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SEC Votes to Regulate Equity-Index Annuities

Last week, the SEC voted, 4-1, to adopt a modified version of Rule 151A that makes certain equity-index annuities securities, subject to the registration and antifraud provisions of federal securities laws. The Rule does not go into effect until January 12, 2011. Prior to that time, equity-index annuities will retain their current status as fixed annuities, regulated by state law. Rule 151A as originally proposed, would have been effective in 2010 and would have reqired an equity-index annuity issuer to retest each annuity every three years. Such a  requirement is not included in the adopted version of the Rule.

Index annuities had been excluded from securities regulation  by reason of the “insurance products” exemption found in section 3(a)(8). There have been Supreme Court decisions seemingly substantiating this interpretation. Nevertheless, the majority of the SEC has apparently adopted a rule (the actual text has not been released) which removes an index annuity from 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.  

Troy Paredes, the lone dissenting commissioner, stated that the Rule exceeds the scope of the SEC’s statutory authority by eliminating index annuities from the “insurance product” exemption.

The impact of this Rule is to be determined, however, index annuity insurers, individually and collectively as groups or associations, may pursue legal action to thwart the SEC’s action. In addition, insurers have already begun developing products that may fall within the “insurance product” exemption. Finally, it is possible that the Rule may extend its reach to equity-index universal life insurance, which heretofore has been classified as insurance and not a security.

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