Because of the growing popularity of variable annuities, variable life insurance, and variable universal life insurance products, insurance agents who sell these products now must be aware of the securities law requirements governing their sale. Since the account values in variable and variable universal products may be invested in securities, these variable products are themselves defined as securities. Under the Investment Company Act of 1940, the separate accounts through which a policyowner�s money is invested in a variable policy meet the definition of an "investment company" and are subject to regulation in the same way a mutual fund is regulated. As a result, those who sell the life insurance policies with cash accumulation accounts that are invested in these "investment companies" are subject to the federal and state securities laws.

The marketers (the insurance producers) are regulated by the National Association of Securities Dealers (NASD) as broker/dealers or as registered representatives of broker/dealers. The products and their issuers (the insurance companies) are regulated by the Securities and Exchange Commission (SEC). Both the producers and the companies must also comply with any applicable state securities laws.

The Securities Act of 1933 is the most important piece of federal legislation that has an impact on advertising insurance products classified as securities. This federal statute has a significant effect on advertising of variable products because it places requirements on the full and fair disclosure of relevant material information about newly issued securities. Civil and criminal penalties are imposed on agents and companies who are found to be in violation of the act.

The major impact of this law on insurance agents is the requirement that a prospectus be given to the applicant at or before the time when the agent attempts to sell the contract. A prospectus is a summary of important information taken from the registration statement filed by the insurance company with the SEC when the policy was registered as a security. The prospectus contains information identifying the insurance company that issued the contract, the fees or expenses to be deducted, financial information about the insurer, and details about the policy. The act also requires that the prospectus for any security be updated and a new prospectus issued every 13 months. This means that agents selling products for which a prospectus is required must be sure that they are always delivering the most recent prospectus.

The act also prohibits any individual from using the U.S. mail or any other means of interstate commerce to sell a security that is not registered. It imposes civil and criminal penalties against any person who uses the mail or other means of interstate commerce to defraud any investor. Persons who omit material information or who make untrue statements designed to induce a sale of securities are also subject to sanctions of the act.

The SEC has enacted numerous rules that have an impact on advertisements of securities. These rules apply to variable insurance contracts. Under Rule 135A, generic advertisements that merely describe the insurance company and the value of its products are not considered to be equivalent to an offer to sell securities. However, under Rule 156, sales literature is strictly controlled. Sales literature is defined as any communication (written or oral) used by any person to effect the sale of a security. If a communication meets the definition of sales literature, it must be accompanied by a prospectus. Rule 156 prohibits the use of fraudulent or materially misleading statements in sales literature.

The increasing popularity of financial planning during the last two decades has broadened the scope of the insurance producer�s market to include mutual funds, annuities, and other financial instruments. This has raised some as yet unanswered questions about the regulation of insurance producers by the state and federal securities administrators.

The Investment Advisor�s Act of 1940 defines an investment adviser as any person who is engaged in the business of advising others for compensation about the advisability of investing in securities. The state blue sky laws are patterned on the 1940 federal act and contain similar language. Those who hold themselves out to the public as providing those services are subject to additional regulation.

Some state and federal regulators have taken the position that holding oneself out as a financial planner is the same thing as being an investment adviser. Some have also taken the position that listing designations, such as the ChFC, on one�s business cards or letterhead is also the equivalent of holding oneself out as an investment adviser and requires the person to comply with the registration, filing, and record-keeping requirements applicable to investment advisers. Underwriters with such designations, especially those who also sell variable products, need to stay abreast of the changing interpretations of the law. Those underwriters who are also in the business of giving advice about securities for compensation are clearly subject to the laws governing investment advisers.

The NASD has enacted Rules of Fair Practice that apply to its members. Article III, Section 35(a) of those rules defines advertisement and sales literature as follows:

The states also have laws and regulations affecting the sale of securities. Kansas, in 1911, was the first to enact such a state law. Most of the other states soon followed with their own laws, but there were considerable differences among the laws. The obvious need for uniformity led to the design of a model state securities law to complement the federal laws. The Uniform Securities Act, the model law upon which most state laws are now based, was developed in 1956. State laws based on this act are sometimes referred to as blue sky laws. The laws of most of these states include variable insurance products within the definition of "securities." As a result, life underwriters who sell variable products need to be aware of relevant state securities laws.

The Uniform Securities Act permits the state securities administrator to require the filing of sales and advertising literature. As with the federal laws, this literature is defined as any communication distributed to clients or prospective clients with the intent to effect the sale of a security. Furthermore, the act prohibits the use of fraudulent or deceitful practices in the attempt to sell securities. The general rule of the act is that no person may make an untrue statement of a material fact or omit to state a material fact in the attempt to sell a security. Life underwriters must become familiar with the appropriate state version of the Uniform Securities Act to ensure that their advertising practices are consistent with the securities laws of the states in which they do business.