SEC Votes 4-1 to Approve Rule 151A
January 9, 2010 by Christina Pellett
Under rule, indexed annuities will be subject to securities regulation
Despite more than 4,800 comments maintaining that indexed annuities are most certainly insurance products and that the Securities and Exchange Commission (SEC) would be overstepping their boundaries in declaring them securities, the SEC has done just that.
In a Dec. 17 open meeting, the commission voted 4-1 to pass a modified version of Rule 151A, which is set to take effect Jan. 12, 2011.
Under the rule, certain indexed annuities that fail the commission’s test of excess interest will be subject to scrutiny and oversight by federal securities regulators and limited to sale by registered broker-dealers.
In adopting Rule 151A, the commission essentially clarified the terms “annuity contract” and “optional annuity contract” under The Securities Act of 1933 (The Act). Therefore, indexed annuities no longer qualify for the exemption set forth by The Act regarding which insurance products can be named securities.
Modifications from the original rule include the deletion of a three-year requalification rule, which said that companies must retest their products every three years to meet the SEC’s test. Opponents of this stipulation said it could cause some indexed annuities to fall in and out of securities status throughout their lifetime. As a result, the commission dropped the rule, and companies need only qualify an indexed annuity once.
The commission also modified the rule to be prospective to protect all indexed annuities currently sold and owned.
“Senior investors will particularly benefit from these additional safeguards against abusive sales practices by unscrupulous marketers,” SEC Chairman Christopher Cox said. “Investors in all types of securities are uniformly entitled to regulatory protections, and the SEC’s action today will result in the extension of these same protections to investors in equity indexed annuities who are exposed to investment risk.”
Those who opposed 151A — including major carriers, producers, industry groups such as the National Association for Fixed Annuities (NAFA) and the National Association of Insurance Commissioners (NAIC), and members of Congress — were less than thrilled with the commission’s actions.
Matt Coleman, managing principal and actuary for AnnuityWorks LLC, said the SEC’s vote was a culmination of many months of worry and unease for both himself and others whose livelihoods are affected by the rule. He did express cautious optimism, however, regarding the two-year window prior to implementation.
“While today’s actions by the SEC do cause concern for those who offer and have benefited from indexed annuities, the two-year window between now and 151A’s effective date should be ample time for the insurance industry to effectively appeal and possibly overturn this ruling,” Coleman said.
Jack Marrion, president of Advantage Compendium, said the industry essentially has three potential courses of action at this point: They can ask the SEC to reconsider and vote again to withdraw the rule, they can ask Congress to specifically pass a bill saying fixed indexed annuities are not securities, or they can sue the SEC and ask the courts to say fixed indexed annuities are not securities under existing regulations and case law.
“I don’t see the first or second happening, but a two-year window allows enough time for a court challenge,” Marrion said.
Some believe that the rule could be challenged on the grounds that the SEC overstepped its statutory boundaries in approving 151A.
As the sole dissenting vote on 151A, SEC Commissioner Troy Paredes delivered extensive opening remarks on his opinion. He pointed to Section 3(a)(8) of the Securities Act of 1933, which in his view specifically exempts indexed annuities from securities status.
Paredes also pointed out the legal precedents against a rule such as 151A.
“Not only does Rule 151A seem to deviate from the approach taken by courts, including the Supreme Court, but it also appears to depart from prior positions taken by the Commission.”
Steve Horvat, chief legal officer for Midland Office, takes issue with the SEC’s reasoning behind Rule 151A. For one, he points out the SEC’s position that the states’ regulation of indexed annuity marketing and sales abuses has been inadequate.
“We simply don’t agree with that,” he said. “We think the evidence is absolutely to the contrary – the states through the NAIC have a very vigorous regime of regulating these products and their features and the sales practices associated with them.”
He also rejects the notion that indexed annuities are the source of widespread complaints from consumers.
Horvat echoed the sentiments of others when asked for a proposed plan of action.
“I think for Midland National and North American, the plan of action is to assess what steps we have to take to comply with the rule,” Horvath said. “But we will also consider litigation, because we feel the rule is not appropriate. There is no legal basis for the rule under federal securities laws.”
Most importantly for those wondering where the SEC’s decision leaves them, NAFA’s executive director Kim O’Brien has some suggestions.
“It is important that … those who believe in the value proposition of fixed indexed annuities stay the course and support our ongoing activities,” O’Brien wrote in a statement posted on NAFA’s Web site (www.nafa.us). “When the SEC used the flimsy and self-indulgent excuse of ‘investor protection’ for over-reaching their congressional charge and ignoring multiple court rulings, there is nothing to stop them from invoking more arbitrary and capricious rationale for other, and perhaps all, insurance products.”
Christina Pellett is managing editor of the Agent’s Sales Journal. She can be reached at ASJeditor@AgentMediaCorp.com or 800-933-9449 ext. 226.