Conferees on financial services regulation today agreed to keep equity indexed annuities state-regulated.
House conferees this afternoon accepted the Senate offer made late Tuesday that would classify fixed indexed annuities as insurance products–if the FIA products are sold by insurers domiciled in states that have adopted the model regulations recently developed by the National Association of Insurance Commissioners, Kansas City, Mo.
Currently, 40 states have adopted the NAIC suitability model law.
According to industry data, approximately $30 billion in EIAs are sold annually through the country.
In response to the action by the conferees, Eric Marhoun, general counsel and senior vice president of the Old Mutual Financial Network, Baltimore, said, “We are pleased the Senate and House Conferees have taken an important step in clarifying the status of these guaranteed insurance products and we support final passage of the measure.”
A panel of the D.C. Court of Appeals issued a decision last July saying that the agency has the authority to regulate EIAs, but withheld final approval on procedural grounds. Old Mutual had asked in February that the court toss out the regulation, but the court has as yet not responded to that motion.
The amendment approved by the conferees was sponsored by Sen. Tom Harkin, D-Iowa. Insurers based in Iowa and Minnesota are prime underwriters and marketers of EIAs.
Under the Harkin amendment, states would retain state-regulation for EIAs if the insurer selling an FIA product has agreed to apply the NAIC standards to all of its FIA sales.
That means that if the overall bill, H.R. 4173, is passed by the Congress, which is likely to occur sometime next week, the new measure would pre-empt Rule 151A, published by the Securities and Exchange Commission.
Until June 2013, the deadline for states to adopt the NAIC suitability rules, the SEC rule would be preempted in the 12 states that have so far not adopted the NAIC rule through a grandfather clause in the Harkin measure.
But after June 2013, the SEC rules would apply in the states that do not adopt the NAIC suitability standard, according to the conferees.
The House action followed a 12-4 decision late Tuesday by Senate conferees.
The amendment states that EIAs are insurance products that should be overseen by the states.
Rep. Spencer Bachus, R-Ala., ranking minority member of the House Financial Services Committee, said he supported the amendment because he was concerned that because of the way the SEC structured its rule, potentially even life insurance products could eventually be subject to SEC regulation.
He said the SEC has enough to do and that state regulators did an acceptable job of regulating insurance companies during the recent economic downturn.
He also argued that leaving EIAs to state regulators provide a “strong incentive” for states that have not adopted the model rule to do so.
Rep. Scott Garrett, R-N.J., also argued that the SEC rule does not apply a higher standard of regulation on EIAs than the NAIC rule.
“SEC regulation does not add to the regulation of these products–there is no higher level of regulation,” he said.
But Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, opposed the preemption provision. He said the SEC rule imposed dual responsibility for regulation of EIAs, by both the SEC and state regulators.
He also said even some state securities regulators support SEC regulation of EIAs.
The amendment is narrower than one offered on the Senate floor by Harkin but rejected by the Senate.
In seeking support of Senate conferees, Harkin said, “This is an insurance product. It always has been and still is today. The Security and Exchange Commission’s got a lot of other things to do than regulate what is now an insurance market.”
He also defended the instruments as an appropriate investment. “No one has lost their money–period,” Harkin said.
Sen. Jack Reed, D-R.I., chairman of the securities subcommittee of the Senate Banking Committee, opposed the reclassification.
Reed contended during the debate by Senate conferees on the issue that Harkin’s amendment misinterpreted the decision.
“The Harkin amendment would effectively trump the court’s decision,” Reed said.
Reed charged that “there have been repeated abuses of this product.” He contended, too, that Harkin’s amendment could not be inserted because it was not contained in the bills passed by the House and Senate.
“This is a major amendment of securities law without any hearings or debate,” Reed said. “I don’t think this is the proper place to make such a change.”