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SoS takes issue with company on state licensing requirement

There has been controversy recently over the issue of state regulation of State Farm agents selling jumbo CDs, which are more than the $100,000 limit insured by the FDIC.

In mid-December a USA Today story headlined, “State Farm plans to defy state regulations,” said that beginning January 1, State Farm planned to defy state licensing requirements that govern the ability of agents to promote the company’s banking products.

The Office of Thrift Supervision (OTS) issued an opinion in October 2004 that State Farm agents don’t need to be licensed by the states to offer jumbo CDs. But State Farm will continue to license its agents with the 18 states that require it until the issue is resolved, said State Farm Bank spokesman Fraser Engerman.

“We’re trying to resolve the issue so agents don’t have to be licensed twice,” Engerman said. “Since we are already regulated by the OTS, we should not be subject to two levels of regulation. But it has never been our intention to violate any state law. We have been meeting with various regulators in the 18 states where it is an issue, Mississippi being one of them, and we will continue to keep our agents licensed in those states until the issue is resolved.”

Secretary of State Eric Clark strongly opposes efforts to drop the requirement for state licensing.

“Clearly, Mississippi law requires that anybody who is selling a security, and these jumbo CDs are a security, must be registered with our office as a securities broker/dealer,” Clark said. “Securities brokers/dealers need to know how to assess risk and advise customers. If they are not educated, it is a danger to the public and they can talk senior citizens into an investment that is not good for them.”

While State Farm has agreed to keep its insurance agents licensed with the Secretary of State’s Office for the present time, Clark said there is “chatter” across the country that State Farm might ask the U.S. Congress to pass legislation so that only the federal government could regulate these bank securities.

“That would be a terrible mistake because it would be taking the local cops off the beat to protect our consumers,” Clark said. “When that happens, historically people are not protected and folks lose battles. From year to year, states fight battles over pre-emption. When you have pre-emption of local officials by federal law, the consumer always gets shafted. If a Mississippi consumer gets mistreated, he might have to work with a federal regulator in Texas, Atlanta or Washington and not someone from Mississippi closer to the problem. I’m completely opposed to any effort by State Farm or anyone else to pre-empt protection of consumers from being ripped off by scams.”

Although there are licensing exam requirements, Clark said getting a securities broker/dealer license from the state is not onerous or burdensome.

American Banker Online carried an article January 27 about a recent meeting in Mississippi with officials from State Farm Bank and 12 states. At that meeting, State Farm Bank agreed to continue to register under state securities rules.
The American Banker article said, “It was a rare chance to crow for state officials who have lost many pre-emption battles lately to federal banking regulators and argue they are the main line of protection for consumers.”

Jim Nelson, the Mississippi assistant secretary of state who organized the meeting in Jackson, was quoted as saying that states are best fitted to protect consumers.

“Keep in mind, currently everyone who sells securities in this country is regulated at the federal government level, generally the SEC (Securities and Exchange Commission); the state level, state securities divisions; and also by the self-regulating member organizations like the National Association of Security Dealers (NASD). There is and has been three levels of protection for the investing public.

“What State Farm proposes, and used the OTS to endorse, is new to the regulatory scheme — drop the state layer of protection. The nearest OTS office with jurisdiction of Mississippi is in Irving, Texas, I believe. The nearest SEC office is Atlanta. The nearest NASD office is New Orleans. Who can better protect and will give priority attention to Mississippians, Texas, Atlanta, New Orleans or state officials located within our borders?”

Nelson said he cannot imagine a member of Congress in today’s climate, considering the corporate accounting scandals such as Adelphia, Enron, WorldCom, ImClone, Tyco, HealthSouth, etc., that have rocked the country and hurt millions of investors, would take away any layer of consumer protection.

“Congress, in my opinion, is in no mood to remove investor protection,” Nelson said. “Quite the contrary, it is in a mood to continue to tighten corporate transparency and accountability.”

Nelson said the cost of a securities broker/dealer license is $50 per year. And dealers must take two exams that test their knowledge of the securities products offered by the NASD prior to be licensed.

State Farm has not said whether or not it will pursue court action regarding the matter.

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.


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