NAIC Committee explains results of Harkin/Meek Amendment
By Kim O'Brien
The National Association for Fixed Annuities
The following memorandum explaining the Harkin/Meeks Amendment was presented to the National Association of Insurance Commissions (NAIC) Life Insurance and Annuities Committee. It’s beneficial information for everyone working in our industry.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203 which contains a Section 989J known as the Harkin/Meeks Amendment — named for its chief sponsors, Iowa Sen. Tom Harkin and New York Congressman Gregory Meeks. That section voided Securities and Exchange Commission (SEC) Rule 151A which provided for the regulation of indexed annuities (IAs), and possibly other insurance products, as securities for federal purposes.
Section 3(a)(8) of the Securities Act of 1933 generally exempts insurance policies from federal securities regulation. Rule 151A defined certain annuity contracts or optional annuity contracts as not being exempt under 3(a)(8) if amounts payable by the insurer under the contract were more likely than not to exceed the amounts guaranteed under the contract. The result of Rule 151A was to exclude IAs from the general exemption under Section 3(a) (8) and make them subject to federal security laws. The Harkin/Meeks Amendment overrides the Rule 151A exclusion and creates a safe harbor, for certain qualifying insurance policies and annuity contracts, to not be treated as a security under federal securities laws or by any future SEC action.
Harkin/Meeks Amendment Section-by-Section
Subsection (a) is the operative provision reversing Rule 151A. It requires the SEC to treat “any insurance or endowment policy or annuity contract or optional annuity contract” — such as an IA — as exempt under section 3(a) (8) of the 1933 Act if the three following conditions are satisfied:
1. The value of the contract does not vary according to the performance of a separate account. The insurer must stand behind the product as a general asset account rather than having the product supported by a separate account set of assets like a variable annuity.
2. The contract meets the requirements of (A) standard state nonforfeiture laws or (B) if no such standards are applicable, NAIC Model Standard Nonforfeiture Law either for life insurance or for individual deferred annuities, or any successor to these model laws. Thus, the insurer must provide minimum guaranteed values to protect the annuity owner’s principal and periodically credited interest.
3. The state of the insurer’s domicile, or, the state where the product is sold, has adopted the March 2010 NAIC Suitability in Annuity Transactions Model Regulation or exceeds the requirements of that Model Regulation. Or, if such a state does not exist for the insurer, it must comply on a nationwide basis with best marketing practices to remain exempt.
Subsection (a)(3)(B) provides that, in the alternative, the IA must be issued by an insurance company that adopts and implements practices on a nationwide basis that meet or exceed the Suitability in Annuity Transactions Model Regulation, and any successor modifications thereto. This provision also spells out the necessary consequence of such nationwide adoption: The insurer becomes subject to oversight by its state of domicile regulator for compliance. A large number of companies have already adopted and implemented such practices or are in the process of doing so.
Subsection (a)(3)(A) simply adds a requirement that in order to be exempt, the IA must be sold by a carrier domiciled in a state that has adopted the new model or be sold in a state that has adopted the new model. Several states are in the process of adopting the new model, and many more are expected to do so in the next two years. In the event that the state of domicile or state of sale has not adopted the new model, the IA may still be exempt under subparagraph (B) if the issuing company has written and implemented policies and procedures that comply with the new model, which are subject to examination by the domestic regulator. Companies representing a large portion of the market can be expected to take the initiative to comply themselves, thus ensuring exempt status for most IAs.
Subsection (b) of the Harkin/Meeks Amendment “Rule of Construction” makes clear that this amendment applies only to products that fit into the safe harbor and makes no changes to existing law with respect to whether or not any non-complying “insurance or endowment policy or annuity contract or optional annuity contract” is or is not exempt under Section 3(a)(8) of the 1933 Act. Therefore, even if an IA product fails to qualify for the safe harbor, it does not mean that the product is automatically a security under the federal securities laws. To the contrary, the product is analyzed under the 3(a)(8) of the Securities Act of 1933 and long standing SEC Rule 151s safe harbor to determine if the IA is exempt. This is the analysis that has been used to conclude that IAs were exempt since their inception.
The Harkin/Meeks Amendment (1) restores and codifies what has been considered the dividing line between insurance and securities products based on whether the insurer predominantly bears the risk of loss and (2) ensures that vigorous state regulation of IAs is taking place and will continue. The amendment provides a clear safe harbor test to IAs to ensure that they remain treated as exempt from the Securities Act of 1933. It does not replace or affect the need for states to adopt the NAIC model on suitability.