Two years ago, the Securities and Exchange Commission (SEC) proposed Rule 151A, which would have regulated indexed annuities as securities rather than insurance products. After a long battle, however, indexed annuities have secured their fixed insurance status of thanks to two final actions:
- The District of Columbia U.S. Court of Appeals vacated Rule 151A
- Iowa Sen. Tom Harkin added an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which would ensure state regulation of the index-linked annuities.
Now that the dust has settled, what have we learned?
The real issue
Indexed annuities are products that provide a guaranteed income that one cannot outlive, while providing a minimum guarantee, protection from market losses, and the opportunity for gains based on the performance of an outside stock market index. These products first made their way onto the insurance scene on Feb. 5, 1995 when Keyport Life (now Sun Life) introduced their novel idea of combining the best features of both fixed and variable annuities.
At the time, it seemed logical to everyone that the products be regulated as insurance rather than securities. After all, the purchaser’s principal and gains were protected from any losses that were due to stock market volatility. In addition, indexed annuities met the three criteria for the SEC’s Section 3(a)(8) exemption from securities regulation in the Securities Exchange Act of 1934. This exemption was determined eight years before indexed annuities were ever introduced, and indicated that a product was not subject to SEC regulation if:
- The annuity contract was subject to supervision by the state insurance commissioner;
- The insurer assumes the investment risk under the annuity (as opposed to the purchaser)
- The annuity is not marketed primarily as an investment.
So, it seemed clear that indexed annuities were fixed insurance products, and not securities – at least based on the SEC’s own words in 1987.
More than a decade later, the SEC’s proposed Rule 151A created a new definition of what could and could not be deemed an “annuity contract.” The new rule said an annuity was not a fixed insurance contract, and was thereby subject to SEC regulation, if:
- The crediting method is based on the performance of a security or index
- The amount credited is more likely than not to exceed the minimum guarantee on the contract.
Interestingly, indexed life insurance products (IUL) met the SEC’s new definition, and yet IUL was expressly excluded from SEC regulation in Rule 151A. To many, it appeared that the SEC was intentionally targeting the indexed annuity for SEC regulation. Unfortunately, the definition was so vague that it was subject to wide interpretation – would whole life products with indexed-linked benefits then meet the definition of a security?
In light of all of this redefining, the securities regulators’ actions began to be viewed as a power grab and an opportunity for job security. After all, what business did securities regulators have in regulating a product that they themselves had previously defined as insurance? The issue suddenly became a fight for state regulation of insurance products, rather than a fight for indexed annuities.
An industry effort
There was an instant need for support from even those who were disinterested in the indexed annuity market. The insurance industry wanted to send a message that it was not OK for securities regulators to have jurisdiction over fixed insurance products.
The industry based their argument on this one question: “If we allow the SEC to regulate indexed insurance products, what product will be next?” Essentially, would anyone want the SEC to regulate term life insurance? Whole life? Fixed annuities? The resounding response was a firm, “no,” which moved even those marketing organizations and insurance companies that didn’t sell indexed products lending their support against the SEC in the conflict.
The insurance industry hired lobbyists, started grassroots efforts against 151A, and learned how to work with their legislators. Now, two years later, and after millions of dollars spent, indexed annuities will continue to be regulated by the state insurance commissioners of the National Association of Insurance Commissioners (NAIC). But what have we learned?
Although the securities industry may have gone about this in the wrong way, they certainly had reason to speculate on our business. After all, the double-digit commission products are the ones gaining advertising spots, not the lower-commission products that are actually more frequently.
The misinformation in the media, however, has led many to believe that those selling indexed annuities are taking advantage of seniors with products that are long in duration, high in commission, and very illiquid. In reality, the products are reasonable, consumer-friendly, and very liquid – but how many people really know that?
Until AnnuitySpecs took up the battle in 151A, nobody corrected the media or held them accountable. In the future, we need to ensure that the facts about insurance products are widely available, so that consumers can access unbiased information about the benefits of owning insurance products.
We also need to hold our legislators close. Despite indexed annuities ensuring their fixed insurance status, there may be other issues in the future. We need to take what we have learned from the 151A battle and always be prepared, proactive, and ready to fight.
Sheryl Moore is president and CEO of LifeSpecs.com, an indexed product resource. She can be reached at firstname.lastname@example.org.