SEC's 151A Decision Provokes

The U.S. Securities and Exchange Commission voted on Dec. 17 to regulate many kinds of indexed annuities.

Commissioners voted 4-1 to treat indexed annuities as securities when the contracts are set up in such a way that the amounts payable by the insurer under the contract “are more likely than not” to exceed the amount guaranteed under the contract.

However, in response to strong insurance agent and carrier opposition to the decision, the commissioners voted to impose the rule only for contracts sold after Jan. 12, 2011.

SEC staffers also added language to the new rule, Rule 151A under the Securities Act of 1933, that clarified that only indexed annuities, and not other insurance products, such as fixed annuities, would be affected by the new rule, and that underwriters and sellers of indexed annuities issued before Jan. 12, 2011, would not be subject to additional legal responsibilities even after the new rule becomes effective.

The rule also addresses the way in which a determination will be made about whether amounts payable by an insurer under a contract are likely to exceed the amounts guaranteed under the contract.

The SEC staffers said the rule would be “principles-based,” meaning that the insurer’s determination at the time it issues a contract would be conclusive, “if, among other things, both the insurer’s methodology and the insurer’s economic, actuarial and other assumptions are reasonable.”

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.

However, Iowa Insurance Commissioner Susan Voss, the vice president of the National Association of Insurance Commissioners, Kansas City, Mo., said 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 said. “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.”

The SEC’s indexed annuities decision means that insurers and agents who sell indexed annuities will be subject to federal securities laws concerning reporting rules, suitability rules and securities license rules, and they also will be subject to the fraud provisions of the federal securities laws, according to Gary Sanders, a vice president at the National Association of Insurance and Financial Advisors, Falls Church, Va.

Commissioner Troy Paredes voted to reject the rule, saying he believed the 1933 securities law exempted indexed annuities from SEC regulation. “I believe the SEC will be entering a realm that Congress prohibited us from entering” when it passed the law, he said.

He said the rule would have a potential impact on small businesses that sell indexed annuities.

A “range of state insurance laws govern indexed annuities,” Paredes said. “I am disappointed that the rule and adopting release make an implicit judgment that state insurance regulators are inadequate to regulate these products. Such a judgment is beyond our mandate or our expertise.”

Section 3(a)(8), the provision of the Securities Act of 1933 that governs the insurance exemption, “does not call upon the commission to determine whether state insurance regulators are up to the task; rather, the section exempts annuity contracts subject to state insurance regulation.”

Moreover, Paredes said, “as a result of Rule 151A, insurers will have to bear various costs and burdens, which, importantly, could disproportionately impact small businesses. Some even have predicted that companies may be forced out of business if Rule 151A is adopted.”

NAIFA President Cliff Wilson said, “We are disappointed” by the SEC’s decision.

“We strongly believe that while any unscrupulous sales practices should be prosecuted, we do not believe the index annuities fit the definition of a ‘security,’” Wilson said. NAIFA is “encouraged that the agency is going to look into some clarifications as to how far-reaching the ruling is, and we are encouraged by that.”

At this point, Wilson said, “NAIFA will closely evaluate the text of the final rule and has not yet determined what action, if any, it will take in response to the adoption of Rule 151A by the SEC.”

David Stertzer, CEO of the Association for Advanced Life Underwriting, Falls Church, Va., said in a note to members that it appears the SEC has agreed with an AALU request that the new rule not apply to general account insurance products and traditional fixed annuities not linked to an equity index.