Click here for a detailed timeline of the SEC’s efforts to regulate Indexed Annuities
as securities products.
SEC QUESTIONS IF INDEXED ANNUITIES SHOULD BE SECURITIES- PART I
In 1997, just two years after Indexed Annuities were introduced, the SEC first
explored whether the products should be treated as securities (and subject to SEC
regulation), as opposed to being treated as insurance (and therefore regulated by
the NAIC). The primary motivation for this inquiry was the SEC’s lack
of information on the products; they earnestly didn’t know if Indexed Annuities
were, or were not, securities. The SEC issued a concept release, requested promotional
materials explaining the products, and ultimately took no action on the matter.
At the time, the insurance industry assumed the lack of action to mean that the
SEC had decided that Indexed Annuities were not securities. This was furthered by
the insurance industry’s understanding of the products’ regulatory framework. The
purchaser’s principal and gains were protected from any losses due to stock market
volatility in an Indexed Annuity, unlike securities products. In addition, Indexed
Annuities met the three criteria for the SEC’s Section 3(a)(8) exemption from securities
regulation. This exemption was determined eight years before Indexed Annuities were
ever introduced and indicated that a product was not subject to SEC regulation if:
(1) the annuity contract was subject to supervision by the state insurance commissioner;
(2) the insurer assumed the investment risk under the annuity (as opposed to the
purchaser); and (3) the annuity was not marketed primarily as an investment. For
these reason, it was believed that Indexed Annuities were fixed insurance products,
not securities- particularly when the SEC took no action in 1997.
FINRA’S NOTICE TO MEMBERS 05-50
Several years later in August of 2005, FINRA (then known as the National Association
of Securities Dealers, or NASD) issued the “Notice to Members 05-50.”
This notice suggested that broker/dealers (B/Ds) treat Indexed Annuities as if they
were securities, despite their fixed insurance status. FINRA justified their notice
based on their belief that Indexed Annuities might one day be treated as securities,
despite the fact that they were treated as insurance at the time the notice was
issued. For salespeople not selling securities products, NTM 05-50 did not affect
their sales practices. Alternatively, annuity salespeople with securities licenses
were forced to change their sales practices in regard to Indexed Annuities. All
sales of Indexed Annuities were to go through their broker/dealer forthwith. This
meant that a salesperson’s B/D needed to approve the fixed insurance product that
he wanted to offer his client, despite the fact that FINRA had no regulatory authority
over Indexed Annuities. Regardless, salespeople holding securities licenses must
abide by the rules of FINRA. Therefore, B/Ds began the task of overseeing Indexed
Annuity sales for their registered representatives in August of 2005, and still
oversee them to this day.
SEC QUESTIONS IF INDEXED ANNUITIES SHOULD BE SECURITIES- PART II
In June of 2008, the SEC began a second inquiry on the matter of whether, or
not, Indexed Annuities should be regulated as securities with proposed Rule 151A.
The SEC’s proposition was the result of years of negative and inaccurate media being
published on Indexed Annuities.
One of the primary reasons that Indexed Annuities have received negative media
attention is because of their perceived complexity. In an effort to
differentiate the many products that are available for sale today, insurance companies
have invented new methods of calculating potential interest crediting. At times,
these methods are overwhelming to both the salesperson and the annuity purchaser.
However, 99.8% of the crediting methods available on Indexed Annuity products are
based on very simple math (point-to-point, monthly and daily averaging, and fixed
strategies). It’s the other 0.2% of the strategies out there that get folks confused
once in a while.
Adding fuel to the media fire is that fact that some annuity salespeople have
used Indexed Annuities in the course of bad behavior. These individuals’
suggestions of unsuitable annuity products resulted in some annuity purchasers being
taken advantage of. Overall, this resulted in observers making the inaccurate assumption
that all Indexed Annuities are “bad,” or used to take advantage of senior purchasers.
**It is worth noting here that all financial services products have been used
on the course of bad behavior on the part of the salesperson. It is
also worth mentioning that the tool of the bad behavior is not the problem in such
situations. (I liken this to a serial killer using a hammer to murder his victim
and the government subsequently outlawing the use of hammers. That would make it
difficult to complete tasks such as building homes and hanging pictures, but it
would certainly eliminate people bludgeoning their victims with the tool.)**
Mistakenly, the insurance industry did not foresee media outlets’ disparaging
and erroneous statements to be an immediate threat to Indexed Annuities; it was
merely considered the newspapers and magazines’ attempts to cater to their advertisers.
These advertisers sold securities products (such as mutual funds and stocks), therefore
no one expected the media the sing the praises of products their advertisers competed
against. This folly, coupled with a lack of publicly-available, credible information
on Indexed Annuities, eventually resulted in the SEC declaring that the products
should fall under their purview per Rule 151A.
After a two-year battle waged with regulators, litigators, and legislators,
the insurance industry secured the fixed insurance status of Indexed Annuities indefinitely.
In the end, it was an act of Congress that settled the matter. In July of 2010,
President Barack Obama’s signed the Dodd-Frank Wall Street Reform and Consumer Protection
Act, which contained Senator Tom Harkin’s (D-IA) Congressional amendment detailing
and dictating Indexed Annuities’ permanent insurance regulation.
CLOSING THOUGHTS
Now you should understand what an annuity is, who can sell them, and who regulates
them. You should also understand quite clearly, what an annuity is
not. Fixed, Indexed, and Multi-Year Guaranteed Annuities are not alternatives to
Variable Annuities, stocks, bonds, or mutual funds; these products are “risk money
places.” Fixed, Indexed, and Multi-Year Guaranteed Annuities are more accurately
classified as a “safe money place,” and generally viewed as an alternative to CDs,
or other fixed-rate savings instruments. Is an annuity right for you? Only YOU can
decide.