The insurance industry has rallied against the Securities and Exchange Commission’s Proposed Rule 151A, issued in June 2008, which would make fixed index annuities securities. The industry argues that the proposal is poorly drafted, significantly unsupported and unjustified.
But even as it submits comments before the Sept. 10, 2008 comment deadline, the industry must begin looking beyond rhetoric to the underlying FIA regulatory issues. Whether FIAs will be regulated by state insurance divisions or at the federal level via the SEC and Financial Industry Regulatory Authority, producers and insurance marketing organizations will be unable to escape change.
In particular, significant changes will occur in at least 3 areas: licensing, disclosure, and supervision.
Licensing: Currently, a life insurance license is required to sell FIAs, but critics have suggested a Series 6 securities license should be required. However, the Series 6 has no substantive information on FIAs, making it useless training for this product. Proponents of the Series 6 claim it provides general information about the markets and indices (S&P 500, Dow, etc). This weak rebuttal typifies the disconnected and ill-informed approach being taken in an attempt to fashion a remedy for FIA concerns.
Other suggestions intended to address the need for more FIA training include creating a new license specifically for FIA producers, such as a ‘Series 5′ or ‘Series 8′ (which currently do not exist). Even if federal and state authorities agree on a new license specifically for FIAs, debate is heated as to which regulator should issue it–FINRA or state insurance divisions.
Allowing FINRA to issue FIA licenses opens the door to securities regulation of a fixed insurance product. Opponents fear that, over time, FINRA will further erode state regulatory authority over FIAs. In the spirit of compromise, perhaps the National Association of Insurance Commissioners or the Interstate Insurance Product Regulation Commission could oversee this licensing.
Disclosure of information: Another criticism of current FIA regulation concerns discrepancies in, and availability of FIA information for consumers. Critics find lack of uniformity on 2 levels: 1) product information varies among FIAs in the same state; and 2) such information varies from state to state. Of most concern: Consumers seeking to compare multiple FIAs have difficulty, as disclosure forms use different terminology, explanations, and formats.
Some critics have opined that a securities prospectus is the cure, although no supporting documentation has been presented. But how many consumers would actually read, or for that matter comprehend, such a prospectus?