The question was: Do you believe fixed index annuities should be regulated as a security?
The answer is: Many people have weighed in on this issue and many have said that the state departments of insurance should be the ones to regulate fixed index annuities since they are fixed products. Many have also have said that because fixed index annuities aren’t securities, they shouldn’t be regulated as such by the Securities and Exchange Commission or by the Financial Industry Regulatory Authority. I agree with both positions.
However, I also think that the current FINRA rules are clear about the responsibilities that broker-dealers have for fixed index annuity recommendations made by their registered representatives. Current FINRA rules are well-established on this question: if a broker-dealer’s registered representative recommends a fixed index annuity to a client, then the broker-dealer is responsible for supervising that sale. However, that responsibility on the part of the broker-dealer does not make a fixed index annuity a security.
Understandably, if a broker-dealer is required to supervise fixed index annuity sales, it can and should set the rules for which carriers and types of fixed index annuities can be sold by their registered representatives. So, in the current debate, it is important to draw a distinction between supervision, and fixed index annuity security status.
If fixed index annuities were securities (which they are not), then broker-dealer affiliation would be required to sell them just like variable annuities. If an agent is a registered representative of a broker-dealer, any fixed index annuities the representative sells still aren’t securities, even though those sales are subject to broker-dealer supervision.
From what I read, hear, and see, it would seem to me that the SEC’s primary concerns about the fixed index annuities are as follows: 1: surrender charges 2. complexity; 3. sales practices of agents recommending them; and 4. suitability for “older” clients. Let me address each one, because I believe none of the SEC’s concerns about these four items has anything to do with fixed index annuities being securities.
Surrender charges. Most fixed annuities (whether their interest is guaranteed or it is based on the appreciation of a stock market index) have surrender charges. If a client puts money into a fixed annuity and then withdraws a large chunk of that money during the surrender period, the annuity owner will incur a charge. Fixed annuities have been this way for decades. Incurring such a charge has absolutely nothing to do with whether the annuity is a security or not.
Yes, it would be much better if annuity owners never incurred surrender charges, if all agents clearly explained annuity charges to prospective buyers, and if insurance companies built products with lower surrender charges and shorter surrender periods. Whether these things are done or not, has nothing to do with whether fixed index annuities, or fixed interest annuities, should be considered securities. Surrender charges do not make a fixed index annuity a security.