Marketing of equity indexed annuities continues to run into compliance headwinds despite a go-ahead from Congress and the courts as well as a commitment from the industry to clean up its act.
The two latest controversies involve a regional consumer advocacy group’s harsh criticism of equity indexed annuities–noting that Florida public employees should think twice before investing in them–and a decision by Illinois securities regulators to revoke the license of a Champaign, Ill. investment firm and the husband-and-wife couple who ran it because of market conduct transgressions the couple made while selling equity indexed annuities.
Both incidents have unfolded almost simultaneously, and bring to mind the kinds of criticism that initially prompted the Securities and Exchange Commission in 2008 to issue its Rule 151A, an effort to regulate equity indexed annuities as a securities product, rather than an insurance product. The EIA industry immediately countered with a grassroots political campaign to get EIAs specifically exempted from the then-in-development Dodd-Frank financial services regulatory bill, as well as with a legal challenge to Rule 151A itself in the case of American Equity Investment Life Insurance Company, et al, v. the Securities and Exchange Commission, No. 09-1021.
After an extensive legal battle, Rule 151A was defeated in court in July 2010, when the D.C. Circuit of the U.S. Court of Appeals held that while the Securities and Exchange Commission had authority to regulate EIAs as securities, the agency had “failed properly to consider the effect of the rule upon efficiency, competition, and capital formation.”
Earlier that month, a congressional conference panel reconciling differing House-Senate versions of the Dodd-Frank financial services law approved a provision that EIAs would remain state-regulated— so long as they were governed by standards developed by the National Association of Insurance Commissioners, Kansas City, Mo., as state-regulated insurance products.
Both the legal victory and the Dodd-Frank exemption occurred almost at the same time, prompting the SEC to drop Rule 151A altogether in what was seen as a major David-versus-Goliath victory for the EIA industry.
Despite the NAIC standards to govern equity indexed annuities, Barbara Roper, securities advisor to the Consumer Federation of America, said the CFA remains very concerned about abusive practices associated with the sale of these products.
“Indeed, with the threat of securities regulation largely removed by the Dodd-Frank Act and the court throwing out proposed Securities and Exchange Commission Regulation 151A, there is a real concern that insurance regulators will start backsliding on their recent efforts to strengthen regulations in this area,” Roper said.
She added that rules on the books are meaningless if they are not effectively enforced, and that only time would tell if state insurance regulators will take tough enforcement actions against abuses.
“Given how hard they worked to get these products exempted from securities regulation, the onus is on the state insurance regulators to provide strong consumer protections,” Roper said.
With the regulatory battle over 151A still fresh in the memory of the EIA industry, equity indexed annuities received perhaps its sharpest criticism in more than a year, when the Consumer Federation of the Southeast issued an alert on June 3 advising public employees to not invest in “unvetted indexed annuities.”
The CFA alert echoed a similar alert issued last year by Jeff Atwater, Florida’s new chief financial officer. In warning people in the state to be careful when buying EIAs, Atwater said, “as their popularity grows, equity indexed annuities are coming under increasing scrutiny by regulators.”
Walt Dartland, executive director of the Consumer Federation of the Southeast, said his group issued the alert because third-party administrators are sending people into Florida to sell EIAs to teachers who are reeling from new legislation requiring them to contribute to their pension plans and healthcare. This, after five years of no salary increases.
“This makes them vulnerable, upset at their reduced pensions and more concerned than ever about their future,” Dartland said.
“We find that they are a good target for sale of EIAs because of a lack of knowledge, their trust in presenters and an inability to follow-up with another opinion as to what is available.”
In his comments, Marrion said based on data from the Securities and Exchange Commission, the Financial Industry Regulatory Authority and the National Association of Insurance Commissioners, there were 114 securities complaints for every one annuity complaint.
He said he also examined Florida records, going through the files of the 1,791 actions taken against insurance and securities registered people in Florida from January 2009 through August 2010. Of these, he said only 15 of these actions involved indexed annuities.
But Dortland defended his comments, saying his concerns were prospective, not retrospective.
He said most people do not complain because they don’t know who to complain to. “In reality,” he said, “EIAs are extremely complex investment products and can contain many detrimental features such as hidden penalties, costs, fees and massive, multi-year surrender charges,” Dartland said.
But Jack Marrion, who provides research into EIAs through Advantage Compendium, Inc., in St. Louis, defended the industry.
He said complaints about sales of EIAs has plummeted 70% from 2007 to 2010 because carriers are doing a better job of educating their agents.
And while the business is relatively large, it has recently suffered ups and downs.
According to data released by the National Association of Fixed Annuities, fixed indexed annuities broke sales records in 2010, according to the Beacon Research Fixed Annuity Premium Study. (Sales figures for this study do not include structured settlements or employer-sponsored retirement plans.) Annual indexed annuity results climbed 6% to an estimated $31.4 billion. Income annuity sales grew 2% to $8 billion. Each product type also claimed its largest share of sales in the study’s 8-year history–48% for indexed and 11% for income annuities.
But, according to Marrion, indexed annuity sales for the first quarter of 2011 were $7.1 billion, according to results released from LIMRA and Beacon Research, off 15% from the previous quarter.