Staffers at the U.S. Securities and Exchange Commission say the benefits of putting indexed annuities under SEC jurisdiction would far outweigh the costs to product manufacturers and distributors.
The SEC put a copy of the final version of Rule 151A, which would classify most indexed annuities as securities, on its Web site today.
The final rule, which is set to take effect Jan. 12, 2011, comes with more than 100 pages of SEC staff discussion of the 4,800 public comments submitted in response to a draft of the rule released in June 2008.
The final rule, which was approved by the SEC in December 2008, would classify an indexed annuity as a security “if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract,” SEC staffers write in a preamble to the final rule.
“The definition hinges upon a familiar concept: the allocation of risk,” officials write in the preamble. “Insurance provides protection against risk, and the courts have held that the allocation of investment risk is a significant factor in distinguishing a security from a contract of insurance. The Commission has also recognized that the allocation of investment risk is significant in determining whether a particular contract that is regulated as insurance under state law is insurance for purposes of the federal securities laws.
“Individuals who purchase indexed annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index. Insurance companies have successfully utilized this investment feature, which appeals to purchasers not on the usual insurance basis of stability and security, but on the
SEC staffers reject the idea that Rule 151A exists because of a perception that there are widespread abuses in indexed annuity marketplace.
“Rather, the rule is intended to address an uncertain area of the law, which, because of the growth of the indexed annuity market and allegations of sales practice abuses, has become of pressing importance,” officials write. “We do not believe the states’ regulatory efforts, no matter how strong, can substitute for our responsibility to identify securities covered by the federal securities laws and the protections Congress intended to apply.”