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August 10, 2003 at 08:00 PM
By
John Selden, a 17th century writer said, “Equity is a roguish thing.”
He was speaking about the English Chancery system of law by that name–not justice or fairness, and certainly not about risk interest or ownership rights in property, or common stock of corporations.
The interpretation does apply, however, to each of the other meanings. Just look at the stock market over the last three years, or three months, or at what forecasters are predicting for the rest 2003. Have common stock prices been fair to investors?
Another question: Have equity indexed products been treated fairly? Lets see.
The National Association of Securities Dealers recently indicated it intends to scrutinize practices used in sales of equity indexed products to seniors. The NASD appears to anticipate significant sales activity of such products to seniors. This heightened scrutiny has implications for marketers of equity index annuities.
But this article addresses a less obvious spotlighting of equity indexed products–namely, the impact on annuities of the floating rate model nonforfeiture law recently adopted by National Association of Insurance Commissioners. As this was being written in late July 2003, approximately a dozen states had already adopted the model.
The model replaces the prior 3% guaranteed minimum interest rate requirement for fixed annuities. Since its adoption, the model has provoked what I consider to be a disproportionate focus on equity indexed annuities. Specifically, the marketplace is abuzz with questions about what this means for the status of equity indexed annuities under the federal securities laws.
However, few people seem to be actively concerned about the models impact on more traditional declared rate fixed annuities. Nor do they seem to realize that traditional fixed annuities are not immune from scrutiny under the same securities laws.
There is no question that this new model poses significant issues concerning the status of equity indexed products under the federal securities laws. Those of us who analyze, and opine on, these products are keenly aware of this.
Yet the industry should be aware that the model does pose the same issues for any declared rate fixed annuity. This is because much of the precedent–including formal articulations by the Securities and Exchange Commission and its staff–has been in terms of the guaranteed return of 90% of premium at 3% interest. “Ninety at three” has been the underlying mantra of Rule 151 under the Securities Act of 1933 that provides a “safe-harbor” for fixed annuity contracts.
