A Tumultuous Year For Annuities

One can’t speak of synthetic annuities without mentioning 2008′s proliferation and retrenchment of variable annuity guaranteed minimum withdrawal and income benefits, the first-born fraternal twin of synthetic annuities. A growing number of insurers are either suspending or repricing the offering of some of the more expansive and expensive forms of these benefits.

After 4 years in development, the Financial Industry Regulatory Authority’s Rule 2821, addressing suitability and supervision in the sale of variable annuities, was officially implemented this year, in part. Implementation of the other portions has been delayed until sometime yet to be determined. Thus, not only are the answers to the open questions of principal review, non-recommended transactions and what to do with purchasers’ funds pending supervisory approval unresolved, but the details of compliance with regard to training and automated supervisory review are far away.

In November of this year, the National Association of Insurance Commissioners also released proposed amendments to its Suitability in Annuity Transactions Model Regulation. Viewed through either end of the binoculars, its extensive details reveal a kinship with Rule 2821 and bear a strong resemblance to federal regulation of insurance initiatives.

The SEC has adopted amendments to Form N-1A requiring certain key information in plain English in a standardized order at the front of each mutual fund’s prospectus. This eliminates any composite integrated tabular presentations for multiple funds. The amendments apply to funds underlying separate accounts funding variable annuities. Key information includes the fund’s investment objectives and strategies, risks, and costs. The summary must also include brief information regarding investment advisers and portfolio managers, purchase and sale procedures, tax consequences, and financial intermediary compensation.

The SEC contemporaneously adopted a new rule permitting delivery of a short-form summary prospectus to satisfy prospectus delivery requirements, provided that the fund’s full prospectus, and other specified information are available online. The summary prospectus must have the same information and order as the Form N-1A amendments.

As of the writing of this article, the SEC’s formal releases were not yet available. Thus, the details of the major issue raised by its prohibition on the integration of key information remain over the horizon. What is known, however, gives new meaning to the term “short-form.”

The litigation landscape looks much the same through 2008 with respect to the appropriateness of disclosures in the sales of annuities and the suitability of different types of annuities for different audiences, with some settlements but with no federal circuit court class certification opinions. Some state insurance departments and state attorneys general have been exploring the appropriateness of certain sales practices and suitability issues, particularly as they relate to sales to seniors, sometimes through the filing of lawsuits or regulatory enforcement proceedings.

Speaking of seniors, the binoculars work strangely. Over the years, the state and federal authorities have held a variety of meetings, summits and roundtables, exploring how to protect this newly created “protected” class. The closer the view the more some of the protection seems to be taking the form of protecting seniors from the burden of making investment decisions. What other right will they be protected from having to exercise next?

As of the date of this article, whether held correctly or not, no pair of binoculars can help see what is on the horizon for the following: adoption of Rule 151A; proposed relief from the Securities Exchange Act of 1934 reporting requirements for insurance products like market value adjusted annuities or synthetic annuities; or whether a SEC rule proposal relating to Nationally Recognized Statistical Rating Organization that will effectively prevent the use of the less onerous Form S-3 for these annuity products will be adopted. Each of these, however, may be part of the tumultuous history of annuities in 2008 and the tumultuous future for 2009.