On March 21, 2019, in Van Dyke v. Jesse White, the Illinois Supreme Court issued a long-awaited opinion relating to Illinois Securities Department authority to regulate annuities under the Illinois Securities Law of 1953 (Act).
By way of background, in 2011, the Illinois Securities Department audited Richard Lee Van Dyke following complaints from the adult children of one of his deceased clients. Van Dyke was registered with the Securities Department as an investment advisor and licensed by the Illinois Department of Insurance as an insurance producer. The auditors reviewed Van Dyke’s insurance files, as opposed to his investment files, and subsequently alleged that he had defrauded 21 clients. Specifically, the Securities Department claimed Van Dyke liquidated the clients’ indexed annuities and replaced them with other annuities, from which Van Dyke purportedly earned $312,278 in commissions while his clients paid $263,822 in surrender charges, penalties, and other fees.
The Securities Department initiated administrative proceedings alleging Van Dyke violated Section 130.853 of its administrative regulations, which prohibits investment advisors from effectuating “any transactions of purchase or sale that are excessive in size or frequency or unsuitable.” The Securities Department also charged Van Dyke with violating four administrative sections that expressly implicate transactions involving “securities,” and one that makes it unlawful, generally, to employ any device, scheme, or artifice to defraud any client while acting as an investment advisor. Van Dyke moved to dismiss, arguing the Securities Department had no jurisdiction over him because the Act expressly excludes annuities from the definition of a security and because he was not acting as an investment advisor at the time of the transactions.
Following an administrative hearing with the Securities Department, the secretary of state issued a final order finding Van Dyke committed fraud by offering unsuitable annuities. The secretary revoked Van Dyke’s investment advisory registration, permanently prohibited him from selling securities in Illinois, and fined him $300,000 plus costs of the investigation. The circuit court affirmed the administrative order, and Van Dyke appealed.
The appellate court agreed but held that Van Dyke was nevertheless acting as an investment advisor and thus subject to the Securities Department’s jurisdiction under Section 12(J). At the same time, the appellate court found the Securities Department did not prove Van Dyke violated Section 12(J) in the sale of replacement annuities or perpetrated a fraud on his clients. Accordingly, it reversed the secretary of state’s final order.
The secretary of state appealed to the Illinois Supreme Court, arguing the sale of indexed annuities falls under the definition of a security under the Act, and that it put forth sufficient evidence Van Dyke committed violations of the Act. Van Dyke sought cross-relief, maintaining section 12(J) of the Act did not apply because he was acting as an insurance producer, not an investment advisor.
Click here for the full GT Alert on the Illinois Supreme Court’s analysis and holding that annuities do not fall under the Securities Department’s jurisdiction.