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Separate and equal: A fixed annuity solution

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Many in the media and some in Congress have suggested that H.R. 2733 and S. 1389, “Indexed Annuities and Insurance Products Classification Act of 2009,” are about “de-regulation.” While others believe the debate is about federal oversight versus state oversight. FINRA actually believes that Rule 151A will help protect consumers and that they are the best regulator to ensure consumer protection – ironic given their track record.

Contrary to the securities-driven media, the court did not decide that indexed annuities were securities or even that the Security and Exchange Commission’s interpretation of risk was a reasonable exercise of its discretion and authority. It decided that under the precedent of the Chevron case, deference should be given to the Commission if the Court concluded that its interpretation was not unreasonable. As legal distinctions go, “not unreasonable” is worlds apart from “reasonable.” The court questioned extensively during oral arguments why the SEC would consider risk to be the “not knowing how much additional interest might be earned until the end of the indexing period” when there was a minimum guaranteed interest and no risk to principal if the index performance was negative. One judge even suggested in a not-so-subtle jest that that given the SEC’s concept of risk they might next seek to regulate state lotteries.

Unfortunately, given the SEC’s inarguably convoluted definition of risk, many other insurance products are in danger of being swept under Rule 151A or a similar Rule created in the future when those product sales hit a significant share of the financial services marketplace.

Nevertheless without a more explicit legislation (H.R. 2733 and S. 1389) removing the ambiguity fixed annuities in the 1933 Securities Act, the court felt compelled to give deference to the SEC. In the end they are leaving the ultimate responsibility with Congress to pour content into the 1933 Act by more clearly defining “optional annuity contract.”

There is considerable discussion today about protecting consumers and NAFA is dedicated to a safe and informed marketplace for all Americans. Fixed indexed annuities have extensive consumer protections which, since their inception, have been monitored and enforced by state insurance departments. Rule 151A would dismantle those protections and put more consumers at risk with inappropriate, duplicative and ill-fitting securities regulation.

People who own indexed annuities did not lose one dime throughout the recent economic turmoil nor did they lose a single dime throughout the economic turmoil at the beginning of this decade nor will they lose a single dime during any future economic crisis. When fraud or illegal sales activity is proven in the insurance industry, consumers are made whole by the insurance company. This cannot always be said with securities fraud.

Not only has the SEC capriciously flouted Congressional mandates in Section 2(b), flagrantly failing to assess the impact of their rule on the public and capital markets, but they are neither ready, nor preparing to accommodate regulation of a true guaranteed insurance product. It’s neither their expertise nor mission. They have no registration exams which cover fixed annuities. They have no rules for product approval, no standards for disclosure which help consumers make sense of their insurance contract, no continuing education requirements for registered reps or broker-dealers covering fixed annuities. They have made no efforts to collaborate with the NAIC and state insurance departments on how their additional regulations may conflict with existing state regulations.

Indexed annuity benefits, features and limitations are fully disclosed to purchasers under strenuous state advertising requirements. Their guaranteed values are governed by rigorous, time tested state mandates.

It is critical for customers seeking the protection of insured fixed annuities that their regulation continues to be separate from and equal to – and as recently demonstrated better than – the SEC’s oversight of security products. Both H.R. 2733 and S. 1389 will ensure that consumers are protected with their choice of fixed indexed annuity products made available through the independent insurance agent or advisor of their choice.