The following Letter Type K, or variations thereof, was submitted by individuals or entities.

Letter Type K:

The Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

I am writing concerning File Number S7-17-08.

The key problem with proposed rule 151A is that it burdens and imperils access to an insurance product that has for years demonstrated significant public demand. Accepting the status quo - that indexed annuities currently are insurance products - rule 151A would place an insurance product under the securities regulatory bureaucracy - a bureaucracy that has neither the training nor the necessary experience to understand insurance product benefits or markets.

The Securities Industry Does Not Understand Indexed Annuities This lack of understanding can be abundantly attested to by the variety of complaints from all manner of securities industry stakeholders over the last few years. The outcry of the securities industry from securities salespeople to state securities regulators to NASAA and FINRA chairmen has been loud and continuous. For all its ferocity, however, it is surprisingly not matched by the volume of consumer complaints made to state insurance departments nor by flagging public demand. Neither is there a similar outcry from the National Association of Insurance Commissioners nor the American Academy of Actuaries.

The Chairman's comments introducing this rule echo the same criticisms leveled by SEC constituents, namely that indexed annuities are complex, pay outsized commissions, have high surrender charges and place investment risks similar to variable annuities upon their buyers. To place an insurance product so reviled under a regulatory scheme that does not value or understand it can neither the protect investors nor enhance market efficiency. This rule will kill the indexed annuity industry as we know it.

Promotion of Competition a Key SEC Directive The promotion of efficiency and competition are primary directives for the Securities Commission as explained by Congress in the Securities Act of 1933 section 2b:

"Whenever pursuant to this [Act] the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation."

The guidance provided here is among the very first given in this historic and foundational Act. As such, efficiency, competition and capital formation must have been primary interests of congress in its writing. These three interests should be controlling in any rulemaking the SEC undertakes, yet I find the proposed rule 151A to be clearly anticompetitive.

Indexed Annuities: The Insurance Industry's Alternative
Since the mid 1990's the SEC has been cognizant of indexed annuities and in 1997 undertook a formal process of hearing public comment on the nature of this product. At that time, the SEC chose to abstain from any rulemaking. In 2003 the NAIC modified these laws requiring higher guarantees of all fixed and indexed annuities. More recently, states have begun enacting suitability requirements - ensuring that these annuities are sold properly. Beyond these two items, since 1997, little else has changed in the marketing or regulation of indexed annuities. However, the securities market has changed dramatically.

During the 1990's, drawn by the historic bull market, the percentage of the US public invested in securities more than doubled. Many of these newer investors were ignorant of the risks of market volatility. In the years 2000 to 2002, most owners of securities lost significant value in their holdings. This loss was particularly devastating to senior citizens whose holdings often represented both their life savings and their retirement assets. In the years following these losses, billions of dollars flowed out of securities and into the guaranteed, insured indexed annuity.

State non-forfeiture laws enacted in nearly every state in the country prescribe a minimum cash value that every indexed annuities (and fixed annuities) return to their owners. In addition, competition drove many companies to offer guarantees well in excess of the guarantees required by law. These minimum guarantees together with the other provisions of indexed annuities that responded to investors fears and drew so many billions of assets into these insured products.

This flow of assets out of securities and into indexed annuities at the rates over $20 billion annually for the last several years has not gone unnoticed by securities salespeople. Why is it that NASAA and FINRA are finding indexed annuities to be so troublesome and yet neither the owners of indexed annuities nor the insurance regulatory bodies are? I propose the answer is that it is not the indexed annuity owners, but the securities sales people who are complaining to their regulators. Dollars are flowing out from under their management. Indexed annuity owners, by contrast have received record interest credits over the last five years - while maintaining nearly no risk of loss.

Market Risk
As has been mentioned earlier, non-forfeiture laws in nearly every state limit a policy owner's loss due to market volatility or any other force. Under today's conditions, a typical ten year policy surrendered five years early cannot by law return less than 97% of its original principal. This minimum standard is the same standard set for traditional fixed annuities.

Furthermore, nearly every indexed annuity sold today includes the provision that market performance can neither invade principal nor prior credited interest. Said another way, interest credits cannot be negative - only positive or zero. This provision, together with the minimum guarantees mentioned above, distinguish the indexed annuity as insurance.

Actuaries are the insurance industry's mathematicians and risk technicians. The Actuarial Profession's mouthpiece is the American Academy of Actuaries. In 2005, they submitted to the SEC a comprehensive opinion on the nature of indexed annuities. In their final comments, they concluded as follows:

From a technical perspective we have noted that an EIA provides to a purchaser guarantees and other conditions that are quite similar to those on a fixed-rate annuity. Similarly, the method in which an insurer financially manages the product and realizes financial results is essentially the same as that for a fixed-rate annuity. The combination of these perspectives indicates that non-registered EIAs operate like fixed-rate annuities and thus have characteristics that support their status as non-registered products.

High Surrender Charges Surrender charges are limited by the same non-forfeiture laws mentioned above. Neither early surrender, nor market risk are allowed by law to drive cash values below the legally prescribed minimums.

In addition, surrender charges are not unique to indexed annuities. Traditional fixed annuities have surrender charges of equal magnitude because both products are subject to the same insurance law.

Surrender charges are assessed when a fixed or indexed annuity is not held to its term of usually 5 to 12 years. They have two purposes. First, they recover sales costs that would have been amortized over the term. In the case that an annuity is not held to term, the amortization is not complete and the surrender charge recovers the remaining, unamortized cost. Second, surrender charges protect the insurance company. The assets invested by the insurance company both for fixed and indexed annuities are bonds of a term approximating the term of the annuity policy. If the policy is surrendered early, the company may be forced to sell the bonds at a loss to generate the proceeds to the policy owner. Surrender charges help cover that risk for the insurance company.

High Commissions
Commissions are generally driven by market forces. Surveys done by Advantage Compendium find that the average indexed annuity commission paid to the insurance agent is 8% today. There are policies that offer higher and lower commissions.

By comparison, a typical securities sales person might receive 1% of the assets they manage each year. Over the same term of 5 to 12 years, the commissions paid to both insurance and securities agents are actually quite comparable.

Although regulation could be enacted to squeeze the commissions paid to a narrower range, I believe market forces and company controls are working to provide annuities to the public in an efficient manner.

Complexity
All insurance is at some level complex. Even traditional universal life insurance with its interest credits, insurance charges, loads, cash values can be a complex product to understand. At issue here is the ability for the customer to understand his or her indexed annuity purchase. Securities are also highly complex financial instruments.

The indexed annuity value proposition is something like this: This annuity has a term of (5 to 12) years. During this time you will be able to access up to 10% of the accumulated value each year without penalty. If you surrender your policy early, you are guaranteed to receive no less than the guarantee provided by law (or by the insurance contract if higher). Each year you will be credited interest that is no less than zero. The actual interest will be tied to an external index (such as the S&P 500). If the S&P increases, you will receive (50% of the increase, or all the increase up to 9%). If the S&P decreases, you will receive no interest that year. I find this explanation to be generally complete for most annuities and less complex than many other forms of insurance regulated at the state level.

Conclusion
The US Supreme Court, in the case that determined Variable Annuities to be securities (SEC vs. VALIC), began their reasoning as follows: "We start with a reluctance to disturb the state regulatory schemes that are in actual effect, either by displacing them or by superimposing federal requirements on transactions that are tailored to meet state requirements. When the States speak in the field of "insurance," they speak with the authority of a long tradition. For the regulation of "insurance," though within the ambit of federal power, has traditionally been under the control of the States."

I would encourage the SEC to consider whether propose rule 151A was crafted with the appropriate "reluctance to disturb state regulatory schemes that are in actual effect."

I would encourage the SEC to read and consider the professional opinion of the American Academy of Actuaries who may be knowledgeable concerning the technical aspects of indexed annuities.

I would encourage the SEC to consider the source of the complaints they are hearing concerning indexed annuities and the possible motivations behind them - to consider whether this rule is a just response to these complaints.

I would encourage the SEC to consider the thousands of careers and small business ventures that would be harmed or destroyed by enacting this rule.

I would encourage the SEC to consider the guidance laid down by congress in the Securities Act of 1933 - to take appropriate measures to foster competition and efficiency - and to reach for the hammer of federal regulation with due care.

And finally, I would recommend that the SEC consider whether FINRA (formerly NASD) had in fact overstepped its authority in 2005, enacting Notice to Members 05-50. This notice recommends that broker-dealers untrained in and unfamiliar with insurance oversee the sales of indexed annuities which were known at that time to be insurance products and thereby not subject to NASD purview.

Sincerely,

http://www.sec.gov/comments/s7-14-08/s71408-1492.htm