Members of the public are submitting a flurry of reactions to efforts by the U.S. Securities and Exchange Commission to define indexed annuities as securities.

Comments on the draft proposal, which was approved for release June 25, are not due until Sept. 10, but, at press time, the SEC already had posted 37 comments on its Web site.

Members of the staff say they want to define indexed annuities as securities because of concerns that sales representatives who are not registered securities representatives are explaining the products to older consumers poorly and possibly exposing the buyers to risks that the consumers do not understand.

Insurers and state insurance regulators have objected, contending that the insurers selling the contracts assume responsibility for investment risk, preventing holders who follow contract rules from losing principal or seeing returns fall below a guaranteed rate.

Some members of the public who have commented on the SEC proposal say they support it.

Robert Ow, a registered principal at securities dealer, has written to endorse the proposal.

“Unlike many stock brokers in the industry, I come from an insurance background and have known many people in the life insurance/annuity business,” Ow writes. “In my 27 years of experience I have seen several registered representatives drop their registration but continue as an insurance agent. Without exception, these agents would take advantage of their clients gullibility and sell them ‘garbage annuity contracts that are inappropriate under any circumstance.”

Some members of the public have written to oppose the indexed annuity proposal.

Robert Eldridge Jr. of Producers Choice West Inc., Las Vegas, notes that his clients have lost no money despite a 20% drop in the stock market since October 2007.

“I think this is personally about money,” Eldridge writes. “I believe that securities firms are concerned that money is leaving wall street for insurance companies.”

If the SEC does classify indexed annuities as securities, “all insurance agents who previously offered index annuities before they became classified as a security would be forced to acquire a security license and be subject to the additional high cost of errors and omissions insurance specific to securities along with very high securities licensing fees relevant to the registration with broker dealer firms,” according to Eric Rambis of Kenosha, Wis.

Several other commenters also have written about concerns about competition in financial services distribution.

“It appears the only possible explanation for the ruling is that the SEC is bowing to the shrill cries from the brokerage world over loss of ‘market-share’ to [investment advisors],” writes Charles David Gray, a Henderson, Texas, insurance agency principal.

“I believe that your recommended regulations change seeks to stop the bleeding from lost brokerage accounts,” writes Richard Mellor, a Castro Valley, Calif., life insurance agent.

Gerry Seymour contends that the SEC proposal would have the effect of further concentrating access to relatively high-return investment vehicles in the hands of broker-dealers.

“This, in effect, would be similar to saying all OTC medicinal products should be given with a prescription, making it difficult for average people to easily handle their own affairs,” Seymour writes.

State insurance regulators say they have had difficulty with communicating directly with members of the SEC about indexed annuities, and several commenters write to say that they believe that the SEC indexed annuity proposal shows a lack of understanding of the products and regulation of the products.

The SEC started the June 26 indexed annuity proposal discussion by airing a “Dateline NBC” segment on seniors who had bought unsuitable annuities several years ago.

The “SEC has not a clue of what current sales suitability is,” writes Patrick Robertson of Holliston, Mass. In 2000, “the words suitability and disclosure were nowhere to be found in an annuity application. Today an annuity application is 20 pages long and in-depth financial information is taken by the writing agent on the client, which also has to pass muster with the insurance suitability department.”

The SEC indexed annuity proposal shows no understanding of the requirement that an indexed annuity issuer “reserve 100 cents on the dollar to satisfy that future obligation they have to the owner of the contract,” Robertson writes.

Unlike indexed annuities, “‘true securities’ actually invest in the market, allowing for both gains and losses based upon market performance,” writes David Scott, a licensed insurance agent who also is a registered representative. “Fixed indexed annuity investors invest for the potential gains while sidestepping losses in declining markets.”

Some commenters suggest that the SEC should look harder at sales of stocks to seniors before cracking down on indexed annuity sales.

“I believe you need to get your own house in order, before making baseless rulings that favor your industry,” Mellor writes. “In my practice I consistently meet with large numbers of seniors with limited funds whose brokers have them 85% to 95% invested in the market… The markets performance over the last 9 year is a perfect example of how these practices seriously affect seniors. Why aren’t you addressing this ‘real’ issue?”

David Rosales, a Lake Forest, Calif., financial advisor with a securities license and an insurance license, notes that the SEC already regulates variable annuities as securities.

“The fact that there is a higher number of consumer complaints of variable annuities… versus index annuities… disproves the theory that making index annuities a security would improve consumer protection,” Rosales contends.

Willard Colson, president of a Greenville, N.C., broker-dealer and insurance agency, says he agrees that there are abuses in the indexed annuity market, such as excessively high commissions and misrepresentation of the effects of bonuses, but he says regulation of the contracts should stay at the state level.

“In my opinion indexed annuities are not securities due to the guarantees and should not be regulated but the SEC,” Colson writes.