Sales of Unregistered Securities

DATE: July 3, 2000 RE: Sales of Unregistered Securities State insurance regulators and federal regulators across the United States are alerting insurance agents to the dangers of selling certain non-insurance investment products. Licensed insurance agents recently have been recruited to market and sell unregistered securities such as investments in corporate promissory notes, pay phone sale and lease-back plans, time-share vacation properties, so-called foreign bank investments and viatical settlements. These unregistered securities are sold in violation of state and federal securities laws. Worse yet, the promoters of these investments are engaged in "Ponzi" schemes and are committing fraud that will harm the investors. (In a Ponzi scheme, new investors' money is used to repay, or pay interest or "profits" to earlier investors. The enterprise is not intended to generate legitimate profits and eventually collapses, leaving the promoters with most of the money and most investors empty-handed.) The firms that market these investments target insurance agents to do the selling by offering high commissions on sales and "rollovers", and false guarantees backed by offshore "insurers". The investments are promoted to agents through ads in insurance trade publications and by word-of-mouth. The agents usually are not licensed to sell securities and do not understand the risks involved. Besides the financial devastation they cause to customers, these agents risk losing their right to sell insurance. Financial regulators say that "guarantees", high returns, complicated investment strategies, glossy brochures and other hype are warning signs not to be ignored. Agents should be cautious and contact the State Securities Commission and the Alabama Department of Insurance if they have any questions or to report these schemes and obtain information.