Subject: File No. S7-14-08
From: Aaron C Ray
Affiliation: Health, Life, Variable annuities licensed, Series 7, Series 66, Series 24, OSJ / Branch Manager, Vanguard Capital

July 10, 2008

As a dually licensed individual, I have been inundated with opinions for and against the regulation of indexed annuities as securities from the two industries for which I hold license.

In response to the proposed rule change, I take exception to numerous components of the arguments put forward. The text is steeped in circular arguments, and self serving assumptions on every level.

While presuming the intent of congress and the courts, this document wholly perverts its arguments on risk, from the universally acknowledged core concept of risk of LOSS, to wildly include the consumers risk of excess growth, which is CLEARLY, neither the concern of consumers, the courts, OR the congress with regard to the need for securities regulation. No investor ever demanded better mutual fund regulation because they can earn 20%, but because they can LOSE 20%.

The document asserts on one hand the LIKELIHOOD of indexed annuities exceeding the minimum guarantees, then blithely dismisses the merits toward granting safe harbor based on an unsubstantial risk to the insurer who they have already acknowledged are more likely than not to pay in excess of the minimum guarantees.

The document ignores its own language in rule 151, which states clearly that any interest to be credited in excess of the minimum guaranteed rate not be modified in excess of once per year. The committee ignores this language, and instead denies safe harbor to EIAs apparently because the rate is not declared as a percentage. By way of an 8th grade algebra refresher, the rate can be expressed as x just as easily as 5%, so as long as the formula for determining x doesnt change, x IS fixed, and meets the definition just as appropriately. This is highly material, because instead of EIAs crossing the line into securities as charged, the committee has effectively moved the line simply to claim jurisdiction.

The document also fails to acknowledge that EIAs minimum interest rates which may be disclosed as 2% on 87.5% of premiums are actually an expression of the cost of insurance and sales costs, and the courts have clearly allowed for deduction of fees and other costs from minimum guarantees.

Mutual funds with a front end sales charge of 5% dont illustrate historical growth based on the 95% of the initial investment they illustrate the average growth on 100% of the remaining investment after fees. While expressed differently, the ANNUITY discloses the difference, securities fail to do so.

Further, and equally distressing in its assumption of jurisdiction, the rule ignores the fact that first and foremost, an annuity is a pension, a tool whose suitability is first and foremost linked to its use in retirement and estate planning. The securities industry is less prepared or trained to embrace those primary planning concepts, than the insurance industry is from properly presenting the secondary concepts of growth opportunities.

Suitability is not an issue exclusive to SEC jurisdiction. While the states and many insurance carriers clearly need to continue to evolve suitability priorities (as do investment banks, and mortgage lenders and the SEC for that matter), that still has nothing to do with jurisdiction. The truth is that most senior consumers move from market based investments to annuities in retirement because their investment horizons have decreased, their risk of incapacity has increased, but the need for growth remains. Their brokers are not equipped to deal with these changing needs and priorities, either by training, or by their arsenal of products. The current, and extended period of a secular bear market has many senior clients rightly questioning whether the continued risk of declining values are worth the lack of planning and protections offered by annuities during a market that may not recover within their investment horizon.

The document also subjectively asserts that investors choose indexed annuities for the higher growth potential and that motivation somehow reinforces the product as a security investment, when the truth is, customers choosing to invest in certificates of deposit do so for safety and liquidity, and yet EVERY consumer shops CDs based on the rates offered. That doesnt make a bank CD a security, it means all things being equal with regard to liquidity and safety, the best rate is the best deal. Ive never once seen a bank sign that read Certificates of Deposits are liquid and safe, inquire inside they usually just read 5yr CD 5.000%. Does that mean Banks market their CDs based on growth potential??? Are those to become securities next? Consumers choose an ANNUITY over market investments. They choose EIAs as the annuity TYPE because they have more competitive returns than fixed products, with all the same safety, tax deferral, creditor protection etc.

Annuities remain the only non qualified source of tax deferral after retirement that allows unlimited contributions, yet offers guarantees. Tax deferral after retirement is a significant issue to many seniors and only annuities avoid being counted against threshold income for calculating taxation of social security benefits. While municipal bonds may be triple exempt, they are NOT tax free as nearly every broker advises they count towards threshold income which impacts taxation on what is often the sole source of retirement income.

After age 65, 1 of 2 seniors will require long term care, yet their investment portfolios often represent the only planning they have done prior to retirement. Risk of market losses are NOT the only risks for seniors there is an additional risk to need to withdraw funds in a down market to pay for care and no longer have the remaining funds to overcome the losses and taxes incurred. Market investments may have higher AVERAGED growth, but values are cyclical, and healthcare needs are not.

While commissions on EIAs are repeatedly targeted as excessive, the truth is one time front end commission of 10% can be far less costly to a client than a deferred sales charge of 5% on a mutual fund after years of growth, yet these highly regulated products are staples of senior investments.

While suitability of EIAs for seniors are also herein questioned, long term bonds are the conservative choice of many brokers, and these products are only conservative if held to maturity, which is never likely for a senior who has a 50% chance for needing long term care. The risk then of accessing funds for long term care when invested long term in bonds is not conservative at all. While there are a myriad of disclosures regarding Bonds, I have NEVER met a senior that was aware bonds are discounted when sold in less than round lots prior to maturity.. and you won't find it in a prospectus either. Most brokers (excluding CFPs) typically peddle products, but do not provide planning for clients beyond the investments themselves, exposing clients to numerous risks which are FAR more costly than just investment loss.

When was the last time a typical broker recommended Long term care insurance, or life insurance, or calculated their future premium requirements when assessing a clients liquidity needs or suitability prior to recommending an investment that would tie up the funds that would buy that protection? How many seniors forgo that GOVERNMENT RECOMMENDED PROTECTION, due to bad or non-existent advice, market losses, taxation, or reduced growth that would result from liquidating assets from shortsighted portfolios?

In my opinion, The SEC would be far better served to explore there own significant shortcomings with regard to senior suitability, rather than rewriting the landscape and compounding the existing problems with even larger ones by continuing to fuel public misunderstanding by focusing on EIAs as investments rather than as INSURANCE products. If that IS the final result, collateral damage to seniors will be far greater by diminishing their exposure to annuity planning concepts that are sorely needed by our greatest generation.