September 6, 2008
Proposed rule 151A regulating fixed index annuities is premature, unjustified, and ill conceived and not in the interest of investors, agents or the industry. If enacted this rule will deny the American public access to attractive, lifelong income in an age where retirement assets increasingly do not provide lifetime coverage, empower registered representatives to sell life insurance products they are unfamiliar with, and finally prevent the development of case law by sinking consumer and agent alike into the morass of arbitration known as FINRA.
From a policy perspective the effort lacks credible justification. Clearly lacking is an identification and description of the population at risk for fixed indexed annuity problems. Lacking is a statement of the incidence and prevalence of any fixed indexed annuity problems, nor a description of consumer or agent involved in such fixed indexed annuity problems. The document tells us that large amounts of retirement capital are devoted to fixed indexed annuities, but it does not tell us the number or amount of contracts (or their associated amounts) that are subject to abuse or litigation. Anecdotal evidence is offered in terms of key informant and court cases, but the necessary logical and causal linkages between this problem and the proposed rule change are absent, or severely limited to cases which are on point. Why is the inclusion of fixed indexed annuities into other types of variable asset classes the only alternative proposed? Is this the best alternative? Why? Sadly, relevant data is available through examination of FINRA cases. State insurance data are also available. Limiting the analysis to legal elements is analogous to outlawing internal combustion engines in automobiles because drivers exceed the speed limit or fail to stop completely at stop signs. Soliciting public comment in lieu of collecting scientific data simply puts investors, agents and companies in the surreal position of the blind men and describing an elephant – each describes the entity by that part that is accessible to them, but the analysis is meaningful only by assuming a holistic, rather than an elemental approach. Admitted there are features of the indexed annuity which might be abused by investors and agents alike. Often it is a bonus feature with matching contributions linked to longer surrender periods with penalties for early withdrawal, or it might be presented as an investment, rather than as savings for retirement. But without systematic and objective analysis, the public will suffer from a minority of disputes or problematic features which can be resolved if identified and examined. Perhaps the SEC should borrow a page from the motion picture industry and require suitability ratings on its regulated products. This may not stop all off label purchases, but investors and agents alike would be forced to acknowledge a lack of suitability of these financial instruments before or at purchase.
Proposed Rule 151A is also fraught with unintended and unanticipated problems. Bringing indexed annuities under the benefits of federal protection takes the matter out of the courts into FINRA arbitration, the financial industry regulatory agency does not need follow the law (including the proposed 151A) and has few published opinions for subsequent cases to follow (since such cases are handled in unpublished arbitration). Such a benefit already exists – FINRA claims jurisdiction over fixed indexed annuities simply by claiming that there is a dispute in facts, and claims personal jurisdiction by fabricating names of registered representatives or companies regardless of their actual association, even beyond two years of termination of last registration. Investors nor agents benefit from FINRA deliberations – they are a black box of loosely followed deliberations whose opinions are not available for future panels. How can the SEC claim it is following past law only to dump the consideration of indexed annuity cases in arbitration which does not follow civil court procedure, Federal rules of evidence or even past opinions or law? The SEC is achieving a rather dubious benefit by placing indexed annuities under such Federal protections. Investors can just as easily file a complaint before their State Insurance commissioner and have the matter investigated without paying hefty FINRA fees The same elements of lack of suitability are repeatedly considered by each panel. The only benefit for the investor is the obvious one – FINRA is investor insurance for investments gone bad. The premiums are FINRA fees and the payout, if a prominent financial columnist is to be believed, is achieved about one in three times. Finally, the Americans planning to retire suffer catastrophic costs due to the proposed rule. There are few, if any attractive savings vehicles for Americans which offer both market returns, safety, and the promise of lifetime income. The availability of such a product is critical for the first generation to anticipate outliving its retirement assets due to advances in personal health, technology and lifestyle.
The entire analysis and proposed rule should be sent back to the drawing board – but to a Federal policy entity skilled in such work. Perhaps the Government Accountibility Office or highly regarded Assistant Secretary for Planning and Evaluation at the DHHS would provide the intellectual and scientific rigor necessary for such an important decision.
I have plenty of documentation, but the OMB clearance estimate of burden time is a vast underestimate of the burden placed upon the public.