Protest Rages over EIA Proposal
By Edward Hayes
August 18, 2008
The Comment period on the SEC’s rule proposal to regulate equity-indexed annuities (EIAs) as securities still has three weeks left. But some industry groups have come out to criticize the measure, with one of the biggest annuity trade groups still looking into it.
Last month, the SEC proposed treating EIAs, which individual states now regulate, as securities and to place them fall the jurisdiction of SROs like FINRA. Equity indexed annuities are investments that earn their returns from a stock index that the insurance firm invests in.
While regulators consider variable annuities to be securities products, EIAs have never been as clear-cut.
Until the proposal, there was no definitive guidance for firms as to whether or not EIAs were securities. The rule proposal specifically states that EIAs are securities offerings and must be sold by a broker-dealer certified to sell securities.
Some proponents of the rule change say the rule proposal was necessary because securities regulators focus on investor protection, while insurance regulators are primarily concerned that the insurance companies they oversee don’t become insolvent.
But the National Association for Fixed Annuities (NAFA) disagrees. It claims that state insurance regulators are equally concerned about investors.
“State insurance departments have very robust departments that deal with consumer complaints and sales tactics,” said James Jorden, an outside council with NAFA. “For years, they have been responding to issues of that sort.”
NAFA publically expressed its reservations about the proposal, although it has not yet submitted a letter to the SEC. Meanwhile NAVA, a major VA trade group, is still quiet about the measure. Both groups requested an additional 90 days to confer with their members.
Even though NAFA has not submitted its opinion yet, its representatives, as well as other groups have already laid out some initial concerns. Opponents of the proposal believe that the states the proper regulators to handle the offerings, and claim that state insurance regulators have been beefing up regulations concerning EIAs and seniors.
Some of the state insurance regulators’ measures include closer scrutiny on sales of EIAs and other fixed annuity offerings. Also some states have passed rules that require firms check the the suitability of EIA sales. At the same time, insurance companies have worked to improve the training of the sales staff and have given their own policies and procedures a closer look regarding the products.
Other commenters on the proposal have shown the more emotional side of the EIA regulatory issue.
“The securities industry is living in glass houses, and throwing stones at an industry that has protected the lives, property, and nest eggs of people for a long, long time,” said Steven Delaney, a member of American Annuity Advocates.com, said in his letter to the SEC. “It’s all ridiculous, again, greed, imperialism on the part of the Rulers of the Universe, FINRA.”
The proposal is part of the SEC and FINRA’s effort to combat unsuitable sales to seniors. After looking into “free lunch” seminars, the two have begun filing cases and proposing new rules and regulations. The rule proposal on the EIAs is the latest in that effort.
The problem is, while the regulators believe those offerings pose a threat to seniors, those who deal with EIAs on a regular basis aren’t convinced that is the case.
“Through state regulations, there are very robust standards applied to every sale,” Jorden said. “The vast majority of these sales are suitable.”
He went on to argue that the number of complaints about those specific offerings is less than 1% at each insurance company. Others argued that while there are unsuitable sales made with EIAs, it is a common fact found associated with all finance services offerings.
Some provisions that make EIAs a low-risk investment are the fact that they must guarantee a return on the buyer’s principal and rate of return, Jorden said. In other words, if a buyer invests $100 at 10% interest, so long as they remain in the offering for the required amount of time, they will have the same money when they pull out at the same interest rate.
NAFA also contends that Congress and the SEC have already established that EIAs can’t be securities. First, the ’33 Act lists “insurance or endowment policy or annuity contract or optional annuity contract[s]” as exempt from being classified as securities. And Rule 151, which became effective in 1986, establishes a safe harbor for fixed annuities from securities regulations, according to Jorden.
“Congress decided years ago [fixed annuities] should not be regulated under securities regulations and the courts have validated them,” Jorden said.
He also referenced the 2002 Malone v. Addison Marketing Insurance case, where a United States District Court ruled that the definition of a security does not include fixed annuities.
As it stands now, comments on the rule proposal will close on Sept. 10, but if the Commission wishes to extended the period it would most likely do so when the current comment period ends.
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