An SEC case against an investment advisor who offered allegedly misleading advice was dismissed by the Supreme Court on technical grounds, but the complaint could be tried again.
In a recent decision, the U.S. Supreme Court overruled the Securities and Exchange Commission (SEC) in its dispute with a financial advisor over allegedly misleading investment advice. Although the case wasn’t decided on merit — that is, the justices’ decision hinged on technical disagreements — the underlying complaint reminds insurance agents to be responsible and professional when speaking with clients about the potential returns of annuities and other investment products.
The Ins and Outs of the Case
In 2012, the SEC hit investment advisor Raymond J. Lucia, Sr. with a $300,000 fine and a lifetime ban on working in the industry because of allegedly inaccurate investment advice he gave to consumers in his books and seminars. In response, Lucia argued that the SEC’s judgment was invalid because the SEC’s administrative law judge (ALJ) who ruled against him had not been properly appointed and therefore had no right to render a decision.
The SEC and the U.S. Court of Appeals for the District of Columbia upheld the SEC’s initial ruling in the case. The Supreme Court, however, disagreed, instead siding with Lucia and agreeing that the ALJ should have been appointed in compliance with the Appointments Clause of the U.S. Constitution. Under that rule, Officers of the United States must be appointed by the president, courts of law, or heads of departments. The Supreme Court rejected the SEC’s assertion that ALJs are not Officers of the United States.
However, the Supreme Court did say that the SEC could file another complaint against Lucia and bring it before an ALJ appointed under constitutional guidelines. If another ALJ reaffirms the SEC’s original charge, insurance agents and investment advisors should take note of Lucia’s example.
“Buckets of Money” Strategy
The SEC based its initial fine and suspension on the “Buckets of Money” savings model Lucia touted in his books and seminars. In essence, he directed consumers to divide their assets into three “buckets” based on staggered timelines, with the money going into different forms of annuities accordingly.
Near-term outlays, Lucia advised, should be funded by immediate annuities that offer fixed returns and protected the principal amount. Fixed and indexed annuities would cover intermediate-term expenditures. Lastly, variable annuities would be the investment of choice for money needed further out — such as retirement.
The SEC said that Lucia failed to thoroughly test and document the outcome of his investment strategy. Specifically, the agency cited Lucia for using assumed inflation rates and not informing consumers of advisory fees. The SEC asserted in its complaint that, under Lucia’s model, an investor’s money wouldn’t necessarily increase in value during the periods outlined, but might be depleted.
In response, Lucia argued that the SEC had not accused him of misappropriation of funds or causing investor losses. The advisor also claimed that the SEC had received no complaints from attendees to his seminars.
What it Means for Insurance Agents
It’s worth noting that Lucia won his case based on a technicality over the appointment of the ALJ rather than on the merits of the SEC’s findings. While the Supreme Court sided with the advisor in this instance, the underlying SEC complaint indicates that the regulatory agency won’t hesitate to penalize advisors for dispensing unsound and unprofessional investment advice.
If the case is brought before a rightfully appointed judge, the advisor’s penalty may be upheld. Therefore, insurance agents should learn from Lucia’s example. Before selling complex investment products like annuities, make sure to carefully vet assumptions before recommending products — or guaranteeing certain outcomes — to clients and prospects.