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Regulation and Compliance > Federal Regulation > SEC

SEC Counsel Confident About Annuity Move

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Washington Bureau

Brian Cartwright, the general counsel of the U.S. Securities and Exchange Commission, says he is “very confident” about the strength of the SEC’s position on its ability to regulate indexed annuities.

Cartwright expressed that view Wednesday in response to a suggestion by Commissioner Luis Aguilar that insurers might sue to overturn SEC efforts to participate in regulation of many indexed annuities.

Cartwright said he had heard some “saber rattling” from the industry regarding the rule.

But Cartwright said the SEC’s approach is consistent with a “couple of” Supreme Court cases.

Cartwright said, however, that the cases are “fairly old” and do not directly address indexed annuities.

In related news, more details about the SEC decision and more reactions to the decision are emerging.

SEC commissioners decided Wednesday to define the terms “annuity contract” and “optional annuity contract,” and to state that indexed annuities are not eligible for the exemption from securities regulation given to ordinary life insurance policies and fixed annuities.

SEC Chairman Christopher Cox said the SEC was acting because improving regulation of indexed annuities is a matter of great interest to senior investors.

Commissioner Kathleen Casey, who also voted for the change, said it will end a long period of uncertainty as to whether indexed annuities are insurance products or securities.

The current state regulatory approach provides insufficient protection for investors, Casey said.

Casey said the current market downturn has added urgency to the need for the rule because, she said, investors seeking to recoup losses will turn to “hybrid products,” such as indexed annuities.

The regulation approved Wednesday was a modified version of a draft released in June.

The SEC made 3 changes before adopting the regulation, according to lawyers at Jorden Burt L.L.P., Washington.

The SEC limited the application of the rule to indexed annuity contracts that specify that, “Amounts payable by the issuer under the contract are calculated at or after the end of one or more specified crediting periods, in whole or in part, by reference to the performance during the crediting period or periods of a security, including a group or index of securities.”

The language, “at or after the end of one or more specified crediting periods,” and “during the crediting period or periods of a security,” was added to address many commenters’ concerns that the proposed rule was overly broad and would apply to traditional fixed annuities and other annuities that are not indexed annuities, the Jorden Burt lawyers write.

The SEC also eliminated a proposed requirement that would have mandated that an issuer determine “not more than 3 years prior to the date on which a particular contract is issued whether the amounts payable under the contract are more likely than not to exceed the amounts guaranteed under the contract,” Jorden Burt lawyers write.

As adopted, the rule “will only require that such determination be made not more than 6 months prior to the date on which the form of contract is first offered,” the lawyers write.

In addition, the Jorden Burt lawyers write, the SEC adopted a modification to permit surrender and other charges to be reflected both in amounts payable and amounts guaranteed in determining whether the former are more likely than not to exceed the latter.

In response to a question from Casey, SEC Associate Director Susan Nash said the SEC would use the 2-year period before the definition change takes effect to consider how to handle disclosure and how to address the differences between Generally Accepted Accounting Principles and the statutory accounting rules that apply to insurers.

The SEC already has dealt with those considerations in connection with regulation of variable insurance products, Nash said.

The SEC also will look at financial statement presentation, advertising and marketing requirements, and filing fees, Nash said.

Iowa Insurance Commissioner Susan Voss, the vice president of the National Association of Insurance Commissioners, Kansas City, Mo., says she and her colleagues are disappointed by the SEC’s decision.

“We are very dismayed the SEC chose to ignore thousands of comment letters opposing this rule,” Voss says. “As insurance products, equity-indexed annuities are subject to extensive and ongoing regulatory initiatives taken by insurance regulators and numerous state insurance laws. The states have a demonstrated record of consumer protection, and we do not believe this rule is in the best interest of insurance consumers.”

Along with the indexed annuities terminology proposal, the SEC adopted a proposal dealing with a rule exempting insurers from filing periodic reports under the Securities Exchange Act of 1934 on securities that are registered with SEC but regulated as insurance under state law.

That rule, 12h-7, was adopted with 2 changes.

The SEC revised the proposed requirement that an issuer take steps reasonably designed to ensure that a trading market for the securities does not develop to include an exception for steps prohibited by state law, Jorden Burt lawyers write.

The SEC also added a condition requiring that insurers claiming an Exchange Act filing rule exemption include a statement in the prospectus noting that the insurer is relying on the exemption.

As a result, the Jorden Burt lawyers write, an issuer can choose to remain subject to Exchange Act reporting requirements by omitting the statement.

An insurer that omitted the statement would be subject to mandatory Exchange Act reporting and to all the other requirements that apply to Exchange Act reporting companies, according to SEC Associate Director Susan Nash.

The American Council of Life Insurers, Washington, put out a statement praising the SEC’s adoption of the reporting measure.

The measure “simplifies periodic reporting requirements under the federal securities laws for insurance products in deference to the comprehensive state insurance regulations governing financial statements,” says Carl Wilkerson, chief counsel for securities and litigation at the ACLI.


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