State slams CT’s backdoor to securities scofflaws [Hartford Business Journal]

May 27, 2014

Hartford Business Journal | By Gregory Seay

If Connecticut residents are never scammed by a defrocked stock broker working under the guise of selling insurance, they will have Kevin Kelly to thank first.

The Stratford state senator, with no fanfare from consumer advocates but some initial opposition from state insurance and bank regulators, helped push through the recent legislative session a bill that makes it next to impossible for scofflaw securities peddlers from Connecticut or any other state to obtain an insurance-producer’s license in this state, to perhaps continue conning consumers.

Unfortunately, it’s a ruse that has snared consumers in less-vigilant states, prompting them to take preventative measures akin to what Connecticut has done.

“I don’t know if it exists in Connecticut, but it’s not something we want to enable,” said Kelly (R-Seymour).

Kelly, a lawyer whose practice includes elder law and estate planning, said he grew concerned after reading a Wall Street Journal article last January about a worrisome loophole in some states’ securities- and insurance-enforcement regulations.

Under the loophole, a person sanctioned and stripped of his license to sell stocks or other securities could apply for an insurance license in his home state, or another, to sell such savings and estate-planning products as life and long-term care insurance and annuities, among others, he said.

Kelly’s district covers Monroe and Seymour, towns in the shadow of Connecticut’s money-center communities of Stamford and Greenwich that are home to financial institutions and their agents of all stripes — legitimate and ones less so.

“This was a way to batten that down to protect consumers from that kind of behavior,” he said.

Awaiting the governor’s signature, which would make it effective Oct. 31, SB 480 formalizes an ad hoc arrangement in place for several years between the state’s banking and insurance departments, officials for both agencies say.

Ironically, both opposed the measure initially because they saw no need for a legislative directive to make them do something they already are.

Bruce Adams, general counsel for the state Banking Department, said the bill requires the state’s top financial- and securities-industry cop to compile and forward to its top insurance cop a monthly list of securities-industry scofflaws in the event they one day show up pursuing an insurance license.

The Insurance Department opposed the measure while it was being drafted in committee, but a recent state appellate court ruling against the department refocused its attention on the bill as a potentially useful regulatory tool, insurance department lawyer Tony Caporale said.

In that case — Lagueux v. Leonardi — the state appeals court ruled that Insurance Commissioner Thomas B. Leonardi lacked authority to deny an applicant a producer license because doing so would not be in the public’s interest, Caporale said.

The applicant sued after the insurance department cited his criminal record, demeanor and lack of rehabilitation as factors for denying him a license. The applicant appealed after a lower court judge declined to order Leonardi to issue him a license.

By the time the bill reached the Senate, insurance regulators were working closely with Kelly to amend it to give the insurance commissioner explicit authority to deny an insurance license to protect the public, Kelly said.