By Dorice Maynard, VP Customer Service & Sales

I have been waiting since early 2007 for the SEC to finally issue a clear position on whether the equity indexed annuity ("EIA") is a security or an insurance product. However, rather than a firm ruling they instead presented a paper outlining the new rule they want to make and why; soliciting comments from the industry before making its final decision.

See: Securities and Exchange Commission File No. S7-14-08

The SEC paper is very long. In a nutshell, they are concerned not only with the EIA being sold primarily as an investment (which violates the exemption under Section 3(a)(8) of the 1933 Securities Act), but with crediting methods that appear to change/credit the amount interest credited more frequently than annually (another violation), and that guarantee less than 100% of the deposited principal. The latter means that the contract holder is bearing some of the risk, which puts the EIA squarely into securities territory, they argue.

Personally, some of the EIA configurations I have seen SHOULD be securities. Some inappropriate marketing & sales practices can only be curbed by requiring the disclosure and transparency found in securities sales. (We tried to push for full disclosure and transparency with our Project TAD - but it seems we were pushing 'dead weight'.) 

So what will the fallout - or impact - be on the indexed annuity?

Some have said that the SEC ruling EIAs as securities would open a regulatory can of worms because of the lack of a federal insurance body, meaning state securities regulators could clash or overlap with state insurance departments.

In May 2006 James Poolman, North Dakota insurance commissioner, stated his belief that equity-indexed annuities should be regulated as insurance products and that insurance regulators can work more closely with securities regulators to improve standards and compliance. At that same meeting Joseph Borg, Alabama Securities Commission director, disagreed and thought that equity-indexed annuities should be registered as securities. (Alabama is also the only state to make giving investment advice when not licensed, a felony.)

Industry experts do believe the SEC will require some specific types of equity-indexed annuities to be registered as securities - and I agree with that view. For example, products that pay a 3 percent minimum guaranteed rate on 75 percent of the premium deposit might rightly be considered more "investment" than "insurance".

There are fears that this SEC action could put a real damper on EIA sales, causing insurers increased costs or even discontinuing a once-profitable line. I don't think it will swing that far left. However, marketing organizations without a broker/dealer relationship may suffer.

On the other hand, because EIA oversight may increase costs to the b/d and cause client confusion over EIA products, there is a golden opportunity for the IMO to offer their experience and clarity. Since the NASD's NTM 05-50, most b/d firm's unregistered products are already sold as though they were securities — with the required disclosures and suitability standards — so there may be very little additional cost.

Finally - and I think this is the best outcome - we should see a standardization of EIA product specifications which will make it easier for everyone, down to the consumer. Standardization would lead to more consistent product training and disclosure: Hooray!

See my blog post Controlling Frankenstein's Monster for our training and disclosure resources.

Too bad the insurance industry couldn't fix this on their own - years ago. But with 50 independent state governments and only optional NAIC "model rules" to follow (or not), it must be difficult. Well, there's nothing like a common enemy or a crisis to bring a diverse group together, united in purpose. Maybe this is exactly what was needed, after all.

If you'd like to send your comments to the SEC on their proposed new rules, use their internet form below and be sure to reference "File No. S7-14-08".

SEC Commissioner: http://www.sec.gov/rules/proposed.shtml

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