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Regulation and Compliance > Federal Regulation > SEC

AALU: SEC Rule 151A Could Affect Some Life Products

By Arthur D. Postal

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Washington Bureau — NU Online News Service

The new Securities and Exchange Commission rule subjecting equity indexed annuities to federal oversight appears to apply only to annuities, but as a practical matter, it could also have an impact on indexed life insurance products, says the Association for Advanced Life Underwriting.

The impact could be felt on those indexed life products that calculate and credit interest similar to the manner in which interest is credited on EIAs, AALU is telling its members.

In an analysis based on comments by its lawyers and other advisers, the AALU is also telling its members that there is a “distinct possibility” that industry interests may challenge the ruling in court.

At the same time, the AALU said in a bulletin to members, “the final rule will be narrower in scope than the proposed rule,” something the AALU fought to do, although it is unclear when the final rule will be published.

Moreover, the rule will not go into effect until Jan. 12, 2011 and will be prospective, according to statements made at the SEC meeting where the rule, 151A, was adopted. That in itself is a significant concession, because the proposed rule published in June provided only for a 12-month grace period.

In its note to members, the AALU said the opponents of federal regulation of EIAs may argue in court that through the new rule the SEC has exceeded its jurisdiction in treating a class of fixed insurance products as securities where those products place significant investment risks on insurers, comply with state non-forfeiture laws and are not marketed primarily as investments.

“Any such challenge would contend that the rule is not consistent with established Supreme Court precedent and also represents a significant departure from prior SEC interpretations of Section 3(a)(8) of the 1933 securities law,” the AALU said in its note to members issued today.

The Section 3(a)(8) exempts from federal oversight annuity or optional annuity contracts that are regulated by the states.

The AALU bulletin said its interpretation of the new rule is that typical indexed annuity contracts will fall within the scope of the rule and be regulated as securities, but contracts declaring discretionary excess interest in advance generally would appear to fall outside the rule.

“Based upon the discussion at the open-meeting, however, it appears that, while the terms of the rule would encompass only contracts contractually providing for the crediting of interest retrospectively, the rule may not be limited in scope to contracts tied to equity indexes,” the AALU note cautioned.

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