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.”