July 24, 2008
The proposed rules go a long way toward correcting the misleading lack of disclosures the insurance industry has exploited resulting in numerous investors becoming victims of these products.
Despite the insurance lobby's attempt to dance around what these products really are, the reality is they are broadly sold in a manner that promises market returns (sound like an investment?)without any investment risk. I could provide a mountain of sample sales materials and solicitations that essentially communicate this misleading message. Of course the Commission (in these proposed regulations) recognizes the sales practices and calculation methods require these products to be considered a security for all practical purposes and the vendors' attempts to use sales practices that position themselves as benevolent grantors of market level returns with "no" risk would be considered a false and misleading representation that would violate numerous securities laws. I do not think the Commission should grant a special exemption of these products from registration.
My only other criticism of the regulation is that the insurance vendors are being exempt from what I consider past violations of securities laws. To me, they manufactured a security and sold said security without proper registration. They should be held accountable for this, not given a free ride from the past victims they exploited.
In fact, there was a time where registered securities were sold (very popular about 15 years ago) that were structured in a manner not all that dissimilar to how equity index annuities are sold. They were structured as unit investment trusts (registered as securities and sold under securities disclosure and fair practice regulations) that would bundle a portion of the portfolio into zero coupon treasuries sufficient to insure that in some period of time, like 10 years, the investor would receive 100% of their original investment back. The remaining amount would be invested in equities and participate in the upside with the portion of the investment not needed to buy zero coupon treasuries needed to return principal at the maturity date. Essentially, this is not dissimilar to the nature of equity index annuities, with the exception that these Unit Investment Trusts needed to be registered as securities.
I think that at a minimum these new regulations should be adopted but would prefer the SEC pursue all insurance companies selling these products for violation of state and federal security laws for selling an unregistered security. Also, all agents that sold these products are equally guilty of violating securities laws and should be punished under the same premise. Without teeth of enforcement, the insurance industry is likely to just attempt to creatively slide though other potential loopholes not explicitly addressed in the regulations.
David B. Loeper
CEO
Financeware, Inc.