The SEC building, with a stream of dollars (Image: Allison Bell/ALM)

An arm of the U.S. Securities and Exchange Commission last week told investors what it thinks about a product you may sell.

The SEC’s Office of Investor Education and Advocacy expressed its views in a short document with the title “Investor Bulletin: Indexed Annuities.”

The SEC as a whole seems to have decided that the federal government should avoid smashing ordinary, commission-based indexed annuities like a bug.

Under former President Barack Obama, the U.S. Department of Labor put out a fiduciary rule, and associated batches of guidance about how to apply to rule, that seemed to be designed to make selling commission-based indexed annuities classified as fixed-rate insurance products about as difficult as selling narcotics.

The administration of President Donald Trump let the Labor Department’s annuity sales rules die in court. The SEC recently completed work on Regulation Best Interest.

(Related: 10 Key Regulation Best Interest Points, for Agents)

The SEC’s regulation appears to let annuity issuers continue to pay sales commissions, and even to offer carefully structured sales incentive costs.

But a look at the new bulletin shows that some members of the SEC staff continue to be skeptical about indexed annuities.

Here’s a look at five points from the bulletin of interest to financial professionals who sell indexed annuities, or who focus on selling products that compete with indexed annuities.

1. Annuity terminology may confuse at least some members of the SEC bulletin development team.

Sheryl Moore, president of Wink Inc., a life insurance and annuity market research firm, pointed out in a LinkedIn post last week that, in the bulletin, SEC officials said that, if the index used in an indexed annuity falls, the annuity account value could fall.

(Related: 6 Questions for Sheryl Moore, a Life and Annuity Tracking Rockstar)

In other words: The bulletin writers seemed to be unaware of the fact that the contracts that the products commonly known as fixed indexed annuity contracts come with built-in principal protection, and guaranteed, fixed crediting rates.

2. The SEC bulletin writers do not seem to be fond of the term “fixed indexed annuity.”

When life insurers expose the holders of indexed annuity contracts to the potential for loss of principal, they file those indexed contracts with the SEC, as variable insurance products.

The version of the SEC indexed annuity bulletin seen at press time includes a section describing the various types of variable indexed annuities that are available.

In the bulletin, SEC officials never explicitly acknowledge the existence of fixed or non-variable indexed annuities.

SEC officials never use the terms “fixed,” “non-variable,” “guarantee” or “guaranteed” in the bulletin.

SEC officials use the word “principal” only in this passage: “You may lose some of the principal invested in certain indexed annuities if you withdraw amounts before the end of a time period, depending on the value of the market index at the time of the withdrawal.”

3. The SEC bulletin writers are not enthusiastic fans of indexed annuities.

“Indexed annuities are complex products,” SEC officials say in the bulletin. “Investors should carefully read the indexed annuity contract, and any prospectus, before deciding whether to buy the annuity.”

4. The SEC bulletin writers are more interested in factors that could reduce an indexed annuity’s crediting rate below the performance of an index than the possibility that the rate could be higher than the guaranteed rate.

SEC officials note that participation rate and rate cap provisions typically affect how much of the performance of an index is included in an indexed annuity holder’s own rate of return.

“These features reduce your return in the same way that a direct fee would even if the annuity is called a ‘no fee’ annuity,” officials say.

5. The SEC bulletin writers don’t compare indexed annuities with other products that offer guarantees.

The SEC has posted an investor publication that warns consumers to check the fine print when looking at high-yield bank certificates of deposits.

“Like many other products in today’s markets, CDs have become more complicated,” officials say in that 2008 bulletin.

SEC officials posted a similar bulletin about money market funds in 2017, and a similar bulletin about variable life insurance in 2018.

None of the investor bulletins make direct comparisons between one type of product and another.

The SEC does include “additional information” links at the bottom of many investor bulletins that offer readers access to SEC investor bulletins about other types of financial services products.

Resources

A copy of the SEC indexed annuities investor bulletin is available here.

Correction: An earlier version of this article described the status of the bulletin incorrectly. The version on the web at press time had not been changed since it was posted.

— Read SEC’s New ‘Best Interest’ Rule Is Far From Best for Investors, on ThinkAdvisor.

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