FSO E-NEWS WEEKLY

November 15, 2009 Edition

QUI TACET CONSENTIT - "Silence gives consent," but silence is no longer an option:

ATTACK ON COMMISSION BASED SALES – The Investor Protection Act of 2009 (H.R. 3817) could allow the Securities and Exchange Commission to ban registered representatives of broker-dealers from receiving a commission for the sale of variable insurance products or other securities products and expose registered representatives and investment advisers to increased liability for being compensated for providing personalized investment advice. Apparently, the bill is designed to subject broker-dealers (and registered reps) to the same rules that apply to fee-based registered investment advisors. See article here.

NAILBA AND OTHER ASSOCIATIONS - The National Association of Independent Life Brokerage Agencies (NAILBA) and other industry associations are working to protect the insurance business. As Leon Huffman put it at NAILBA 28, "We need your help" because some of the legislative proposals represent ominous threats to our livelihood." The current political and economic environment has resulted in "a rise in skepticism unlike anything we have experienced" and a portrayal of the entire industry "as the epitome of everything that is wrong with corporate America." Under the guise of consumer protection (Investor Protection Act of 2009), there is an aggressive move to over regulate the fiduciary and suitability roles of agents, as well as the supervisory responsibility of agencies and companies. Huffman also raised questions about proposals to create a National Office of Insurance Information. Click here for more information.

EFFECT OF 151A – At NAIBLA 28, Leon Huffman also posed the question, "What is an insurance and investment product?" The SEC proposed rule 151A, which seeks to treat indexed annuities as securities might be overridden by HB2733 and S1389, but if the legislation does not pass and the rule is adopted, it could "lead to a reorganization of independent distribution that would shake NAILBA to its core."

INTERNAL BUILDUP – In its unending search for revenue, Congress may also try to fund new initiatives by eliminating or restricting the tax protections that are built into life and annuity products. Huffman also pointed out that the sections in the Internal Revenue Code that exempt the inside buildup in life insurance and annuities, as well as allowing the receipt of life insurance death benefits on a tax-free basis, are also "under intense scrutiny."

Stay informed and make your voice heard!

UNEMPLOYMENT SPIN - "New claims for unemployment benefits fell again this week, a continuing sign that the job market continues to recover. The four-week moving average fell to 519,750, the lowest level in almost a year and more than 20% below its peak level." Regardless, 10.2% (the highest since 1983) of the workforce is not working.

"JOBLESS" RECOVERY NONSENSE – An economy that isn't creating employment opportunities simply isn't working. The economy did grow in the third quarter, fewer Americans are filing for unemployment insurance, giant financial institutions appear less likely to collapse and the stock market has rebounded. However, the U.S. has lost jobs in 22 straight months. With 10.2% of the labor force out of work, we have a long way to go.

STATES IN PERIL – A Pew Center report reveals that at least 10 states are in deep financial peril due to declining tax revenue, rising unemployment and increasing budget gaps. In the most trouble are Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin, with Colorado, Georgia, Kentucky, New York and Hawaii close behind. Expect these states to raise taxes, lay off or furlough state workers and reduce state services.

HEALTH CARE PRESCRIPTION - The Business Roundtable has come up with its prescription for health care reform, summed up in the report Health Care Reform: Creating a Sustainable Marketplace. The group's chair has said that the organization "cannot support a health bill if it believes the bill will make the health finance situation worse." Unfortunately, there's not much in the current legislation to make us think that won't be the case. Hopefully some of the suggestions from the Business Roundtable and other organizations will see the light of day as the legislation progresses through Congress.

AIG UPDATE - The good news is that AIG "has made tangible progress on its restructuring plan and will likely be able to repay the government's loans and much of its preferred equity stake," according to Moody's Investors Services. The not-so-good news is that AIG CEO Robert Benmosche continues to act like a spoiled child. After taking over in August, he promptly left for his seaside villa and vineyard in Croatia, wanted to use AIG corporate jets for personal travel, boasted that he would tell Congress to "stick it where the sun don't shine" and, most recently, threw a fit over so-call pay czar Kenneth Feinberg's AIG pay pronouncements, telling AIG board members that he was "done." Mr. Benmosche has since agreed to reconsider...perhaps, however, the AIG board should take him up on his threat...more here.

FEWER MORTGAGES UNDERWATER - Fewer people are "underwater" on their mortgages, evidence that the real estate free-fall may be slowing. "Just" 21% of all single-family homeowners owe more on their mortgage balances than their homes are worth, down from 23% at the end of the second quarter. However, foreclosures are included in those numbers, meaning that many have lost their homes and are no longer "underwater."

BUFFET, GATES...CAPITALISM ALIVE AND WELL - The world's two richest men are bullish on the future of capitalism despite lingering shocks from the longest, deepest recession since the Great Depression. Gates: "We proved that we can make mistakes, but the fundamentals of the system, a marketplace-driven system where we invest in education and a great infrastructure for the long-term, that's continued." Buffett: "Last fall was really blindsiding, but I did not worry about the overall survival of our economy."

WEAK DOLLAR, TRADE GAP – A weak dollar usually boosts the nation's economy by increasing exports and narrowing the trade gap, but it's not happening yet. Instead, the nation's trade deficit rose in September by the largest percentage in a decade. U.S. exports did grow for the fifth straight month, but imports rose faster. Experts say higher exports, spurred by a lower dollar, probably won't reduce the trade gap and/or boost the U.S. economy until 2011.

DEBT LIMIT INCREASE - The Obama administration is confident Congress will raise the country's debt limit by year end to avert a showdown similar to the one that closed parts of the government in 1995. The White House wants an increase of at least $1 trillion to $1.5 trillion, pushing the national debt closer to the $12.1 trillion statutory limit.

OBAMA TO CUT DOMESTIC SPENDING – Sources say the Obama administration, mindful of public anxiety over the government's mushrooming debt, will shift emphasis from big-spending policies to deficit reduction in the next budget. Domestic agencies have been told to brace for a spending freeze or cuts of up to 5% as part of a midterm election-year push to rein in record budget shortfalls. President Obama is expected to make post-recession spending restraint a key theme of his State of the Union address in January. Let's hope he can come through.

STIMULUS WORKING – A Deloitte survey of management indicates only 32% felt that the Economic Stimulus Program had improved economic conditions to date, 49% expect improvement by the end of 2010, and two-thirds do not believe the fraud prevention requirements associated with Stimulus Program funds will be effective in increasing transparency and preventing fraud.

TREASURY BLOCKS FANNIE PLANS - The Treasury Department rejected a proposal by Fannie Mae to sell $2.6 billion, or roughly half, of its unused low-income housing tax credits to two unidentified investors believed to be Goldman, Sachs and Berkshire Hathaway. The Obama administration blocked the transaction saying the plan would result in a significant reduction in tax revenue.

ACTIVE GOVERNMENT EQUALS UNSTABLE ECONOMY – This from Steve Forbes "Finger-pointing at capitalism is absolutely misplaced. Every economic disaster during the last 100 years has its origins in bad government economic policies, from the Smoot-Hawley Tariff, which triggered the Great Depression, to the Federal Reserve's excessive printing of money, which brought us the Great Inflation of the 1970s and the recent housing bubble. Despite many people's incomplete understanding of free markets...there's a general appreciation that they usually work better than government-dominated ones. Hence the growing political backlash against the Obama Administration's attempt to nationalize health care and extend Washington's tentacles deeper into more areas of our economic lives." See complete article at www.forbes.com.

CHINESE DEBT - China's production jumped 16.1% in the past year, their trade surplus nearly doubled to $24 billion and the country's GDP grew at an impressive 8.9% rate last quarter. These are all positive signs that China's economy is rebounding, but many economists are concerned that the country is taking on too much debt to keep its economy moving. Beijing spent $1.27 trillion on new loans in the first nine months of 2009, and total lending in the country reached 140% of GDP by midyear.

FHA MAY NEED BAILOUT - An independent audit revealed that the cash reserves maintained by the Federal Housing Administration are substantially less than the level required by law. This could precipitate the need for a government bail out.

CITIES' CREDIT DETERIORATING - SIFMA reports that local governments and other municipalities have suffered plunging tax revenue and soaring social-services costs that might hinder their ability to pay off debt. "Federal stimulus funds received were not sufficient to offset the decline in tax collections, and states were forced to make more budget and spending cuts."

CHOOSING A MEDICARE PLAN – This is not an easy task, but Kiplinger's has a good article on it at www.kiplinger.com. If you're 65 or older, you have between now and December 31 to decide how you'll pay for your prescriptions in 2010. Choices are a Medigap policy and a Part D prescription drug plan to supplement Original Medicare, or a Medicare Advantage plan that provides medical as well as prescription-drug coverage through a private insurer. For those of you in this market or who want to be, The Virtual Assistant has a definitive Life Guide on Retirement and Medicare. Use it to get yourself up to speed and/or provide it to your clients approaching age 65 or those clients considering Medicare changes during the open enrollment period.

STRANGE BEDFELLOWS – No pun intended here, but investment advisory groups, state regulators and consumer advocates are cheering a pledge by the House Financial Services Committee's chairman Barney Franks to defeat the "Bachus amendment" that could expand FINRA's reach over advisers. "We're very pleased with Chairman Frank's decision to basically reverse that amendment," Financial Planning Association chief executive Marvin Tuttle said. "That will mean that we still have the opportunity to see financial advisers properly regulated under an appropriate regulatory scheme." The FPA, and other adviser groups, strongly oppose the Bachus amendment on the grounds that FINRA's expertise is with brokers, not investment advisers.

COURT ON 151A - Old Mutual may have struck a blow legal for the industry as a federal appeals court panel could vacate Rule 151A. Their suit in the D.C. Circuit has raised questions about the SEC's authority to regulate indexed annuities. The SEC rule, which would apply the same rules that it now applies to variable annuities and other securities to indexed annuities, is set to take effect on January 12, 2011.

MORE ON 151A – Here is the rub in a nutshell. An indexed annuity guarantees the return of principal (subject to the ability of the carrier to pay) and the only amount at risk is the amount of interest earned. With a variable annuity, both the principal and the rate of return are at risk. We believe the SEC wants to "step in" due to perceived abuses in the marketing of indexed annuities, rather than based on the structure of the product. Further, you would be hard pressed to find anyone owning an IA prior to the latest market downturn who is unhappy with the product.

PUBLIC PENSION PROBLEMS - We've written about this previously...the deep financial trouble municipalities find themselves in with their public pension plans. Here's a good article from Forbes, Public Pensions Face Ugly Choices. What are the choices available to municipalities to deal with their under-funded pension plans? Increase funding, either by increasing public employees' contributions or getting it from taxpayers; don't hold your breath. Decrease benefits, which has proven difficult, if not impossible in the past. The magic bullet, whereby pension funds are invested in financial markets that produce such stupendous returns that the under-funding magically disappears; Wall Street wins, doubtful the pension plans would. And the fourth solution...municipal bankruptcy, which would require a fundamental restructuring of public pensions.

SENIOR SURVEY – The fifth annual Retirement Fitness Survey by Wells Fargo of retirement savings reveals that adults in their 50s (is that a senior now?) seem to be in a state of denial about how long their retirement savings will last. However, 56% now expect to work longer by an average of three additional years. On average, they have saved $300,000, but will need $800,000 for retirement

EX-BEAR EXECS ACQUITTED - Two former Bear Stearns hedge fund executives were acquitted last week of lying to investors about the Wall Street crisis. They were found not guilty of conspiracy and other charges in an alleged fraud that cost investors approximately $1.6 billion.

INSURANCE JOBS DECLINE AGAIN - Despite positive outlooks by many for the insurance industry, the Bureau of Labor Statistics reports that the U.S. insurance industry lost 3,400 jobs in October...the 12th straight monthly decline.

OVERDRAFT FEE CRACKDOWN - The Federal Reserve released a new rule prohibiting banks from automatically enrolling customers in overdraft protection programs, which charge fees when customers spend more than they have in the account. Starting July 1, 2010, banks will have to ask customers to opt in to overdraft protection. The rule applies only to ATM and most debit card transactions and not to personal checks and automatic bill payment programs.

CREDIT CARD REFORM - The House passed legislation that would move up to December 1, 2009 the crack down on the way banks raise credit card fees and interest rates. The Senate, however, also has to pass the legislation for it to become law.

TAX CREDIT BOOSTS HOME SALES – According to the National Association of Realtors , the $8,000 first-time homebuyer tax credit helped lift U.S. home sales by 11% to a two-year high in the third quarter. The tax credit, initially set to expire at the end of November, has been extended until April 30, 2010. Plus, a new $6,500 tax credit for current homeowners has been added.

HOME BUYING PLANS – A Move.com (not to be confused with Moveon.Org) study indicates that 5% of Americans (most under 34 years old and living in the South or West) plan to purchase a home in 2010. Reasons: bottomed out prices, bargain-priced foreclosures, low interest rates, and the wide selection of homes available.

FORECLOSURE PLAN WORKING - After a slow start, the Treasury's Making Homes Affordable program is starting to work. The program has helped about 20% (650,994) of the homeowners who qualified for the program and were delinquent on their mortgage.

FINRA, SEC AND LIFE SETTLEMENTS - FINRA and the SEC are studying life settlements, but are still not ready to define the depth of their jurisdiction in the industry. At the Life Insurance Settlement Association's 15th annual conference, an SEC speaker said, "I think one problem that the SEC has had is that it hadn't differentiated between the initial sale of the policy to the buyer and then the pooling of policies. Now that the SEC and the staff get the difference, it allows us to better assess when to get involved." Yes, that knowledge would certainly help.

GOVERNMENT NEWS – Many journalists, fearing the Internet is destroying newspapers by cutting into resources needed to generate the news and in-depth, investigative stories, are proposing the government get involved in saving news reporting. Some want, among other things, a National Fund for Local News (paid for through a variety of taxes), which would give public radio and public television added resources to cover more local news reporting.

GOLD HITS RECORD - The price of gold surged to an all-time high point above $1,123 per ounce, driven by buoyant stock markets, the weak U.S. currency and the Bank of India buying up all the gold reserves in the World Bank.

CAN THE BULL OF 2009 LAST? - Since March, the Dow has jumped 57% and the S&P 500 has gained 62%, but there is a problem. What will the markets do when the very thing that has boosted the market dries up? The U.S. government has spent nearly $1 trillion to stimulate the economy and the Federal Reserve has maintained a policy of keeping interest rates near zero. Those will disappear as the economy's health improves, potentially halting the bull market by taking away what has been its crutch...cheap and plentiful money.

LARGE CAPS BACK - The stock market's huge rally since March was initially led by smaller stocks, because small caps were hit the hardest on the way down. But small caps aren't looking that cheap anymore, and in October, the Russell 2000 index of small-capitalization stocks sank 6.9%, snapping a seven-month winning streak, while the Dow closed at its highest level in 2009.