management, Inc., alleging that Thrivent committed acts that could subject the firm to suspension of its investment adviser and securities dealer registrations. Among other things, the Securities Department claimed that Thrivent representatives misleadingly solicited unsophisticated investors to replace their existing variable annuities with new variable annuities that added a guaranteed lifetime withdrawal benefit, even though no economic analysis of the transactions had been conducted.

Thrivent then filed a complaint asking an Illinois circuit court to enjoin the investigation. Thrivent alleged that the Securities Department's investigation centered on Thrivent's sales of variable annuities, and that the Illinois Department of Insurance had exclusive jurisdiction over variable annuities sales under the Illinois Insurance Code. The circuit court found that the Securities Department had authority to investigate the alleged misconduct, however, and dismissed the complaint.

Authority to investigate. On appeal, Thrivent relied primarily on Van Dyke v. White (Ill. App. 2016), in which the Illinois Court of Appeals held that the indexed annuities at issue were not "securities" under Illinois law because they were annuities issued by insurance companies authorized to transact business in Illinois. Because insurance companies also issue variable annuities, Thrivent asserted that variable annuities cannot count as securities.

The appellate panel noted, however, that the Illinois Securities Law authorizes investigations into allegations that an investment adviser or securities dealer committed fraud, even if the fraud does not involve securities. And while Section 245.24 of the Illinois Insurance Code bars the Securities Department from regulating the issuance and sale of variable annuities, it does not bar the Securities Department from investigating whether a registrant engaged in fraudulent business practices involving the sale of variable annuities. Thus, when a registered investment adviser or securities dealer also has a license to sell insurance products, the Director of Insurance and the Secretary of State share jurisdiction over fraud in the sale of insurance products. Accordingly, the Securities Department had authority to investigate Thrivent’s conduct.

Constitutional rights. The appellate panel also rejected Thrivent’s contention that the Department’s discovery requests violated the firm’s constitutional rights. The court observed that the Securities Department cannot compel responses to its requests for discovery without a court order. Moreover, Thrivent did not allege any facts showing that judicial proceedings on the Securities Department's requests would fail to protect Thrivent's constitutional rights. Accordingly, the amended complaint did not state a claim that the investigative demands violated Thrivent's right to due process and its right to freedom from unreasonable searches.

The case is No. 1-17-1913.