Many of the developments and anxieties of the first quarter of 2009 have been attributable to the financial crisis. But other equally significant causes are also reshaping the square peg of insurance products and the round hole into which they are supposed to fit.

The first is the long heralded arrival of the boomers and their changed investment tolerance and focus: they wanted products suited to retirement and their concern about outliving their assets. The inevitable answer was products with guarantees.

Creative variable annuity issuers responded with a proliferation of guaranteed accumulation, income and withdrawal benefits, with and without lifetime guarantees.

These and other products, such as synthetic annuities, entail a degree of innovation that made the old clich? of variable insurance products being the square peg to be fitted into the round hole of federal securities regulation seem to be an inadequate metaphor.

The financial turmoil as a backdrop to these innovations called for a more fitting metaphor–such as, a newly shaped peg in an ever morphing shaped hole.

Insurers, as they should, took a look at the pricing of the guarantees and their line of reinsurance for these guarantees. Sound management dictated a variety of responses: repricing, termination of certain guarantee benefits, offerings of differing benefits, and other techniques. All of this was done to respond to the financial turmoil, meet state law mandated capital requirements, as well as realize a legitimate level of profitability.

The Securities and Exchange Commission’s historic interaction with insurance has focused on assumption of investment risk by owners as the essence of variable annuities. The staff has had no framework for the risk management goals and mandates of insurance.

Example: As the now-closed annual update season evidenced, the staff has been hard pressed to deal with whether the SEC or the registrant needs to rely on Rule 485(a), 485(b), or 497. Thus, the SEC seems to have thought that the staff needed to review the changes described above. The usual SEC staff statement that it is the registrant’s obligation to determine which rule to rely upon was lost.

The SEC staff has ignored the usual standards of material fundamental disclosure and material non-fundamental disclosure. It would appear that the staff’s unfamiliarity with the heart of insurance and the newer guaranteed benefits started even before the financial turmoil took hold.

The SEC staff began and is continuing to attempt to reverse the practice of decades and create an almost irrebutable presumption that the filing of Securities Exchange Act of 1934 reports (10K, 10Q, etc.) is required of depositors of variable insurance products (the insurance companies), absent reliance on newly adopted Rule 12h-7.

This substantive change is ostensibly to be accomplished by a footnote in the January 8, 2009 adopting release of Rule 12h-7–without any fact-gathering or administrative process giving insurers adequate notice or an opportunity to comment on such a change.

Another example: The novel and unprecedented standards of newly adopted Rule 151A, which deems indexed annuities to be securities, may well be another example of an alternatively shaped peg product that doesn’t fit the round hole of the federal securities laws.

Are these ad hoc and unprecedented reactions the way to go?

As the industry introduces innovations, is the SEC staffed to the task of fitting the innovations under federal securities laws in a meaningful way?

While innovation and the financial crisis have revealed that the federal securities laws don’t catch everything in today’s changed financial marketplace, the federal securities laws, as originally crafted from 1933 to 1940, have served investors well and required relatively few amendments. The cohesive interaction of the various laws was the result of scholarly, detailed analysis and understanding of the marketplace and products; that is why these statutes have endured.

It may well be time for the SEC to undertake a careful study of the business of insurance to generate an integrated response.

What may surface is the fact that it was not insurance products that spelled disaster, and that the insurance companies are by and large financially sound and functioning as they should. Thus, no systemic change may need to be made–only changes that are not ad hoc or without a discernable purpose but integrated into the structure of securities regulation and precedent.

That would help assure that, as the peg or hole changes shape, there will still be a fit that serves the purpose of really protecting investors.

Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is JEB@jordenusa.com