Love ‘em or hate ‘em, the case for equity-indexed annuities is playing out before our eyes. With downside protection paramount in the current meltdown (especially for pre-retirees and retirees), principle guarantees inherent in the products are looking pretty good right about now. But as with every other area of the financial services industry, EIAs (or FIAs if you prefer) are experiencing quite a bit of controversy as of late.
On December 17, 2008, the SEC adopted Rule 151a, which authorized the enforcement agency to begin regulating EIAs. Insurance agents, unlicensed to sell securities, are a bit upset, as is the National Association of Insurance Commissioners. We spoke with Iowa Insurance Commissioner Susan Voss, the NAIC’s point person on Reg 151a. For a regulator, she was refreshingly blunt about the situation and what the future holds for annuity regulation and enforcement.
Boomer Market Advisor: For any readers that have been living in caves, can you give us a brief overview of the controversy?
Commissioner Susan Voss: State laws subjected EIA products, and the companies and producers selling these products to state insurance regulatory oversight. With adoption of the proposed rule, the SEC could begin regulating indexed annuity products as securities after a two-year transition period.
BMA: Why should EIAs be regulated by state insurance commissioners, rather than federal regulatory agencies?
SV: The risk is to the carrier. It’s part of their general fund and subject to their reserve requirements.
BMA: Something of an obvious question — how do you feel about the decision?
SV: We’re disappointed by the decision. State insurance commissioners have taken active steps to protect consumers of equity-indexed annuities — and we will continue to do so.
BMA: But the annuity is indexed to the broad market? What about the variable component that’s subject to market fluctuation?
SV: Yes, I guess you could argue that there is risk in the indexed portion, but it’s very small. The much larger risk that’s born by the carrier rather than the individual investor doesn’t sound like any security I know.
BMA: Are there other products that are structured in a similar fashion that the SEC might also take a look at?
SV: That’s the interesting thing. There’s a life product out there that has an indexed component [universal indexed life insurance], but you don’t hear the SEC clamoring about that.
BMA: Why do you think the SEC took the action it did in passing Reg 151a?
SV: I think Chairman Cox was listening to a select group of securities regulators in making his decision. In doing so, the SEC chose to ignore thousands of comment letters opposing this rule. He never mentioned the insurance commissioners he spoke with or his reasoning other than a Dateline NBC piece that supposedly outraged many people.
BMA: Scary. Do you think a piece on a news magazine show really had that much of an effect on his decision?
SV: The issues mentioned on the Dateline piece were five years old and ones that we’re taking active steps against. So I think his decision was based on skewed information from people that had his ear.
BMA: Have you had a lot of cross-agency interaction with the SEC on the subject of 151a? Did you actively work with them prior to the announcement?
SV: I met with Susan Nash [associate director of the SEC’s investment management division] a while ago and floated an idea, and because it was at the 11th hour it didn’t fly. I said, “Let’s take a year and work together and get all our ducks in a row, in terms of our compliance and suitability requirements and then figure out a way to work together.” It didn’t happen and 151a passed anyway.
BMA: Mary Schapiro, CEO of FINRA, has been named by President Obama as Chairman Cox’s successor at the SEC. Have you worked with her before and do you think it was a wise choice?
SV: My past interactions with Mary Schapiro have been cordial and she and her FINRA staff have been very helpful, so I’m encouraged by her selection to run the SEC. I think we’ll explore ways to work together on the regulation of these products. The 151a ruling doesn’t take affect for two years, so we’ll use that time to figure out the best way to work together.
BMA: So that’s it? 151a has passed and will be implemented?
SV: Companies are already fining actions, so this isn’t over by a long shot. And, as I mentioned, it will be two years before it takes effect, so a lot can happen between now and then.