Reaction Fires Up To NASD Notice On EIAs

Index annuity executives are questioning the purpose, usefulness and effect of new guidance on equity index annuities (EIAs) issued by the National Association of Securities Dealers, Washington, D.C.

The NASD guidance, delivered in an Aug. 8, 2005, Notice to Members 05-50, does not define whether an EIA is an insurance or a security product. Rather, it raises “concerns” the NASD has about marketing, supervision, disclosure and investor protection issues that registered broker-dealer firms may confront when selling EIAs that are not registered as a security with the Securities and Exchange Commission. (See box for highlights).

Immediate reaction to the Notice has been varied. John Heine, from the SEC press office, declined to comment, explaining “we don’t comment on circulations by self-regulatory organizations.”

But National Association of Fixed Annuities, a Milwaukee-based association of fixed annuity insurers and marketers, put out a statement the next day, saying the Notice raises “undue concern over the securities law status of index annuities.”

Michael Tripses, executive vice president and chief actuary at Creative Marketing International Group, an EIA marketer in Shawnee Mission, Kan., was sharper: “It’s very negative and looks like a hatchet job on index annuities. It paints a brooding picture of the products.”

Some people see inter-agency squabbling in the mix.

“By issuing the Notice, the NASD effectively slapped the face of the SEC,” contends Jack Marrion, president of Advantage Compendium, a St. Louis annuity consulting firm. That slap was for failing to clarify whether the SEC considers index annuities to be securities, he says.

“The NASD is effectively trying to do the SEC’s job,” adds Tripses.

Not so, according to Herb Perone, a spokesman for the NASD. “The SEC knew of the contents of the Notice. They saw it before posting and said it was OK.”

The NASD is a self-regulatory organization, under the SEC’s oversight, Perone says. The NASD does believe EIAs should be declared a security, and it did send a letter saying that to the SEC in 1997, he adds. However, the SEC did not so determine, and “we don’t have the authority to declare that.” Therefore, he says, NASD issued the Notice to ensure that registered firms are supervising the sale of the product in an appropriate way.

“Because of the uncertainty concerning the status of the product, there has been uncertainty about what rules apply,” he adds.

In its statement, NAFA faults the Notice in several areas, such as for:

o Depicting indexed annuities as complex investments. Rather, says NAFA, EIAs “are guaranteed insurance products accompanied by full and fair disclosure as assured by extensive state fair trade and insurance department regulations.”

o Seeming to encourage “the idea that indexed annuities should be treated as securities by reminding firms of the potential risks and perils associated with treating them otherwise.”

o Taking index annuity marketing statements out of context, creating “maximum concern without the requisite perspective.”

o Casting shadows that work to create “a general fear of involvement in the product line” among NASD member firms and reps who may want to sell the products outside of their practice. Consumers who might benefit from the product may go elsewhere “as firms struggle to interpret the release,” it adds.

o Being issued without first undergoing “the authoritative and principled route of filing a Rule Proposal, which allows for public comment and response from the SEC.”

“We don’t think the Notice promotes clarity,” sums up Michael H. Ebmeier, chairman of NAFA.

That is partly due to the fact that it was issued without public discourse and also because it repeatedly states the potential pitfalls of not treating EIAs as securities without mentioning other points, says Ebmeier, who is also president of Producers Choice East, Forest Hill, Md.

“It is written in as negative a way as possible.”

To illustrate, he criticizes the Notice for identifying surrender charges and other features as reasons why the product may not be suitable for some investors. [Examples: The Notice says many non-registered EIAs "permit investors to participate in only a stated percentage of an increase in an index"; many impose a "cap rate" and "do not provide for investor participation in the dividends accumulated on the securities represented by the index"; EIAs have "other features that contribute to their complexity"; and unregistered EIA sales materials "do not fully describe the features and risks for the product."]

Taking surrender charges as an example, Ebmeier says the Notice does not point out that these are also present in other long-term insurance products. “That doesn’t mean the products are subject to market risk,” he says.

The immediate impact will depend on what member firms do, predicts Ebmeier.