Wednesday, December 17, 2008
Today the SEC approved a rule, 151A, that will bring most, if not all, indexed annuities within the definition of "security" and subject them to the registration and antifraud provisions of the securities laws. The distributors of indexed annuities took the position that indexed annuities were excluded from the definition of "security" by reason of the "insurance products" exclusion in section 3(a)(8), and the SEC apparently acquiesced to this interpretation until this rule-making process. Rule 151A was proposed in June, which makes this a speedy adoption process by SEC standards, and thousands of letters, principally from the insurance industry and its agents, were filed in opposition. In his opening remarks, Christopher Cox emphasized that indexed annuities are complicated products that are difficult to understand; their sales are frequently aimed at senior investors, and that regulators have been concerned about abusive tactics used in using these products. (It has been reported that Cox's interest in this area stems, at least in part, from his mother's purchase of an indexed annuity that was unsuitable for her needs.)
The SEC's new rule provides that an indexed annuity is not an "annuity contract" under the 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. (I confess that I found the methodology set forth in the proposing release on how to determine the "more likely than not" question virtually incomprehensible; others more knowledgeable than I told me that it would encompass virtually all indexed annuities. We must await the publication of the final rule and accompanying release to see if the concept is expressed more clearly.)
Troy Paredes, the newest SEC Commissioner and former law professor at Washington University at St. Louis, filed a dissent, stating that the rule exceeds the scope of the SEC's statutory authority by eliminating indexed annuities from the "insurance product" exemption.
We can expect a judicial challenge from the insurance industry.