Members of the U.S. Securities and Exchange Commission today voted 3-0 to propose a rule that would define some indexed annuities as securities.

The proposal would create a new rule, Rule 151A, that would change the way the SEC treats indexed annuities under Section 3(a)(8) of the Securities Act of 1933.

If the rule were adopted, the SEC would treat an annuity as a security if its performance were linked to the performance of a security, group of securities or securities index, and if “the amounts payable by the insurer [were] more likely than not to exceed the amounts guaranteed under the contract,” officials said today at an SEC meeting.

If adopted as written, the proposed rule would apply to indexed annuities starting 12 months after a final rule was published in the Federal Register, officials said.

At press time, a copy of the proposed rule was not yet available from the SEC.

SEC staff members believe insurers have responded to the current ambiguity in the status of indexed annuities by relying on their own analysis of the rules, and the staffers do not want the proposed rule to expose the insurers to new legal risk, several staffers said at the hearing.

Staffers at the meeting argued that the change in definition could offer consumers the benefits of protection by federal suitability and antifraud laws.

The commission started the meeting by playing a portion of an NBC Dateline segment that looked into indexed annuity sales practices.

The producers of the segment show one indexed annuity purchaser stating that the indexed annuity markets are selling the products to people who have “one foot on the grave and the other on a banana peel.”

The segment and SEC commissioners also talked about the complexity of indexed annuities, the difficulty of comparing different indexed annuity contracts, and features such as surrender periods that expose purchasers to the risk of loss of assets.

One SEC commissioner, Paul Atkins, asked staff members at the hearing about how well state law has handled indexed annuity concerns.

“State law has a different focus,” said Susan Nash, associate director of the SEC’s investment management division.

State insurance regulators have been working with the Financial Industry Regulatory Authority, Washington, to deal with suitability issues, but their primary emphasis has been focused on ensuring insurers’ ability to meet their obligations, Nash said.

Atkins also asked about the proposal provision that would define some indexed annuities as securities but might let some indexed annuities continue to be regulated under state insurance laws.

“Will that create investor confusion?” Atkins asked.

In related news, the SEC also has proposed a change in regulations that would exempt about 24 indexed annuity issuers from the current Securities Exchange Act of 1934 filing requirements.

To qualify for the exemption, an indexed annuity issuer would have to file annual statements and be monitored by its home state insurance regulator.

The insurer also would have to take steps to keep the annuities from trading on any kind of exchange or electronic trading system, staffers said.

Insurers already tend to require annuity holders to seek approval before assigning contract rights to others, and that practice should help insurers prevent the creation of a trading market for existing annuities, staffers said.

The American Council of Life Insurers, Washington, says it needs more time to evaluate the proposed indexed annuity regulations.

“The status of insurance products under the federal securities laws is an important issue for the life insurance industry,” the ACLI says in a statement. “As with all administrative actions, we encourage the SEC to provide a sufficient and meaningful period of comment on any regulatory or interpretive actions.”

The National Association for Fixed Annuities, Milwaukee, also is emphasizing the importance of the SEC providing an adequate comment period on proposed Rule 151A.

SEC officials at today’s meeting “provided very little information pertaining to the legal analysis and precedents that were relied upon to construct the proposed rule,” NAFA says.

When the SEC releases the exact language of proposed Rule 151A, NAFA will work with NAFA members, other industry associations and lawyers at Jorden Burt L.L.P., Washington, to develop its response, NAFA says.