Subject: File No. S7-14-08
From: John E Raines
Affiliation: ChFC

July 14, 2008

My background is that I have sold health, life, and annuity products since 1990, attained the ChFC and LUTCF professional designations.

Having read the latest SEC ruling and their opinions as to why indexed annuities should be reclassified as securities, may I suggest the following:

1. It would be very confusing to the general public in my opinion to redefine risk to mean not only:
A. The chance for loss of principal, the commonly agreed upon definition of risk, but also
B. The chance for gain above the guaranteed minimum on annuity contracts.
In my experience the reason most clients buy indexed annuities is to avoid the risk of loss of principal due to a market downturn. Redefining risk and reclassifying indexed annuities as securities by redefining risk this way will blur the consumer's ability to choose an insurance product as opposed to a securities product. The fact that a fixed index annuity is an insurance product is the very reason sales have been so robust during the past decade in my opinion.
2. I've conducted over 2000 client interviews with seniors about their insurance and financial options since 1990. If I am permitted to generalize, I would estimate that over the past decade fixed index annuities have prevented several billion dollars of investor losses that would have occurred had fixed index annuities not been available. This is due, of course, to insurance companies underwriting the risk of the terribly volatile and unpredictible financial markets that investors have been and are now exposed to.

3. It is remarkable that FINRA and SEC officials could be either so ignorant or so biased against fixed indexed annuities that they would deliberately try to minimize their safety by referring to them as offering "some protection" of principal. "Some" protection of principal? How about 'billions of dollars not lost' protection of principal History has proven that individual investors are highly likely to "buy high and sell low" during volatile markets. Fixed index annuities largely minimize or eliminate this terrible reality and often reverse it to allow investors to profit even in highly volatile markets.

4. In truth, fixed index annuities are probably the greatest financial tool yet created for the general public to help conservative investors and retirees reach their investment goals come "Hell or High Water". With the tremendous range of minimum guarantees, indexing options, length of surrender charges, and minimum lifetime guaranteed benefits now available it is becoming easier than ever for experienced brokers to structure a suitable index annuity portfolio for a very broad range of clients.

5. Having recently viewed the "Dateline" show I now realize the extent to which a bias can influence newscasts. Of all the insurance commissioners and securities regulators to choose from, dateline chose only two, each of whom believe 100% of indexed annuity sales are unsuitable. Where is the "Fair and Balanced" standard I constantly hear advertised? And for an insurance commissioner who approves every fixed indexed annuity issued in her state to comment on public TV that she doesn't understand the component parts of the annuity is almost as frightening as having the California Department of Insurance state on their website that "in a fixed annuity the amount remaining in the annuity at the annuitant's death stays with the insurance company."

6. If a state insurance commissioner and the California Department of Insurance can be this ignorant or biased, what is the likelihood that the SEC or FINRA will get it right on insurance matters? A recent example further illustrates this. The recently proposed 'Senior Investor Protections Enhancement Act' would increase penalties for those who take advantage of investors 62 and older. Additional fines of up to $50,000 would be levied for violations, which could include selling unsuitable products to seniors or failing to disclose fees or lock-up periods for investments. In contrast, The NAIC believe suitability rules should apply equally to everyone, not just those who are age 62 and older. When you think about it, those age 62 and older are often the most capable of making financial decisions, both in their own opinion and in the opinion of most other people of all ages. In conclusion, does it make sense to have people who are less knowledgable and less intelligent on insurance matters making rules for those who are best in a position to govern insurance matters? In my opinion the state Insurance Commissioner and the National Association of Insurance Commissioners are in a much better position to create rules for insurance products, based on their experince and knowledge of insurance matters.

7. Having been a registered representative for about 5 years, it is my opinion that the learning process of becoming a registered representative would do little or nothing to enhance the insurance producer's ability to make suitable indexed annuity sales. Indexed annuities are so specialized that insurance company training and general agent assistance are required to aid the producer in making educated, suitable, and ethical sales. Most of the fixed annuity carriers I'm affiliated with provide all of the on-line webinars, in-person and by phone training you could ask for, not to mention the incredibly qualified GA assistance that is available for the asking. The securities industry has little to add to improving the suitability of index annuity sales training, except for the fear of extremely large fines in ambiguous situations. And I question if this will be a positive result overall. Let me illustrate with an example:

Let's assume fixed index annuities are reclassified as securities in 2009. Further assume an insurance producer becomes a registered representative to be able to continue to sell fixed index annuities. Assume this producer sells 100 contracts of fixed index annuities during 2009, each with a 10 year surrender charge. Further assume that market conditions are about as they are now, with 5 year Bank CD's averaging about 4%. Now assume three years later in 2012 the stock and bond market volatility increases, which causes the indexed annuity renewal rates to stay about the same or decrease due to increased costs of the indexed links ( call options) to the insurer. Overall the return to the fixed annuity investor for three years has been meager because of sideways market movement (which no one can predict). Meanwhile assume Bank CD's increase to 9% in 2012. Of the 100 fixed annuity customers mentioned earlier, how many in the above senario would complain when they see attorney's TV advertisements proclaiming: "IF YOU ARE UNHAPPY WITH YOUR ANNUITY, CALL US AND WE WILL GET YOU CASH NOW" Using the Senior Investor Protections Enhancement Act a $50,000 fine could be levied for an unsuitable or fraudulant investment recommendation. If a fixed index annuity (assuming it's now classified as a security) client's litigation attorney counsels them that (in his opinion) their broker should have known that interest rates were rising (in securities matters, 20/20 hindsight is permitted). Further the litigating attorney counsels his/her client that in his opinion the broker should have recommended a short-term fixed annuity or money market fund to take advantage of rising interest rates, but instead recommended a 10 year fixed indexed annuity due to the higher commission (in his opinion). The litigator further opines that the broker therefore made an unsuitable recommendation and should be punished. Further, if it can be proved that the broker knew interest rates "could have/should have" gone up, the broker is guilty of fraud. Looking back with 20/20 hindsight, the litigator opines that the broker should have known inflation was heating up and interest rates should be increasing, and therefore (in his opinion) there is intent to defraud the client when the broker recommended the higher commission fixed indexed annuity.

I believe this example has real potential to become a reality, seriously damaging the producer and insurance company financially, even though the truth of the matter is that, in my opinion:
1. No one can predict which way the stock and bond markets will move with consistency. Even the best experts admit to being wrong most of the time in predicting financial market movements.
2. Now may be an excellent time to purchased a fixed index annuity to take advantage of a 20% plus market decline without risking loss of principal (when held to term) in the event the market continues downward.
3. FINRA (formerly the National Association of Security Dealers) has a large financial incentive to gain regulatory power over an insurance product (by redefining it as a security). Not only would it benefit FINRA's member firms to have a robust selling insurance product which works much better than most securities products during volatile markets, but FINRA's fines would likely increase during market up periods. Under security rules people could sue brokers and insurance companies because the broker recommended (and the insurance company approved) a fixed index annuity (now hypothetically a security) that didn't work as well as money markets, bank CD's, or certain other stock indices, and therefore was an unsuitable recommendation using the permitted 20/20 hindsight afforded FINRA by FINRA.
3. Insurance commissioners have the authority to invoke fines, civil penalties, and license terminations, and a far superior system for dispute resolution than the security industry. Insurance related disputes are generally solved quickly in favor of the insured without the insured having to hire expensive legal representation. As such, for insurance matters (such as fixed index annuities) I think most people would agree there is no need for the additional rules created by those who are less experienced and informed on insurance matters (I.e. the SEC and FINRA).
4. Having sold fixed indexed annuities for about 10 years, I have had only one fixed index annuity client who wanted his money back, and it was during the first year after the sale. I requested and the insurance company graciously paid the client back his principal with interest even though, in my opinion the insurance company could have legally refused. I forfeited my commission back to the insurance company, which I was happy to do in order to prevent a client complaint and avoid harming my professional reputation. (Isn't this how most fixed annuity complaints are handled? Therefore, where is the need for the SEC and FINRA?) Had the same fixed index annuity been a security, the odds are an attorney would have been involved, stress for all parties would have increased 100 fold, the state securities regulator and FINRA would likely have been involved, and Lord only knows what would have been the outcome since the client was age 66 and the 'Senior Investor Protections Enhancement Act' would have been invoked, along with a panoply of additional securities regulation.

In summary, I appreciate the good intentions the SEC and FINRA have in protecting the consumer. I just believe that they should limit their authority to securities, and not try to redefine insurance. Thank you for taking the time to read about my concerns as an insurance producer in the field.

Kind regards,

John Raines