A response to the SEC's approval of Rule 151AArticle added by Bob Seawright on December 18, 2008
Bob Seawright

Bob Seawright

Joined: December 18, 2008

As expected, the Securities and Exchange Commission approved the new Rule 151A, slightly amended from the proposed rule, which changes the way the SEC treats fixed-indexed annuities (FIAs); they are sometimes referred to as equity-indexed annuities under Section 3(a)(8) of the Securities Act of 1933. Despite significant congressional, state and industry opposition, the Commission voted 4-1 to enact this Rule, which, in effect, turns FIAs into securities -- subject to securities regulation. It also requires that all producers who sell FIAs have a securities license to do so. The SEC's new standard applies to indexed annuities issued on or after Jan. 12, 2011 and producers will need a securities license to sell FIAs from and after that date.

FIAs, first introduced to consumers in the mid-1990s, have become more and more popular since then, with annual sales having grown to around $25 billion. Today, more than $123 billion is deposited in FIAs, the essential feature of which is a guarantee of the deposited principal with interest credited based upon the performance of an underlying index. Given the recent performance of the securities markets, it isn't hard to see why a product that guarantees the return of one's principal and provides a reasonable return is so popular.

The SEC initially proposed Rule 151A on July 25, 2008 and followed that up with a press release from the Commission, a statement by the SEC Chairman, and a 96-page report on what was proposed and why it was proposed.

We expect that litigation will immediately be filed by interested parties within the insurance industry, both to enjoin enforcement of the Rule and to overturn it as soon as possible. Indeed, at the hearing today, the SEC began its public relations campaign in anticipation of such litigation, with SEC staff criticizing the "saber-rattling" of the industry with respect to the regulation and its legal merit.

I endorse any and all efforts to challenge Rule 151A. It's misguided -- at best -- and counterproductive and dangerous at worst. As many within the industry have repeatedly pointed out, FIAs are fixed insurance products not subject to securities regulation. Indeed, the SEC reported receiving nearly 5,000 comments on its regulation proposal, the overwhelming majority of which opposed it. As the Commissioners noted, that number of comments is highly unusual.

Commissioners who voted in favor of Rule 151A uniformly expressed a desire to protect consumers, and particularly seniors, from unscrupulous sales practices in the sale and marketing of FIAs and to ensure that FIAs are sold appropriately. The SEC's official press release today stated that its action was designed "to help protect seniors and other investors from fraudulent and abusive practices that can occur in the sale of equity-indexed annuities." As SEC Chairman Christopher Cox claimed, "Many equity-indexed annuities appear to have been marketed to investors who may be least able to scrutinize these details, including America's seniors."

Commissioner Troy A. Paredes, a prominent attorney and law professor specializing in securities regulation before his appointment to the SEC this summer by President Bush, issued a powerful dissent to the Commission's decision, emphasizing that Rule 151A exceeds the scope of the SEC's authority, takes back the "safe harbor" from securities regulation granted to insurance products by Congress, threatens jobs and even companies in difficult economic times, and implicitly finds state insurance commissions unfit to regulate these products without warrant. Most significantly, Commissioner Paredes stressed that the SEC's approach "gives short shrift to the guarantees that are a hallmark of indexed annuities." In short, Commissioner Paredes provided what is essentially a blueprint for how those wishing to build a legal challenge to Rule 151A may effectively do so. "The SEC is entering into a realm that Congress prohibited us from entering," Paredes said, adding that insurers will have to bear the costs of the new regulations, a cause for concern during tough economic times.

Republicans were not the only ones to object to Rule 151A. The Commission's action drew a sharp and immediate rebuke from Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, who said that the SEC should not have acted on such a controversial rule in the final days of the Bush administration, saying: "I urged the Chairman of the SEC to withhold and I am very sorry that he did not respond to a large number of requests to defer action until a new administration can deal with it."

FIA sales are already highly regulated by each state's insurance commission and the insurance carriers involved. The new Rule imposes a wholly redundant and unnecessary layer of regulation and bureaucracy to our profession. Indeed, suitability rules in both the insurance industry and the securities industry mirror each other already. The new licensing required and the necessary affiliation with a broker/dealer for producers is costly, time-consuming and counterproductive for insurance professionals who do not wish to engage in the securities business generally.

Remember, change offers opportunity, and whatever ultimately happens with Rule 151A, our industry is constantly changing. How individual producers respond to those changes and the challenges they present will determine how effective they can be for the benefit of their clients, their practices and their families.

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