February 28, 2003

States Take a Hard Look at VAs

State regulators consider the classification of va

State securities regulators are gearing up to replace their securities laws with new ones under the recently revamped Uniform Securities Act. The Act was adopted by the National Conference of Commissioners on Uniform Laws late last year, and updates the Act's outdated 1956 version. One of the Act's most contentious proposed changes is whether state regulators should classify variable annuities as securities.

The majority of states still use the 1956 version of the Uniform Securities Act, says Craig Goettsch, Iowa's Superintendent of Securities. Most states have modernized their securities laws throughout the years via the North American Securities Administrators Association's (NASAA) model amendments, especially to comply with the National Securities Markets Improvement Act, which was 1996 legislation that divided investment advisor registration between the states and the Securities and Exchange Commission. Goettsch predicts most states will be looking to amend their laws to comply with the new Act in 2004. But Missouri, Kansas, Alabama, Oklahoma, Georgia, and Minnesota have already drafted legislation to comply with the new Uniform Securities Act, and have already held hearings in their state legislatures, he says.

The new Uniform Securities Act's overall goal is to bring state securities regulation into the 21st century. The Act "responds to changes in the federal/state relationship with respect to securities regulation, [promotes] cooperation among states, and [seeks] to modernize state regulation in response to advances in technology, like the Internet," says Brooke Billick, VP and securities counsel with Marshall & Ilsley Trust Company in Milwaukee, Wisconsin. Billick is now chairing a committee that's studying how to adopt the new Act's changes in Wisconsin. "We're comparing what's in the new Act with what we have currently, and going through the proposed Act on a line-by-line basis," he says. Ultimately, Billick says his committee will settle on the needed amendments, and send legislation to the Wisconsin legislature.

But Billick's committee is still undecided on whether to classify variable annuities as securities. Language within the new Uniform Securities Act basically leaves it up to each state's general assembly to decide on this matter. Goettsch says about 14 states now classify variable products as securities, with Washington and Arizona ascribing to this view within the last year.

"There are a number of arguments on both sides of the street as to whether [VAs] should or should not be classified as a security," Billick says. "From a practical standpoint, many sales agents who sell VAs are licensed as security agents because they sell mutual funds. So one argument might be that it would be appropriate to classify VAs as securities for purposes of state securities regulation and anti-fraud provisions," he says. "On the other hand, I know folks from the insurance industry are very concerned about having VAs subject to both regulation by a state insurance administrator as well as a state securities administrator." The concern, he says, is conflicting regulations. Goettsch says The American Council of Life Insurers (ACLI) is one of the biggest opponents of classifying VAs as securities.

As it stands now, if a VA is not classified as a security, then the VA "would not be have to sold, for state purposes, by a registered securities agent," Billick says, and "an insurance agent, under state law, could sell a VA without being licensed." If a VA did become classified as a security, "then sales agents selling the VA would have to be licensed as securities agents, and the sales practices associated with VAs would become subject to state securities law."

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