Indexed Annuities And Rule 151A: Where Are We Now?
February 6, 2010 by Sheryl J. Moore
Sheryl J. Moore
Oh what I wouldn’t give to not have to look at the numbers 151 and the letter A ever again!
Wouldn’t it be nice if the securities status of indexed annuities was firmly established today? Without question, the Securities and Exchange Commission (SEC) changed the world of life insurance forever when they first proposed that indexed annuities (IAs) be treated as securities some 18 months ago with their proposed Rule 151A. Recent litigation and legislative advancements in the efforts to secure the fixed insurance status of IAs have left many scratching their heads, wondering what will ever become of these invaluable retirement income products.
From a Regulatory Perspective
Although the rule was first proposed by the SEC on June 25, 2008, it was followed by a brief comment period. During this period, interested parties could give the SEC their “two cents” on whether or not IA products should be treated as securities. Precisely 4,448 comments were submitted on the issue, largely opposing the proposed rule. Unmoved, the Securities and Exchange Commission decided in a four-to-one vote to adopt rule 151A with slight modifications and regulate indexed annuities as securities on December 17, 2008. It was decided at that time that the rule would apply only to IAs that were issued after the rule’s effective date of January 12, 2011. Which leads us to our next perspective…
From a Litigation Perspective
A lawsuit was filed against the SEC, relative to their decision on Rule 151A, immediately following their issuance of the rule. American Equity Investment Life Insurance Company, et al. versus Securities and Exchange Commission was a shining beacon of hope for the millions of opponents of 151A. In the lawsuit, four insurance companies (American Equity Investment Life, Midland National Life, National Western Life, and Old Mutual Financial Life) and two marketing organizations (BHC Marketing and Tucker Advisory Group) were attempting to reverse the SEC’s ruling.
The judge in the case made a decision on July 21, 2009, declaring that the SEC had the authority to declare indexed annuities as securities, but that the SEC’s reasoning that the new rule would bring legal clarity to the status of equity index annuities was flawed. Furthermore, the court found that the SEC’s consideration of the effect of its rule on efficiency, competition and capital formation was arbitrary and capricious. At that time, many were left asking, “What now?”
The SEC had a couple of options:
1. They could decide that the rule was not a priority in light of their current problems.
2. They could complete the necessary analysis to provide the court with proof of the rule’s impact on competition, efficiency and capital formation.
The indexed annuity industry also had options:
1. Wait for January 12, 2011, when indexed annuities were to be regulated as securities.
2. Put all of their efforts into support of bills S1389 and HR2733 (more on that soon).
The petitioners gathered with their legal representation to decide how to proceed. Old Mutual ultimately asked the DC Court panel in the case to make the SEC give indexed annuity issuers more time to comply with Rule 151A. This prompted the SEC to agree to provide a full two-year implementation period for federal regulation of IAs under Rule 151A (implementation would technically begin after a final rule is issued).
The SEC also has agreed through its court brief to open a Section 2(a) comment period on the SEC’s Section 2(b) analysis of the likely effects of Rule 151A. Section 2(b) of the federal Securities and Exchange Act of 1933 requires the SEC to include an analysis of possible effects on efficiency, capital formation and competition when it releases a draft of a proposed rule. Basically, the SEC just has to prove that Rule 151A would increase competition, capital formation and efficiency. And this leads us to our final perspective.
From a Legislative Perspective
United States Representative Gregory Meeks of New York’s sixth district introduced a bill (HR2733) to the House of Representatives in March 2009 known as the “Indexed Annuities and Insurance Products Classification Act of 2009.” The bill closes by declaring that “Rule 151A promulgated by the Securities and Exchange Commission and entitled ‘Indexed Annuities and Certain Other Insurance Contracts’ shall have no force or effect.”
Soon after the introduction of this bill, companion Senate Bill S1389 was introduced by Senator Ben Nelson of Nebraska. Today, there are 65 co-sponsors for the House bill and 12 co-sponsors for the Senate bill; and both bills are now sitting in the Committee on Banking, Housing, and Urban Affairs.
HELP: Get some skin in the game. Don’t count on someone else to ensure that indexed annuities continue to be regulated as fixed insurance products!
Less than 20 percent of Congress is co-sponsoring this bill. If you want to continue being able to offer annuities that have downside guarantees and limited upside-indexed interest potential, get involved.
Even if you hate indexed annuities, you have a vested interest. If the SEC begins regulating these insurance products, what’s next? Term life?
Take five minutes and call, write, or drop in to your local legislator’s office.
Sheryl J. Moore
Moore is president of Advantage Group Associates, Inc., AnnuitySpecs.com, and LifeSpecs.com. Collaboratively, these companies specialize in the indexed annuity market, as well as the rapidly expanding indexed life line of business. Moore provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. Prior to forming Advantage Group Associates, Inc., Moore was the manager of a competitive intelligence unit for a multi-line global insurer. In addition, she gained an intimate knowledge of indexed products and markets as the market research analyst in charge of competitive intelligence for both life and annuity lines of business with a leading carrier in indexed life and indexed annuity sales. She is co-author of “The Encyclopedia to Index Products: Annuity and Life.” Her research and articles have been featured in numerous industry trade publications and resources. Her research has been presented to the National Association of Insurance Commissioners Conference on several occasions, to aid in their understanding of indexed products and provide guidance on issues such as suitability and illustrations. She studied psychology at Graceland University. Moore can be reached at Advantage Group Associates, Inc., 215 Southeast Wildflower Court, Pleasant Hill, IA 50327. Telephone: 515-262-2623. Email: firstname.lastname@example.org.