By now, everyone in the annuity business is aware that the Securities and Exchange Commission is proposing Rule 151A under the Securities Act of 1933–a rule that will require the most popular types of index annuities to be registered as securities.

The Proposed Rule, if adopted, will require sales of index annuities to come under the jurisdiction of the Financial Industry Regulatory Authority.

There have been, and will continue to be, numerous legal analyses of the proposal until the rule’s final adoption or abandonment, or until the courts make a final disposition. Until then, some obvious choices face insurers, sales people, marketing organizations and broker-dealers as they sort out the best courses of action for the time being.

All must keep in mind that no one can predict what the outcome will be. The Proposed Rule may well undergo substantial modification before implementation if, in fact, it ever gets implemented. Moreover, if implemented in any form substantially similar to its current form, litigation will likely follow to determine if the SEC has jurisdiction to make such a Rule and if the courts agree that some forms of index annuities are “securities.”

One thing is obvious: it is extremely dangerous for anyone involved in the index annuity business to wait until final disposition before taking action–action to at least hedge their options regarding the product in whatever format the final decision takes.

A number of index annuity insurers are already beginning the design process to register their products with the SEC.

The current registration process for an index annuity is cumbersome and utilizes SEC forms that are ill-suited for the purpose. Eventually, if the Proposed Rule is implemented and withstands the inevitable court tests, the SEC will probably develop a registration form better suited to registering this type of product. Unfortunately, until that occurs, the industry must use the “catch-all” form that requires information to be provided and disclosure to be included that has little relevance to an annuity.

Nevertheless, it is probably essential to begin the process as soon as possible to garner information that is necessary to make an index annuity registration effective.

Broker-dealers that are active in the index annuity business have probably already modified their suitability standards and supervision practices to cover index annuities–this due to FINRA’s actions requiring such changes of its members.

However, if or when the Proposed Rule is implemented, large numbers of index annuity sellers will need B-D affiliation if they are to continue selling the product. This will require B-Ds to implement new recruiting, licensing and training programs so they won’t be overwhelmed by all the sales people looking for a B-D “home.”

Non-B-D marketing organizations–the insurance marketing organizations, or IMOs–will either have to develop an affiliation with an existing B-D or purchase or develop a B-D if they are to continue marketing index annuities that are registered as securities.

Numerous pros and cons exist concerning the available alternatives. In many instances, traditional B-Ds without extensive experience in the insurance industry have a difficult time adjusting to the peculiarities of selling insurance products. This may augur against affiliating with, or making purchase of, such B-Ds. Meanwhile, many insurance-oriented B-Ds are affiliated with insurers, so this may limit availability of alternative products.

As for setting up a new B-D, this is a time-consuming and expensive proposition. FINRA often limits the scope of a new B-D and severely limits the number of sales permitted in the new entity. Also, there are limited numbers of supervisory and executive personnel with the requisite FINRA registrations to support a new B-D.

Sales personnel with FINRA registrations are probably already conforming to suitability and supervision standards that FINRA requires for B-Ds to sell index annuities.

Sales people without FINRA licenses, however, will need to take the appropriate examinations and find a “home” with a B-D. This gives rise to the obvious question: when? It is unlikely that the Proposed Rule could be implemented before the 4th quarter of 2009, at the earliest. It is much more likely to be in place, if at all, in 2010.

No one can predict if the inevitable court tests will delay implementation until a final decision is made or if the Rule will be implemented while the court tests continue.

If there is a stay of the implementation pending resolution of the litigation, it could be years before the Rule becomes final while the cases wind their way through the various levels of courts. On the other hand, if there is no stay of the Rule pending resolution of the litigation, sales people will have to have B-D relationships as soon as it’s decided that there will be no delay.

If we were an insurer, we would begin designing a registered index annuity immediately. If we were a B-D, we would expand recruiting and licensing capabilities immediately, make sure that compliance procedures are adequate to cover index annuities, and seek selling agreements with insurers already in the business. If we were an IMO, we would immediately seek affiliation with an existing B-D or purchase or create a B-D. If we were index annuity sales people, we would begin the process to find an affiliation with a B-D and get FINRA-licensed.

Needless to say, whatever happens with Proposed Rule 151A, it will mean substantial changes for everyone involved in the index annuity business.