State insurance regulators are angry about EIA proposal

State insurance regulators are displeased with the Securities and Exchange Commission and state securities regulators about a proposal that would regulate equity index annuities as securities rather than as insurance products, and one state insurance regulator is meeting with SEC Chairman Christopher Cox this week to address those grievances. "I've very disturbed by it," said Susan Voss, who as insurance commissioner in Iowa has jurisdiction over state securities regulation. She is scheduled to meet with Mr. Cox tomorrow about the SEC's June 25 proposal. Under the proposal, companies that sold equity index annuities would have to issue prospectuses and other securities disclosure statements approved by the SEC for their products. Agents who sold the products, which held $123 billion in assets at the end of last year, would have to be registered with brokerage firms. "I'm curious as to why all of a sudden [the issue has] risen to this level when clearly, they're regulated by state insurance commissioners," Ms. Voss said. There have been reports of rampant sales abuses involving equity index annuities, which pay investors a minimum guaranteed return while allowing them to benefit from upturns in the market. However, steep penalties are charged if the investment isn't kept for lengthy periods, and some products allegedly have been inappropriately sold to seniors. SEC spokesman John Nester wrote in an e-mail that the SEC officials "look forward to hearing and considering all views" as it reviews the proposal. Bringing annuities under securities regulation has been suggested by both state securities regulators as well as by the Financial Industry Regulatory Authority Inc. of New York and Washington. But when the SEC last addressed the issue, in a 1997 concept release, the agency ruled that they were insurance products. That is what some insurance regulators still think. "This is not [a product] where the risk is going to fall on the investors," Ms. Voss said. "The investor is going to get paid. They're always going to get the underlying value." Insurers guarantee repayment of principal through their general funds, which insurance regulators oversee, Ms. Voss said. Several major equity index annuity insurers have operations in Iowa, such as American Equity Investment Life Holding Co., ING USA Annuity and Life Insurance Co., Principal Life Insurance Co., Transamerica Life Insurance Co., EquiTrust Life Insurance Co., Midland National Life Insurance Co., and Aviva Life and Annuity Co. The National Association of Insurance Commissioners, based in Kansas City, Mo., has issued model suitability regulations for selling annuities that 31 states have adopted, according to Sean Dilweg, Wisconsin's insurance commissioner. Ms. Voss and he are on NAIC's life insurance and annuities committee. Mr. Dilweg plans to discuss the issue with Mr. Cox. "My concern is, it will just become much more confusing — very much like what we have with variable annuities," he said. The $1.5 trillion variable annuity industry is regulated under federal securities laws, but those products are treated as insurance products under most state laws.
"To move the annuities and put them under securities will take away some of the other protections that are currently under insurance regulation," said Tom Hampton, commissioner of the District of Columbia Department of Insurance, Securities and Banking. He is also a member of the NAIC life insurance and annuities committee. Under the SEC proposal, insurance carriers would not have to register or file financial statements with the SEC if their products were supervised by state insurance regulators. "Rather than have this hodgepodge of regulation, let's just have it under insurance regulation and just have the additional suitability and supervision regulations added to the insurance process," Mr. Hampton said. The North American Securities Administrators Association Inc. of Washington wants equity index annuities, which were the subject of a critical "Dateline" documentary in April exposing unsuitable sales to seniors, to be regulated as securities. "Historically, insurance regulation is based on the safety and soundness of the institution," said North Dakota securities commissioner Karen Tyler, who is also president of NASAA. By contrast, securities regulation focuses on investor protection, she noted. "Insurance has long since evolved into the investment business. But insurance regulation has not kept pace with that evolution," Ms. Tyler said. Equity index annuities, which guarantee a minimum annuity payment but carry steep penalties during long lockup periods, "expose investors to risk and are appropriately classified as securities," she said. Finra, which has issued guidance to broker-dealers that equity index annuities should be supervised like any other security, has concerns about how the products are sold, said Herb Perone, spokesman for the regulator. "But only the SEC has the prerogative to change the jurisdiction." One concern of the insurance regulators is that the industry is doing little to fight off the SEC. "Where is the industry, and why have they not weighed in on this?" Ms. Voss asked. That may be because the life insurance industry is divided be-tween the larger variable annuity industry and the much smaller equity index annuity industry, though some firms issue both products. The American Council of Life Insurers in Washington put out a brief statement after the SEC proposal was issued, saying that it will "carefully evaluate the SEC's proposal through its substantive committees to determine what position, if any, it will take." Both the National Association for Variable Annuities Inc. of Reston, Va., which represents the variable annuity industry, and the National Association of Insurance and Financial Advisors of Falls Church, Va., which represents life insurance agent-advisers, also said they are waiting for committees to evaluate the proposal. The proposal would narrow the distribution channels that equity index annuity carriers have to sell their products, since they would be limited to registered-representative agents, noted Brian Hamburger, managing director of MarketCouncil LLC, a law firm in Englewood, N.J. Investment advisory firms are not as involved as insurance agencies or brokerage firms in selling the products, because investment advisers are less likely to receive commissions, he said. But for brokerage firms, the proposal is "great," Mr. Hamburger said. "Now these [equity index annuity companies] are going to have to go through the broker-dealer channel." E-mail Sara Hansard at shansard@investmentnews.com.