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.