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Regulation and Compliance > Federal Regulation > SEC

Industry Groups Slam SEC Over Proposed Rule 151A

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The National Association of Fixed Annuities criticized the Securities and Exchange Commission last week for closing the comment period on a proposal that would impose federal regulation on fixed index annuities.

The letter came as part of a multi-pronged effort by life insurance industry interests to force the SEC and the Financial Industry Regulatory Agency to back off on their decision to oversee index annuities as securities.

For one thing, the National Association of Insurance and Financial Advisors sent out an alert to its members from its annual meeting in San Diego asking them to send letters en masse to the SEC asking the agency to withdraw the proposed rule.

And, in a letter sent in as the comment period closed, the Association for Advanced Life Underwriting questioned, among a multitude of concerns voiced about the proposal, whether the SEC and FINRA “really intended to encompass such a broad array of traditional annuity products within the rule.”

In NAFA’s letter, Malott Nyhart, its chairman, observed, “In light of the significant legal and economic policy issues at stake, we are extremely disappointed that the SEC chose to seek to move this rule to adoption with only a very narrow window for comment.”

He charged in his letter that the “proposal departs significantly from the SEC’s 1997 statement on fixed index insurance products.”

Moreover, Nyhart said, insurance companies have conducted their business in accordance with the release for more than a decade. “By not allowing a reasonable comment period, the SEC apparently discounted the reasoned views of numerous members of Congress, small businesspersons, and state regulatory officials who requested an extension.”

In addition, an extension would have permitted the industry to conduct economic studies of cost-benefit factors in the absence of SEC rigorous analysis of whether the proposed rule promotes efficiency, competition and capital formation which Congress requires of the SEC, he said.

He argued in his letter that fixed index annuities are useful to consumers because they help stabilize income by insuring consumer principal and accumulated minimum interest, while providing the potential for modest benefit from positive market changes.

“They can help consumers plan for future guaranteed income and to assure that wealth will be passed on to their loved ones,” Nyhart argued.

In its alert asking its members to comment, NAIFA officials voiced the same concern as the AALU did in its comment letter, specifically, that the application of proposed rule, 151A, would not be limited to index annuities, and that other annuity and insurance products that fit the criteria set forth in the rule could be brought within the scope of the rule.

Moreover, NAIFA said in its alert, if the proposed rule is adopted, the SEC and FINRA would have authority over index annuity sales, and someone who wishes to market or sell indexed annuities would need a series 6 or 7 securities license and be required to have index annuity sales supervised by a broker-dealer.

NAIFA officials explained to their members that, under the rule, that an insurance producer license, by itself, would no longer be sufficient to sell an IA.

Currently, NAIFA officials said, agents with a life license can sell index annuities whether or not they also have a securities license–but if the agent does have a securities license, he likely has to have the sale supervised by his broker-dealer, whereas an agent without a securities license can sell index annuities without running the sale through a broker-dealer.

Moreover, AALU officials said in their letter, while proposed rule 151A by its terms is limited to annuity products, the trade group is concerned that the securities’ status of any life insurance products with cash value interest crediting mechanisms similar to the accumulation value interest crediting mechanisms in deferred annuity products falling within the broad scope of the rule could come into question.

Specifically, the AALU said, in Rule 151, the SEC said that, while life insurance products could not technically rely upon the safe harbor, the securities’ status of life insurance products should be analyzed “based upon the principles” of the Rule 151 safe harbor.

“A similar logic here would lead to unwarranted questions being raised about participating whole life insurance, universal and other life insurance products whose interest rates may be set in advance either by reference in the policy or marketing materials to specific securities (e.g., U.S. Treasury securities), and life insurance products with limited market value adjustment features,” the AALU said.


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