Thursday, June 26, 2008
The SEC released the text of its proposed rule that would set forth the standards for determining whether equity-indexed annuities (EIAs) are securities or insurance products. As the SEC describes in the release, the proposed rule would prospectively define certain indexed annuities as not being “annuity contracts” or “optional annuity contracts” under the statutory insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract. According to the release:
The proposed definition would hinge upon a familiar concept: the allocation of risk. Insurance provides protection against risk, and the courts have held that the allocation of investment risk is a significant factor in distinguishing a security from a contract of insurance. ...
Individuals who purchase indexed annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index. ... Indexed annuities are attractive to purchasers because they promise to offer market-related gains. Thus, these purchasers obtain indexed annuity contracts for many of the same reasons that individuals purchase mutual funds and variable annuities, and open brokerage accounts.
The federal interest in providing investors with disclosure, antifraud, and sales practice protections arises when individuals are offered indexed annuities that expose them to securities investment risk. Individuals who purchase such indexed annuities assume many of the same risks and rewards that investors assume when investing their money in mutual funds, variable annuities, and other securities. However, a fundamental difference between these securities and indexed annuities is that – with few exceptions – indexed annuities historically have not been registered as securities. As a result, most purchasers of indexed annuities have not received the benefits of federally mandated disclosure and sales practice protections.