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February 10, 2009 at 07:00 PM
In adopting Rule 151A under the Securities Act of 1933, the Securities and Exchange Commission did 
more than change the status of equity indexed annuities. It also threw into a complete state of confusion the question of how another indexed insurance policy–indexed universal life–should be analyzed under the federal securities laws.
The result could be that only registered representatives of broker-dealers using a prospectus filed with the SEC will be allowed to sell IUL policies.
As we shall see, this question appears in a single sentence of the 155-page Adopting Release.
First, let’s look at IUL’s traditional status. Before the 151A Adopting Release, most practitioners would probably have agreed on the criteria to be considered in determining whether an IUL policy is a security. They would have cited as appropriate the criteria referred to in Rule 151′s 1986 Adopting Release, though there would have been differences in how to evaluate and how much weight to give to each factor.
In addition to judicial interpretations of Section 3(a)(8) of the 1933 Act, the criteria would have included the “principles discussed in Rule 151″ which are those underlying these 3 elements of Rule 151:
1) The policy issuer must be subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions;
2) The insurance company must assume the investment risk under the policy; and
3) The policy must not be marketed primarily as an investment.
Another factor which would have been considered is the extent to which the insurance company is bearing mortality risk under its policies–a factor of greater significance to issuers of life policies than annuity issuers.
In discussing IUL, the 151A Adopting Release repeats a statement from the 151A Proposing Release–that Rule 151A will not apply to life policies. It goes on:
“The status of an indexed life insurance policy under the federal securities laws will continue to be a facts and circumstances determination, undertaken by reference to the factors and analysis that have been articulated by the Supreme Court and the Commission. We note, however, that the considerations that form the basis for rule 151A are also relevant in analyzing indexed life insurance because indexed life insurance and indexed annuities share certain features (e.g., securities-linked returns).”
It is the second sentence above which has created uncertainty at several levels.
One approach would be to measure an IUL policy against the 3-factor test of Rule 151, supplemented by assumption of mortality risk.
