Companies that sell equity index annuities are preparing to take the Securities and Exchange Commission to court if the agency finalizes its proposal to regulate the products as securities.
Companies that sell equity index annuities are preparing to take the Securities and Exchange Commission to court if the agency finalizes its proposal to regulate the products as securities.
"This is a huge issue for my company and agents that represent my company," said Wendy Carlson, general counsel and chief financial officer of American Equity Investment Life Holding Co. in West Des Moines, Iowa, the third-largest issuer of equity index annuities, with $2.2 billion in premiums last year, 90% of which were from equity index annuities.
"It would destroy the current distribution of the products. We are committed to challenging the rule as it presently has been drafted," Ms. Carlson said.
Complaints about unsuitable sales practices involving index annuities have been circulating for years, and many in the industry think seniors and other consumers would be better-protected if sales of the product were subject to the suitability requirements that brokers must follow.
"It's adding an extra layer of consumer protection that didn't exist before," said Dan Barry, director of government relations in the Washington office of the Financial Planning Association of Denver. The FPA supports the SEC proposal, and it filed a comment letter to that effect.
State insurance regulators and industry groups are working on plans for alternatives that they hope to offer to replace the SEC's sweeping proposal. Currently, equity index annuities, which held $123 billion in assets at the end of 2007, are considered to be insurance products, and they are regulated only by state insurance departments.
One suggestion being discussed within the industry would be to clarify that in order to be exempt from registering as a securities, EIAs must require marketing standards, Ms. Carlson said.
The National Association of Insurance Commissioners, based in Kansas City, Mo., also has put together an executive-level task force to look at the issue, said Sean Dilweg, Wisconsin's commissioner of insurance and vice chairman of the NAIC's life insurance and annuities committee.
There is a consensus among insurance commissioners that the scope of the SEC proposal is too broad and should be narrowed, he said. "It appears to cover fixed annuities with an inflation rider, which is pretty common" as a feature for annuities, Mr. Dilweg said. "Companies that have stayed away from index or variable products could be pulled in," he said.
CONSUMER PROTECTION
"Equity index annuities are extremely complex investment products that have often been used as instruments of fraud and abuse," North Dakota securities regulator Karen Tyler, the immediate past president of the North American Securities Administrators Association Inc. of Washington, wrote in a comment letter on behalf of the group.
"The proposed rule will enable the SEC to address these abuses with the regulatory tools available under the federal securities laws, ranging from mandatory registration and disclosure requirements to strong suitability standards and anti-fraud remedies," she wrote.
Other organizations that filed comments supporting the proposal include the National Association of Personal Financial Advisors of Arlington Heights, Ill., the Investment Company Institute of Washington, Fund Democracy Inc. of Oxford, Miss., and the Consumer Federation of America of Washington, as well as The Hartford (Conn.) Financial Services Group Inc., a major life insurer.
But the proposal issued by the SEC in June elicited more than 1,000 comments, mostly from insurance agents and financial advisers who sell equity index annuities and strongly oppose it. The National Association of Insurance and Financial Advisors of Falls Church, Va., issued an alert to its members, many of whom wrote the SEC opposing the proposal.
"We did notify our members and encouraged them to communicate with whatever position they had," said Cliff Wilson, president of NAIFA and president of Southeast Arizona Insurance Services Ltd. of Chandler, which does not manage assets. NAIFA opposes the proposal.
Equity index annuity insurers argue that the products should be regulated like insurance products. "The only risk is in how much money you're going to make above the guarantee level," said Alex DelPizzo, government affairs representative for the National Association of Independent Life Brokerage Agencies in Fairfax, Va., which represents wholesale brokers, who write over 60% of life insurance policies in the United States.
The proposal would restrict consumer access to the products, he said, adding that state regulators provide better protection than federal regulators. "Look at Lehman Brothers [Holdings Inc. of New York]," Mr. DelPizzo said. "What the states have done with suitability is certainly better than what the SEC has done lately."
The SEC ignored requests by members of Congress, the National Governors Association in Washington and state legislators that the Sept. 10 deadline for comments be extended.
That led some to believe that SEC Chairman Christopher Cox intends to push ahead with the plan before he leaves office as planned after the current administration changes.
"If he had extended the comment period, he wouldn't have had time to adopt the rule," noted Gary Cohen, a partner with Miami-based law firm Jorden Burt LLP, which filed a comment letter on behalf of the National Association for Fixed Annuities in Milwaukee, opposing the proposal.
He and others said the proposal put forward by the SEC in June provides ample grounds for a legal challenge should it go forward as written.
The SEC ignored steps taken by state insurance regulators in recent years to impose suitability and training requirements for annuity sales, Mr. Cohen said. "The SEC keeps giving it short shrift, saying all the states do is protect against insolvency," he said.
In addition, in its proposal, the SEC contradicted earlier positions it had taken before the Supreme Court, stating that products are not securities if there's no risk of loss, because of state regulation, Mr. Cohen said.
E-mail Sara Hansard at shansard@investmentnews.com.
