Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, June 25, 2008

SEC Proposes Rule on Equity-Indexed Annuities

For several years regulators, in particular NASAA, have raised the alarm about abusive sales practices used in the marketing of equity-indexed annuities to investors, particularly senior citizens, for whom this product may be unsuitable.  EIAs are a complex hybrid of insurance and securities that are difficult to understand and involve high fees, particularly high surrender charges.  An unresolved issue is whether EIAs are securities under the federal securities laws.  The SEC has proposed a new rule that would establish — on a prospective basis — the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws.

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Ever since the securities lobby began losing market share to indexed annuities - since the 2000-2002 bear market when most securities lost significant value - we have been hearing the ever louder drum beat that indexed annuities are complex, have high fees and are unsuitable. Having practiced professionally in this field as a fully credentialled actuary, I find these statements to be both false and self-serving.

An indexed annuity's sales proposition is no more complex than this: you are guaranteed a minimum return on your money for a number of years - say 10. Additional interest will be credited if the S&P 500 index performs well. Each year, if the market gains ground, your money will grow at half that growth rate. If the market falls, your money will neither grow nor shrink - you will be credited zero interest that year, but your principal and prior earnings will be untouched.

There are no fees charged if the policy is held to term.

Given the simplicity of the proposition, why the cries of complexity, high fees, and fraud?

This issue is at its core one industry using its regulatory arm to crush the legitimate competition raised by another industry. It's securities vs insurance and the final show down will occur in the courts. May justice be served!

Posted by: Matthew Coleman FSA, MAAA | Jun 27, 2008 5:41:26 PM

Index annuities are appealing because like traditional fixed annuities, your principal and credited interest can never decrease due to market declines, with all interest tax-deferred until you make withdrawals.

Posted by: Index Annuities | Sep 8, 2008 9:43:12 AM

Over Regulation,
I am an Independent Insurance Agent trying to develop a book of Business. How much more regulation do we need. I am already getting squeezed and hurt by all this regulation. When is the Securities and Exchange going to help the Registered Representative, or Insurance Profession. When you do a client review, most of the time the client doesn't disclose his whole financial situation. You got to think that maybe the guy buying the investment isn't the most straight forward or honset person in the World.

Another issue, My Securities license lapsed. I have to take the exams over again. This is ridiculous, and it's; it's own way for the NASD, State and other business entities to make money off the Individual producer. It's absurd, and you don't ask a CPA, Attorney to take there exams over again. You basically need an Attorney with you now to open an account. Why don't you people go after the bigger fishes and Firms.

With regards to Index Annuities you should leave them alone. They don't go down in Bad Markets and they get upside potential in up markets. Now, I got go out and get registered again, pay a whole bunch of fee's to a broker dealers and Errors and Omissions Insurance. I don't want the to be affiliated with the NASD, SEC and other government agencies in my life. I just want to deal with my own State. This what going to happen, you are going drive the individual Rep out of business and it's all going to be online.

Leave Index Annuities Alone, so Insurance Reps can make money for their clients in up markets.

Help Us and Don't Hurt Us

Posted by: Chris | Sep 13, 2008 6:23:30 AM

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