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Regulation and Compliance > State Regulation

Separation Of Powers Is Working

By Kim Obrien

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The controversial proposal by the Securities and Exchange Commission, to adopt Rule 151A, could have a major impact on development, marketing, purchase and oversight of fixed indexed annuities (FIAs). This Rule, which would institute federal regulation of indexed annuities in lieu of state regulation, should not be implemented. Why?

1. An index annuity (or fixed annuity offering excess interest) which guarantees minimum interest as well as income payout options, and provides an opportunity for additional interest based upon positive change in a market index, is not a security.

2. The Rule proposes duplicative regulation when a comprehensive insurance regulatory regime already exists that protects consumers who purchase FIAs. Such duplicative regulation would adversely impact consumers who need and desire these secure products, especially since individual states and the National Association of Insurance Commissioners, continue to develop regulatory initiatives to address market practices as they evolve.

Unfortunately, the SEC’s rationale to add federal oversight to the marketing and sales of some FIAs is based on the SEC’s misperception that FIAs are marketed inappropriately to seniors. The North American Securities Administrators Association, which the SEC publicly thanked for helping draft the proposed Rule, has often cited a report that it says demonstrates the alleged inappropriate sales. However, NASAA has yet to produce or publish that report; hence, the misperceptions are difficult to address.

The very fact that the SEC relied solely on the influence of the Financial Industry Regulatory Authority and NASAA to propose the Rule, without prior meetings with the NAIC or state regulators, shows a confluence of power at work–without the basic checks and balances of separate insurance and investment regulation.

The proposal does not give specifics as to how federalization will improve the purchasing environment for FIAs. This is a concern for the industry, since federalizing oversight of these products removes the current check and balance of insurance regulation and securities regulation.

Further, the role insured FIAs play in financial and retirement planning is a different role than securities and investment products play. Money targeted to buy FIAs is completely different than money targeted for investment purchases. The polar difference between insurance products and securities is the reason the nation has insurance laws, separate and distinct from security laws. It is also why regulation and oversight should be separate and distinct.

This is critical because first, a state insurance regulator’s primary responsibility is to protect the interests of insurance consumers. Second, state insurance departments exercise great power over carriers, possessing sole final determination over insurer licensing, product approval and marketing. This high degree of existing oversight, regulation, and enforcement effectively compels compliance with standards for marketing conduct and other related downstream practices.

Finally, the NAIC was created in 1871 to coordinate regulation of multistate insurers and provide an effective forum for development of uniform policy when appropriate. This organization, which now includes the 50 states, the District of Columbia, and 5 U.S. territories, constantly seeks to protect consumers in a dynamic marketplace–for instance by initiating easy-to-read marketing materials and disclosure mechanisms.

Today’s localized state insurance departments have enforcement officers accountable to citizens directly by election or indirectly by appointment. They offer personal consumer contact and service.

By comparison, Rule 151A would force consumers to place complaints through the SEC. This would lead to a lengthy, confusing, and expensive arbitration process. A SEC release identified that its policies around arbitration are not working and should be reviewed to address many user complaints. The addition of a new product to the SEC portfolio, then, would only strain these already difficult problems.

The FIA industry wants satisfied customers. Hence, its carriers, practitioners and trade groups have zero tolerance for inappropriate, unsuitable, fraudulent, or misleading sales and unethical sales practices. In fact, the industry works with state insurance departments to identify abuses and purge misconduct.

In sum, the existing separation of powers, state and federal, is effective, and the state regulatory model offers a better solution to consumer protection issues involving FIAs. Proposed Rule 151A will not improve the market for consumers or anyone else. Indeed, customers have the most to lose should the Rule go into effect.

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