From the June 2006 issue of Investment Advisor • Subscribe!

June 1, 2006

Regulating Annuity Sales

An NASD call for cooperation on regulation of annuities

The NASD is taking steps to assess oversight of the sales of all types of annuities by the patchwork quilt of regulatory agencies overseeing the products and move toward a level playing field of regulation without formulating any new rulemaking of its own or seeking any expansion of its jurisdiction, according to NASD officials.

At a self-styled "annuity roundtable" in Washington hosted May 5 by NASD Chairman and CEO Robert Glauber and Minnesota Commissioner of Commerce Glenn Wilson, Glauber proposed that NASD and the state insurance and state securities commissioners create working groups to develop "clear, consistent regulation" of annuity sales.

Details of the working group participants and the meetings are still being worked out, according to an NASD spokesman. The aim is to have the working groups up and running by mid-July.

Glauber also proposed that NASD work together with the National Association of Insurance Commissioners (NAIC) on its model law governing suitability of sales of annuities. Many of the 50 state insurance commissions and legislative bodies are currently in the process of considering or adopting these model laws. Nineteen states have passed the annuity disclosure rule. Glauber also proposed that the NAIC work with NASD to develop a joint disclosure statement for annuity sales.

"NASD reviews variable annuity advertising. We would be more than delighted to provide expertise so equity-indexed annuities and fixed annuities come up to the same level in advertising as we have with variable annuities," Glauber told participants, who included representatives of the NASD, SEC, NAIC, the state securities commissioners, as well as industry participants.

Glauber said he wants to make sure that states have an agent training program for the sale of equity-indexed products and have enough money and staff for exams and market conduct activities.

Mary Schapiro, vice chairman of NASD and its incoming chairman, said the industry needs to have better product disclosure and better advertising models and needs to focus on all the gaps in the regulatory structure so problems selling the wrong product to consumers can be prevented, not just repaired after the sale.

NASD Senior VP Tom Selman expressed concern that equity-indexed annuities, which sometimes fall under the fixed annuity product heading, are sold with the same information to all consumers, regardless of in which state the sale is made or which agent is selling them. He asked the states--an issue that will likely come up in the working groups--how they can move quickly on those areas where gaps have been identified, including: training and supervision of agents; disclosure; suitability of product for the particular consumer; and advertising depictions of a product's performance.

"Equity-indexed annuity sales are a jurisdictional jump-ball, because it isn't clear whether they're securities, insurance products, or something in between," stated Glauber in a release proposing the roundtable. "The three annuity types [variable, fixed, and equity] are really three versions of the same product. It simply is not fair to investors," Glauber said, "that the level of disclosure and protection they receive should vary depending on which agency regulates the version of the product they're buying."

Since variable annuities are a security, the SEC, NASD, and some securities regulators have oversight over their sales while fixed annuities are under the jurisdiction of state insurance commissions. The SEC has been looking for some time at whether equity-indexed products should be considered a security.

More companies are registering equity-indexed annuities, whether they are reading the tea leaves in Washington or want more flexibility in design, said Mark Mackey, president and CEO of the National Association for Variable Annuities (NAVA). He said NAVA supports the initiatives discussed at the meeting and noted the states are making headway with training initiatives as well. Jim Poolman, North Dakota Insurance Commissioner and a key NAIC participant, identified agent education on annuity products as a potential regulatory gap. Sellers of variable annuities must get Series 6 and 7 licenses and also state licenses to sell the products as securities, but a big concern among regulators of all stripes at the roundtable was the perceived or actual lack of training insurance agents have in selling fixed and equity-indexed products.

Iowa and Minnesota, which domicile the insurers that sell 67% of all equity-indexed products, have been beefing up annuity disclosure and training, according to James Mumford, who represents the Iowa Insurance Division and is active in the NAIC.

"If anything, the recent focus on EIAs by the Feds has prompted more action by the states to get their act together to ensure that market is appropriately regulated," said Brian Atchinson, president and CEO of the Insurance Marketplace Standards Association, a non-profit group that promotes high ethical standards in the annuity, life insurance, and long-term care insurance market.

"Iowa is certainly leading the way in that regard. I think today's session played a useful role in educating the various regulators about what one another does and how none of them can or should be everywhere," Atchinson said in an interview.--Elizabeth Festa

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