Conflicting reports continue to trouble the fixed index annuity marketplace. Speculation concerns whether the Securities and Exchange Commission will take sufficient time to consider the thousands of comment letters that have poured into its office in opposition to proposed Rule 151A.
Unable to predict the outcome, FIA carriers and insurance agents are developing contingency plans that include strategies for operation under SEC regulation and state regulation.
Looming in the background is the question of whether the industry will be forced to file a lawsuit against the SEC to protect FIAs from securities regulation.
Certainly, adoption of Rule 151A will adversely impact FIA carriers. Some insurance companies have publicly declared they will be swift to attack the proposed rule legally, with no mercy, should adoption occur. Anticipated legal arguments will strike at the severe contradictions that exist between the SEC’s historic position on FIAs and its posture in Rule 151A.
Critical to analysis of the SEC proposal is the concept of “investment risk.”
In proposed Rule 151A, the SEC claims the consumer bears the “majority of the investment risk” based upon the “fluctuating, equity-linked portion” of the return.
This is contrary to long-standing SEC statements, including those in an amicus brief filed in a lawsuit in 1959. Since at least 1959, the SEC has declared that when a state-regulated insurance carrier assumes all of the risk by guaranteeing the consumer’s principal and a fixed rate of interest (the minimum guaranteed rate), and guarantees payment of excess interest (index-linked interest), then the insurance carrier has sufficiently “assumed the investment risk.” Accordingly, the product cannot be considered a security.
To be clear, the index-linked interest in a FIA is “excess” interest. It is paid over and above the minimum guaranteed interest promised in the contract. The SEC has not changed its position that index-linked interest is excess interest; rather, it is now contradicting itself by claiming the fluctuation in index-linked interest is somehow risky for the consumer.
A second contradiction exists by the mere proposal of federal regulation over a state insurance product. The SEC strongly expressed in another amicus brief, filed in 1981, that redundant regulation should be avoided. It acknowledged that SEC regulation was not necessary where there is a governmental regulatory scheme, like the state insurance laws, as such laws substantially eliminate the risk of loss under the financial instrument.