More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
Making a final determination on a long anticipated decision on whether equity indexed annuities (EIAs) are insurance products or securities, the SEC voted December 17 to regulate EIAs as securities.
The rule defines the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933. The rule clarifies the status under the federal securities laws of equity-indexed annuities, the SEC says, under which payments to the purchaser are dependent on the performance of a securities index.
The new definition provides a two-year transition period and applies only to equity-indexed annuities issued on or after January 12, 2011. The SEC voted 4-1 to approve the rule, with SEC Commissioner Troy Parades casting the dissenting vote, stating he believed the SEC was stepping beyond its authority in promulgating the rule.
According to the SEC, Section 3(a)(8) of the Securities Act provides an exemption under the Securities Act for certain insurance and annuity contracts. The SEC's new rules states "an indexed annuity is not an 'annuity contract' under this insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract."
In explaining the rule, the SEC said the rule "addresses the manner in which a determination will be made regarding whether amounts payable by the insurance company under a contract are more likely than not to exceed the amounts guaranteed under the contract. The rule is principles-based, providing that a determination made by the insurer at or prior to issuance of a contract is conclusive if, among other things, both the insurer's methodology and the insurer's economic, actuarial, and other assumptions are reasonable."
SEC Chairman Christopher Cox said the rule goes a long way in protecting senior investors. Equity-indexed annuities, Cox noted, were first introduced in the mid-1990s, and have grown significantly over the years. In 2004 alone, sales of equity-indexed annuities increased more than 50% to approximately $23 billion, he said. Today, more than $123 billion is invested in equity-indexed annuities. "Equity-indexed annuities are often sold to seniors and can lock up older investors' money for more than a decade," Cox said. The rule that the SEC approved "establishes, on a prospective basis, the standards for determining when equity-indexed annuities are considered not to be annuity contracts under the securities laws and thus subject to the investor protections against fraud and misrepresentation, limiting the potential for sales practice abuses in the promotion of equity-indexed annuities to older investors."