NAIC, NCOIL Petition to Block SEC’s Indexed Annuity Rule
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February 13, 2009 Friday 04:47 PM EST
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NAIC, NCOIL Petition to Block SEC's Indexed Annuity Rule
Raymond J Lehmann
WASHINGTON
State insurance regulators and a group representing state legislators have filed a petition that looks to block implementation of a U.S. Securities and Exchange Commission rule that would define most indexed annuities as securities products.
Filed in U.S. Court of Appeals for the D.C. Circuit, the petition for review by the National Association of Insurance Commissioners and National Conference of Insurance Legislators disputes the SEC's authority to implement SEC Rule 151A, which defines indexed annuities as securities when the amounts payable by an insurer are more likely than not to exceed the amounts guaranteed under the contract.
Published in the Jan. 16, 2009, edition of the Federal Register, and set to take effect in January 2011, the rule states that because "purchasers obtain indexed annuity contracts for many of the same reasons that individuals purchase mutual funds and variable annuities, and open brokerage accounts," that means "the majority of the investment risk for the fluctuating, securities-linked portion of the return is borne by the individual purchaser, not the insurer."
"NAIC members do not agree with this rule and have taken appropriate legal action," said NAIC President and New Hampshire Insurance Commissioner Roger Sevigny, adding that "as this is a legal matter pending review of the court, it would not be appropriate for us to comment further at this time."
The regulators' petition comes on the heels of a similar suit filed by the Coalition for Indexed Products, whose members include insurers American Equity Life Insurance Co., Midland National Life Insurance Co., National Western Life Insurance Co. and OM Financial Life Insurance Co., as well as independent marketing organizations BHC Marketing and Tucker Advisory Group.
The industry groups argue the SEC rule violates the Securities Act of 1933 and prior Supreme Court precedent, and that the commission itself violated the Administrative Procedures Act when it adopted the rule without due consideration of objections raised by state regulators, legislators, insurers, agents and some members of Congress.
Earlier this month, the circuit court granted the coalition's request for expedited review, setting the stage for oral arguments in the case to be heard as early as May.
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While the returns of fixed annuities are set at inception, and those of variable annuities fluctuate with investment returns, equity-indexed annuities typically guarantee a certain amount of principal protected from losses. First introduced in 1995, equity-indexed annuities have grown from $14 billion of sales in 2003 to $25 billion in 2007, with more than $123 billion invested in the products today, according to the SEC.
Federal regulators sought authority over the products on grounds that there are concerns about the suitability of many indexed annuity sales to seniors, as well as over whether information regarding the products' returns, fees and surrender charges are sufficiently transparent to consumers.
If enforced, the rule would require agents who wish to continue selling indexed annuities to become registered representatives overseen by the Financial Industry Regulatory Authority, a status held by only about 55% of those who currently sell the products. Insurance carriers would need to refile the products with the SEC and offer them via a prospectus.
(By R.J. Lehmann, Washington bureau manager: [email protected])
February 14, 2009
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